My Selling Strategy for Making Money Selling Stocks
Uses rules for selling stocks to maximise profits and minimise losses
Rules for Selling Stocks
The main aim of my selling strategy is to maximize profits and to minimize losses from stock selling.
The strategy also recognizes that not every investment decision is going to be a roaring success.
Stuff happens! ... and as a result situations may arise where selling a stock is the best policy.
I use the following rules for selling stocks to be able to handle those circumstances, and also to avoid becoming emotionally overwhelmed ....
I sell whenever losses on a particular purchase reach 2% of total portfolio value unless there is a general market downturn not related to that stock.
This is a capital protection measure. Holding on can result in a loss of opportunity to invest in more profitable investments.
Remember Warren Buffett's first rule - DON'T LOSE MONEY!
It is his second rule as well!
I sell if a share does not generate an internal rate of return (IRR) of at least 5% after two years. I recognize that the funds can be better utilized elsewhere.
I sell if a share does not generate an IRR of at least 10% after three years, or drops below 10% at some later stage. I recognize that something has eventuated that has hindered the expected returns that I initially envisaged.
I avoid selling for profit within one year to minimize capital gains tax.
How much this is a problem for you will depend on your tax situation and the taxation rules that apply in your country.
I commence a staggered reduction of overweight holdings in profitable shares when the overall share market P/E ratio and/or the price earnings ratio of particular shares have reached or significantly breached their historical highs.
I obtain this information from data on my online broker's website.
Selling stocks online is the way I action my selling decisions as it minimizes brokerage charges.
There are two main outcomes from invoking my selling rules. The first is that I purge my portfolio, on an ongoing basis, of stocks that for one reason or another have not lived up to the performance expected of them.
Otherwise my portfolio will in time start to resemble Napoleon's retreat from Moscow!
The second outcome is that I am more likely to have sufficient capital to take advantage of bargains following a market downturn. Not being able to take advantage of market downturns will seriously dent a value investor's returns.
Also, by undertaking a staggered reduction in my portfolio when the market is overheating, I can take more profits by further selling if the market continues to rise.
This recognizes that I can't time the top (and bottom) of market cycles.
NOBODY RINGS A BELL AT THE TOP OR BOTTOM OF THE MARKET!!
Having this selling strategy in place helps me to avoid two types of situations ...
The first situation is where there are sharp up or down movements in the market that may cause me to panic.
The second situation is when there is very little action in the market - and I am looking for some!
So my rules for selling stocks help to provide discipline in my selling decisions and help to add value over the longer term.
The related articles below examine the importance of each of the measures in more detail.
Related ArticlesThe internal rate of return
- allows me to rationally determine selling decisions based on the ongoing financial return I am receiving from the stock.
The price earnings ratio - provides me with one (relative) indicator as to whether a stock is overvalued.
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