How do you know when to take profits on winning stocks?
It’s a question nearly every investor asks at some point—and one that’s especially relevant today given the strong bull market of the past few years.
With major indexes hovering around all-time highs, investors may find themselves sitting on significant winners. That naturally raises the question: Should you lock in profits now, or hold on for more upside?
Deciding when to sell a winning stock can be surprisingly difficult. Even experienced investors struggle with it. In our conversations with subscribers, one theme comes up again and again: Selling winners is often harder than selling losers.
That’s because the psychology is different.
When a stock is underperforming, the decision is often clearer. You may have predetermined stop-loss rules, or perhaps the original investment thesis has broken down.
But when a stock is rising and performing exactly as hoped, selling means stepping away from a successful investment. After all, the stock is doing precisely what you bought it to do—make money.
Still, even the best stocks don’t go up forever. Knowing when to take profits on winning stocks is a critical part of portfolio management and long-term investing success.
To help make that decision easier, here are several simple guidelines investors can use to determine when it may be time to sell a winning stock and lock in gains.
5 Rules for Deciding When to Take Profits on a Winning Stock
1. Sell After a Set Period of Time
This is not a common sell discipline, but it’s a discipline (important) and it’s simple and easy to follow. And it works for Neil MacNeale, the editor of 2 for 1 Stock Split Newsletter. MacNeale’s investing strategy is based on research (the Ikenberry/Rankine study) showing that stocks enjoy two to three years of outperformance after undergoing a two-for-one split. So, with some flexibility built in for profit-taking, he holds each of his picks for two and a half years—30 months—and then sells it.
The “sell after a set period of time” discipline can work well when a) you’re starting with investments that are already undervalued and b) you have already taken some profits off the table after the stock appreciated significantly, locking in part of a gain.
The most important part of this sell discipline, though, is that it is based on and works well with MacNeale’s investing system. It’s most useful for investing systems with a time-related component: like buying undervalued cyclical stocks, for example.
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2. Sell When the Negatives Outweigh the Positives
This is a more popular, but less rigid (and thus harder to follow) strategy for taking profits in stocks. In this kind of system, you hang on to a stock that’s performing well until the factors supporting further upside are overshadowed by factors suggesting downside.
If you’re following this strategy to sell a stock, you’ll want to have a comprehensive understanding of the upside factors that you considered when you made the initial purchase. If the stock’s story remains the same, there’s no need to close out your position. However, if the technical or fundamental factors that supported your initial buy have deteriorated, that’s when you’ll need to consider selling.
Although it can be tricky to weigh the positive and negative forces acting on a stock if you’re not a professional investment advisor, this system does offer the promise of safeguarding gains in winning picks by selling before a downturn begins.
3. Sell Some to Lock in Gains
Another way to safeguard your gains is to take partial profits in your winners while their uptrends are still strong.
If you have a big profit in a stock, but still believe in the stock’s story and technical strength, you can safeguard some of your gain by taking partial profits off the table while leaving the rest to take advantage of further upside.
If the stock has run especially far or fast—particularly if it’s doubled or more—one method I’ve seen many of our contributors use is to take their original investment off the table and let their profits ride. That way you feel secure that you can’t “lose” any money if the wild ride ends (after all, you already got your original investment back).
4. Sell When a Winning Stock Reaches Your Target Price
Selling a profitable stock when it reaches your target price is another system-specific sell discipline that has some advantages. For one thing, choosing a target sell price before buying a stock makes the sell decision much easier—your judgment isn’t clouded by how much money you’ve made on the stock. It also forces you to reconsider how much upside may be left in the stock at current levels. Of course, like selling after a certain period of time, you should build some flexibility into the system, to ensure you aren’t missing out on big winners or letting profits evaporate.
Alternatively, you can use tools like trailing stops (or mental stops) which rise over time. In exchange for slightly increased downside risk if the trade loses momentum, you’ll enjoy a higher likelihood of participating in unexpected market rallies. Because both of these strategies require a willingness to look back at a trade that you may have exited too early, it’s important to stay disciplined and look forward to the next trade.
5. Sell When the Chart Turns Down
Finally, there’s the defensive sell, to protect your investment and whatever profits you have when a stock starts to weaken. This is probably the most important sell discipline and should be used regularly by every investor. This is a more extreme version of selling when the negatives outweigh the positives. In this scenario, you’ve seen a fundamental change to the story of your investment which is causing the entire market to revalue a company.
As you can see, there are many answers to the question of when it’s time to sell a stock. In many ways, the decision to sell a stock for profit is much more complicated than deciding to sell a loser. Losers should always be sold because they’re doing poorly, but there are a wide variety of reasons to sell a winning stock.
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*This post has been updated from a previously published version.