When is the right time to sell stocks? Many new investors make the mistake of not selling when a stock is rising. Actually, taking profits on the way up is a smart move, preserving wealth and reducing the risk that the stock may hit a downturn.
You don't need to hit home runs to win the investing game. Focus on getting base hits. Though contrary to human nature, the best way to sell a stock often is while it's still advancing and looking strong to everyone. To grow your portfolio substantially, take most gains when the stock rises 20% to 25% from its latest buy point.
As IBD founder William J. O'Neil says, "The secret is to hop off the elevator on one of the floors on the way up and not ride it back down again."
So after a significant advance of 20% to 25%, sell into strength. That way you won't be caught in heart-rending 20% to 40% corrections that can hit market leaders.
The 20%-25% Profit-Taking Rule
IBD has long since encouraged investors to limit their risk in every trade. Cut losses in each investment when it hits the 7%-8% sell rule, and move on to the next trade. The golden rule of selling is as simple as that.
When a stock is going the right direction, your decision-making is not as easy. If market conditions are choppy and decent gains are hard to come by, then you could exit the entire position.
But if the market winds are favorable and your stock appears to be still in the early stages of its run, then go ahead and sell at least part of the position, such as a third or half, to lock in gains. Keep watching the stock's behavior to decide how to handle the remainder.
The exception to this sell rule? When a stock runs up 20% within three weeks after breaking out of a sound base, and the market is acting well, try to hold it for at least eight weeks. Such fast risers from breakouts could be big long-term winners, so they deserve to be given some latitude.
Taking Profits On The Way Up
It has been a good year for Exxon Mobil stock. It broke out of a cup base on Jan. 5 past a buy point of 66.48 (1). By Feb. 1, it had climbed 20% from that entry as the company reported Q4 earnings that beat Wall Street analyst estimates (2).
Should investors have sold the stock on Feb. 1 when the stock hit a near-term peak of 81.51? Our portfolio management rule says yes, at least some shares.
Over the following weeks, the stock dipped for a few weeks. Investors would have been comfortable selling at least a portion of their Exxon Mobil shares on Feb. 1.
Then Russia attacked Ukraine, sending oil prices sky high and taking oil stocks along for the ride. Another selling opportunity to take profits? Probably, at least for the investors who didn't take the earlier opportunity to sell shares.
After hitting a peak on March 8, Exxon shares consolidated for many weeks in what would become a cup-with-handle base with an 89.90 buy point (3). It crossed that buy point on May 4. XOM never quite hit the 20% profit target after that. The stock began to fade as oil prices came down.
Once again, though, XOM stock is forming a cup with handle and trying to get back to a 101.66 buy point. On Friday it had fallen close to its 50-day line, in line with the market's downturn.
Advantages Of Taking Profits
All of your stocks aren't going to be huge winners like Exxon in 2022. Many of the stocks you buy in a bull market are going to be profitable, but won't be among the best of the decade. With profit taking, you can lose twice and win once and still be ahead.
And taking a profit feels good. It boosts confidence when you move some cash to the realized capital gains column in your brokerage account. Plus, that cash could be applied to another stock that's rising and even stronger than the one you just sold.
Finally, you can always buy a stock back if it presents another valid buy point.
Follow Michael Molinski on Twitter @IMmolinski
