It’s been a very solid past couple of years for the market, and of course, things have picked up in the past two months (despite the latest wobble), with high-profile AI-related stocks going wild and some high-profile IPOs. Despite that, we’re not seeing a rush of speculation and euphoria that typically comes with hot markets.
And the fact that most investors (retail and institutional) have yet to capitulate on the bullish side is a positive sign—and plays into the big-picture evidence today that there’s still a good amount of buying power left on the sidelines, which plays into the evidence that this post-March rally phase should have longer to run.
But in a choppy environment like this, picking spots and stocks carefully makes sense, as does buying on weakness. And another thing to consider is booking partial profits, which is something I used to write more about.
In fact, I used to dub it the “conservative aggressive” strategy—you’re still buying aggressive growth stocks and aiming for big winners, but you’re handling them in a more conservative fashion, specifically, ringing the register on a portion of your position relatively early in the move, and then riding the rest for what ideally turns into a longer-term gain.
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It sounds simple … and it is. The key, as always, is to follow the plan. It’s easy to say you’ll sell a portion after the stock has a good run, but when you’re watching the name levitate day after day, it’s hard for most to think of paring back.
What I’ve always liked about booking some partial profits on the way up is that it’s a good strategy in any environment. If things are choppy and tedious, it allows you to scratch out some modest profits when you get them. And while you won’t make as much as super-bulls during a runaway market, you’ll do just fine by riding the shares you still own.
There’s no magic formula, and in fact, I usually use judgment as to when to take some chips off the table. But if you’re looking for a few pointers, here are three:
3 Rules for Booking Partial Profits
First, when selling, I always advise selling between one-quarter and one-half of shares—readers of my Cabot Growth Investor advisory know I usually settle at one-third, though there’s no science to it. The real money is in the longer-term trend, which is why I want to give more than half my position a chance to morph into a huge winner.
Second, when looking at when to sell, you want to do it when your profit is more than your initial risk. Example: You bought a stock at 50, with a loss limit at 44, for a six-point risk. If shares get off to a good start and rally to, say, 59—nine points profit, or 1.5x your initial risk—you can consider peeling off a few shares. The 1.5x amount isn’t set in stone; maybe you shoot for 2x or even more, but the point is you’re not selling for just two or three points of profit—doing that means the math will work against you.
And third, once you do sell some shares, try to raise your stop (or mental stop) to near breakeven (ballpark) on the rest of the position. This will bring you the greatest benefit from booking partial profits: With some money in the bank and little risk on the remaining portion (barring overnight gaps down), you can give the rest of your stake plenty of room to maneuver, increasing your odds of capturing a big move.
Is booking partial profits some sort of magic elixir to making money? Of course not. But it’s a simple, well-rounded approach to many environments, especially when moves turn out to be fleeting.
If you want to know what growth stocks I’m currently recommending – several of which I’ve already booked partial profits on – click here to subscribe to my Cabot Growth Investor advisory.
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*This post has been updated from a previously published version.
