Should You Sell Your Stocks When the Market Rallies?

It might seem like a good idea, but you might end up selling yourself short.

In 2022, many investors saw their brokerage account balances take a massive dive as stock values tumbled. But the good news is that the stock market has a tendency to rally following a decline. Those rallies are known as bull markets, and they're typically defined as periods when stock values rise 20% or more from a recent low.

Since 1928, there have been 27 bull markets, according to Hartford Funds. And some financial experts think we're due for a bull market in 2023.

The question is: Should you sell your stocks once the market picks up? Or should you hang onto them and be patient?

Waiting to sell could pay off

It's easy to see why you may be tempted to sell stocks once their value starts to increase. After all, who wouldn't want to score a nice profit and walk away with it?

But one thing you should realize is that if you sell your stocks the moment the market rallies, you might limit your gains. If you hold onto your stocks for many years, you might make a lot more money.

Let's assume you bought $1,000 worth of stocks in 2021, and now, those shares are only worth $900. If the market rallies later this year, those same stocks might end up being worth $1,200. At that point, if you were to sell, you'd end up with a $200 profit. And that seems like a really good deal.

But what you may not realize is that if you were to hold onto those stocks for another 10 years, they might end up being worth $3,000. So in that case, you'd be looking at a $2,000 profit, which is 10 times the $200 profit you'd get by selling immediately.

That's why a stock market rally shouldn't necessarily prompt you to sell. Often, holding your stocks for a very long period of time is the true ticket to making a lot of money in the market.

There are tax implications to consider, too

Another reason not to rush to sell your stocks the moment their value picks up? You might end up owing the IRS a lot of money in taxes.

When you sell stocks (or pretty much any investment) at a profit, you're liable for capital gains taxes. But the length of time you hold your stocks will dictate what your tax burden looks like.

Short-term gains are taxed the same way as ordinary income, whereas long-term gains are taxed at a lower, more favorable rate. You'll be liable for short-term gains if you sell stocks before holding them for at least a year and a day. So, if you bought stocks last May and the stock market rallies in April, selling at that point could mean subjecting yourself to higher taxes -- and losing a chunk of your profit to the IRS.

It's natural to be tempted to sell your stocks when the market is on an upswing. But generally speaking, you're better off being patient and holding your stocks for the long haul.