The Psychology of Profit-Taking: Overcoming Common Challenges
From time to time, there are brief remarks here about remembering to take profits. I suspect that most people find it far easier to make a buy decision than a sell decision, whether it’s a top-slice or a disposal—especially so for beginners. Taking profits is indeed sensible, whether for reinvestment or just to derisk. However, the decision to cut a winning position can be very difficult. The big one is obviously the one that says take half a holding off the table if the stock price doubles, but that is probably not a common occurrence.
Selling Stocks: Why It’s Harder Than Buying and How to Excel
Selling is FAR harder than buying.
As rules of thumb, keep an eye on 12-month highs and lows for indications of shares that might be good to top up or reduce. Then, of course, consider whether there is likely to be more movement in whichever direction.
Be more ready to top-slice stocks that have risen to become large (or even uncomfortably large) percentages of the portfolio.
NEVER continue buying a falling share (catching a falling knife) to push it, even at a depressed price, into that category.
Note ranges. Some shares have fairly predictable ones, sometimes over many years. If a core holding falls into that category, place a limit order to take at least a proportion of the holding in and out. When you are ‘full,’ both buy and sell orders should be a bit above the top and bottom of the range. When you are ’empty,’ both buy and sell orders should be a bit below the top and bottoms of the range. That should keep a reasonable flow of modestly profitable round trips going. If building the position, repurchase with the full proceeds of the last sale. If the position is complete, repurchase the same number of shares as the last sale and pocket the profit. Don’t be greedy—SPQR, small profits, quick returns. And above all, don’t be impatient—in time, the price comes to you, so don’t chase.
One could go on, but I don’t think anyone will go far wrong using those few rules of thumb as a basic template. It generally seems to work for me anyhow.
