iBooyah.com Investment Matters

Sell when your appreciation target has been reached.  When we buy any stock, we set a target sell price.  In our case, we would normally sell some shares when the stock appreciates 20% or higher.  Why 20%?  In our view, if you can beat the S&P 500, you are doing terrific.  Moreover, it has been well documented that we will need to earn at least 10% on our investments in order to beat inflation.  Therefore, if we can earn 20% or greater, we consider this to be a great return.  We fully understand the difficulty of selling our winners, but letting our money ride without taking profit has resulted in a lot of regrets. As a result, we are very discipline in this regard.

On the flip side, what if the stock you purchased started to dive?  What do you do? Similar to our appreciation sell strategy, we would normally cut our loss at 20%. However, before we sell, we usually ask ourselves if the stock is declining due to the company’s inability to grow their business or some other factors.  If the share is down because the sector or the overall market is bearish, we sometime will let it dip to 25%. However, that is the maximum percentage we will tolerate.  In our experience, selling when you are in the hole is the hardest thing to do, but we will swallow our pride and move on.

Selling when the stock reaches its 52 week high has proven to be a great way to secure our appreciation.  In our view, when a stock reaches this important level, the chances of it going higher are less likely in the short term.  If you observe the behavior of any stock that recently reached its 52 week high, the stock will usually fall the following days after reaching this milestone.  This is just pure profit taking by large institutional investors.  This is the primary reason we refuse to buy any stock when it is trading near or at its 52 week high.  Buying at such level is similar to trying to hop on a train going at full speed. The risk/reward factor will not likely be on your side.  Bottom line; do not hesitate to take some profit if you are up on your position; especially if your winners are trading at its 52 week high.

Tax consideration is also an important factor.  If you are just a few months or weeks away from getting a favorable capital gains tax rate, you might want to hold off selling so you can save on your taxes.  It is a good idea to consult the Internal Revenue Services website for details.  In general, our goal is to protect our profits and we will usually sell without fear of capital gains.  In our view, we will gladly pay the IRS their dues if we can sell at a higher price.  However, everyone has their own situation in respect to their tax matters so it would be worthwhile to look into where you stand.