When should you start taking profits?
The old adage of buy and hold seems like an easy way of long-term investing, but with the recent market pullback/correction/China fears, it can certainly make one emotional when your portfolio takes a 10% hit in a matter of days. The next logical issue is whether or not to sell and prevent any further losses, hoping for a lower bottom and then buying back in. One could also look at any market pullback as a complete buying opportunity and load up on shares on dips. Finally, the long-term investor could simply turn off the TV, unplug the computer, and ride out the market volatility since the market is likely to recover.
The big mystery is how hard will the market fall and how long will it take for the market to come back up.
The answer? Nobody knows.
That’s why you can never win by trying to time the market. Buy low, sell high. Sounds great in theory, but if you don’t know when low is low and high is high, how can you do that? Trying to time the market is no longer investing – it becomes gambling. I can count the number of times I’ve left the casino a winner on the fingers of my two hands.
Cut losses? Take Profits?
Since nobody really knows when the market is topping out and how low a market will fall during a correction, how can you safely take profits or cut your losses to fight another day?
This is something I am currently working hard on to do. It’s difficult for me to take profits when a stock jumps up 20% because the greedy part of me says, “what if it goes up another 20%? I’d be missing out!” On the other hand, it’s also difficult to cut my losses when I think, “what happens if it goes back up and I miss the rally?”
The most important thing I’ve learned thus far when investing is “throw your emotion away.” Stomp on it, burn it, lock it up and throw away the keys.
Investing with emotions blind you just like it does in everyday life, except this is with your money. It forces rash decisions that typically aren’t the best decisions.
There are certain stocks that I will hold forever, such as my dividend growth stocks, that I will probably never sell and just continue to load up on shares on market corrections such as this one. I have added positions to my AT&T (T) shares as well as initiated positions in Disney (DIS) and Phillip Morris (PM).
On the other hand, I have also cut my losses on Chevron on their earnings release back in July(?). Since then, it has continued to fall another 10+%. I may re-initiate a position in another oil stock in the near future for long-term growth.
On my third hand (or left foot), I have taken profits in Seagate Technologies (STX) (+1.4% with no intention of re-initiating) and some shares of Realty Income (O) before the correction and will hold off on purchasing more shares until the imminent rate hike that would cause a pullback in the stock, or a $44(ish) price point.
Sometimes it’s better to take your profits and use that money for a future investment. After all, it’s better to have a profit of $1 than to lose $5. I tend to sell either partial or complete positions in stocks after 20-40% depending on the sustainability of their respective growth. Typically, I won’t sell dividend growth stocks simply based on personal investment strategy.
Losses are a little bit more difficult to deal with because that evokes more of a fearful panic emotion that causes rash action. 10-20% is a good point to cut your losses. Depending on the stock and the reasoning behind the drop, you may choose to reinforce and load up on additional shares of a particular stock when it drops that much, but make sure you do your homework before you put more eggs in that basket. I am currently in a slowly sinking boat with Alcoa (AA) and still continue to hold. That may be a mistake. Time will tell.
Just make sure you do your due diligence before making any investment decisions and take my advice with a grain of salt and good luck in the highly volatile market!