An Alternative to Profit Taking
Note: Please read the disclaimer. The author is not providing professional investing advice or recommendations.
So, you did your homework & purchased a stock at the right time. Now it has risen a nice 15% or 20% and you’re feeling the pull to take your profit. However, you feel like the stock has promise to perhaps continue rising in the long run. What do you do?
Obviously, there are 3 options:
(a) Sell all of the stock and take your profit (i.e. don’t be greedy)
(b) Hold onto all shares since they may not be done rising (i.e. don’t be fearful)
(c) Sell some shares, hold onto the rest (i.e. the middle way)
Of course no one can see the future so no one can tell you which is right, but if you do, for whatever reason, feel that the stock may continue to rise in the long term, there is a variation of choice (b) above that might be attractive. That is, sell enough of the stock to just get back the original money you invested. What you’ll have left over are shares that will have much less emotion attached to them.
Say for example, you put about $5,000 into Apple by buying 69 shares on January 3, 2006 at $72.38 per share. Ten days later on January 11, the stock opened at $83.84 per share, up almost +16% already!
Wow! With this large of an increase in such a short time, the Bill O’Neil school of investing
On the other hand, maybe Apple is peaking & is about to start declining.
To do a middle way strategy you decide simply to recover your initial $5000 by selling 60 of your 69 shares at $83.84. Ignoring taxes & trading fees, you’ve now regained that $5000 and can put it into something else.
And the 9 shares of AAPL that you are still holding are just gravy. They’re essentially “on the house†as Jim Cramer
These are shares that you may decide to hang onto for 5 or 10+ years just to see what happens. And since, emotionally, they’re freebies, you won’t really worry about their day-to-day, or even month-to-month fluctuations. Save them for a rainy day a decade from now!
Of course another good reason to hold onto these babies for a long time is because of the decreased capital gains taxes paid on stocks owned over 1 year.
It may not be the way you want to handle all profit-taking but at least put it in your bag-of-tricks as an option you may consider. We’re still obeying Buffett’s Rule #1
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