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.
