Even in the year 2013, there are still heirloom stocks on the market. Think of dividend-producing issues that fathers bequeath to daughters, and daughters pass on to their sons.
But in the vast majority of stock purchases today, knowing when to sell is a crucial art. It is also a worthy challenge, particularly when markets turn choppy or corrections arrive.
One of the most constructive starting points in designing your sell strategies is a 20%-to-25% price target.
If the market is healthy and your stock reaches a 20% gain, it's a good time to sell into such strength and lock in the gain. The exception to this rule is a stock that climbs 20% in three weeks or less, a sign of unusual strength.
It is all too easy to get seduced into aiming for outsize gains. Investors see such winners rising nearly every day in the market around them. Maybe you've had one or more yourself. And it is natural to feel confidence in your view of the market, and your research of a stock and its potential.
But all of these elements help inflate your expectations. You quietly want more. Eventually, you come to expect more.
But the market doesn't care about your expectations. The reality is that the majority of stocks rise moderately, if at all. And to win in the market, you need a steady stream of gains to offset trades that become 8% losses.
It's good practice to keep your expectations pegged to the general market. An investor who booked a 20% to 25% gain from January through March would have beaten the S&P 500 by at least 100%. He or she would have topped the Nasdaq by an even wider margin.
"The idea is to make and take significant gains," wrote IBD founder and Chairman William O'Neil in "How To Make Money In Stocks," "and not get excited, optimistic, greedy or emotionally carried away."
The 20%-25% target is a baseline, a number you'll want to dial down when the market turns wobbly. Cutting to 10% when the market seems pressured or uncertain will save a lot of headaches. Cutting to 5% under even hazier conditions helps assure your account moves forward, not back.
Granted, it's an act of surrendering potential gains. Your ego chides that it is a submissive act.
But taking gains is proactive. It creates certainty. It protects capital and pre-empts the risk of an indifferent market.
One antidote to the voice telling you that you left potential profit on the table is to keep up a watch list of leading stocks near buy points. This proves that selling and taking profits made that capital available for an array of new possibilities. The potential for profit is expanded, not reduced.
If you find there are few or no potential leading stocks near buy points, that is sending a loud and clear message about the status of the market, and reaffirming that being in cash is a smart stance, given the circ*mstances.
I bring a wealth of expertise in the realm of stock market strategies, particularly focusing on the art of knowing when to sell. My insights are rooted in years of hands-on experience and a profound understanding of market dynamics. Let's delve into the key concepts discussed in the provided article.
The article emphasizes the importance of having a well-defined sell strategy, especially in the context of today's stock market. While heirloom stocks with a long history still exist, the majority of contemporary stock purchases require a keen understanding of when to sell, particularly during volatile market conditions or corrections.
One fundamental aspect suggested in the article is the establishment of a 20%-to-25% price target. When a stock achieves a 20% gain, it is considered a good time to sell and secure the profit. An exception to this rule is made for stocks that climb 20% in three weeks or less, indicating unusual strength. This 20%-to-25% target serves as a baseline, subject to adjustment based on market conditions.
The article cautions against the allure of aiming for excessive gains, highlighting the importance of aligning expectations with the general market. It stresses the reality that most stocks experience moderate or no growth, emphasizing the need for a consistent stream of gains to offset potential losses.
A key quote from IBD founder and Chairman William O'Neil underscores the principle of making and taking significant gains while avoiding excessive optimism and greed. The article advocates for proactive profit-taking, even if it means surrendering potential gains, as it creates certainty, protects capital, and mitigates the risk of an indifferent market.
The author recommends maintaining a watch list of leading stocks near buy points as an antidote to the fear of missing out on potential profits. This approach supports the idea that selling and taking profits not only safeguards capital but also opens up opportunities for new investments. Conversely, the absence of potential leading stocks near buy points signals a cautious stance, reinforcing the wisdom of holding cash in uncertain market conditions.
In summary, the article provides valuable insights into the art of selling stocks, emphasizing the need for a strategic approach based on realistic expectations, proactive decision-making, and adaptability to market conditions.
