Should I take profits on a stock that is up?, asks a reader
Should I take profits is a question asked by many investors when a stock has had a nice gain. Tom many this is the hardest question. Naturally we like to make money and making more may seem like a good idea.
Should I take profits, may seem very logical but many find it very hard to stay with a winner. The higher it goes the more they want to sell.
Think like a wise merchant
Wise merchants want the most appealing products in inventory to attract customers. That will make the most money.
Items in the store that do not attract customers or sell well get eliminated. They recognise poor inventory as missed opportunity.
The unwanted or dead inventory gets quickly unloaded. They get out of the loser and buy more of the winning inventory that sells. The faster the winning inventory arrives, the better.
With more winning inventory the merchant makes more profit and grows their business faster. The continuous process of bringing in more good inventory as well as identifying and eliminating the poor or bad inventory is routine for sharp merchants.
We need to follow their example. To effectively manage our portfolio we need to pick winners and eliminate losers. Each time we realise a loser occupies portfolio ‘shelf space’ we must quickly sell it out. We take the capital raised and invest in more winning inventory.
Chose exceptional or average portfolio performance
Too many investors do the opposite. Incredibly they are driven to sell their winners. This behavior divides exceptional portfolio managers from the average or poor managers.
Choose to be exceptional. Have a portfolio performance that ranks with the winners. Avoid behaving like a manager that imposes upside limits by selling too early. Taking the quick and early profits can make you a loser.
Winning managers patiently ride their leaders higher. Take the long easy ride; once you have found a winner stay with it for the full ride.
As part of your regular portfolio review, have achieving your best possible portfolio performance in mind. Always sell losing stocks and keep the winners.
An old market saying sums it up, “trim the weeds, water the flowers” applies here. We want many flowers and no weeds in our portfolio.
When a winner becomes an ever larger portion of your portfolio the urge to sell can seem irresistible. Setting portfolio parameters for yourself can help. See the discussion: Portfolio portions – How are your measurements?
Establish guidelines for the number of positions to hold as well as the portion of your portfolio to hold in each stock. You need limit guidelines as well. You need to ask yourself, How much growth or loss is acceptable to me? Answering that question will let you establish the necessary limits.
For myself I let the winners run. Even when they run past my guidelines. I ride until they run out of momentum and pause. Then I sell to bring them within my guideline. Waiting to sell can produce greater profits. Try it.
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