When a stock is going in the right direction, it is not easy to make decisions. How long should you hold? Here’s a specific rule to help boost your prospects for long-term stock investing success: Once a stock breaks out, take most of your profits when it reaches 20% to 25%. 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 founder of CAN SLIM methodology, William O’Neil, formulated this rule in the early 1960s when he noticed that most stocks broke out of well-formed bases, ran up 20% to 25%, then corrected sharply in price.
Here are more reasons to take gains on the way up:
One, all your stocks are not going to be huge winners. Many, probably most, of the stocks you buy in a bull market are going to be profitable, but won’t feature among the best winners of the decade.
Two, you will have inevitable losses along the way, which should be cut at no more than 8%. So you can lose twice and win once and still be ahead.
Three, taking a profit feels good. It helps your confidence when you move some cash to the realized capital gains column in your brokerage account.
Four, money committed to a stock going through a month-long correction is dead money. That cash could be applied to another stock that is rising and even stronger than the one you just sold.
Five, once a stock’s correction ends, there is no assurance that it is going to continue to be a big winner. You may have sat through that correction only to find that your choice is a mediocre performer.
Six, you can always buy a stock back if it presents another valid buy point.
Read our last week’s learning article on Break the Stereotype - Why You Should Be Buying into New Highs?