Welcome to your “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about investing in stocks; specifically, how you know when enough is enough and it’s time to sell.
I worked as an investment adviser for 10 years and have been investing in stocks for about 40. As every stock investor knows, the question of when to get in or get out is an agonizing one. But with a simple rule of thumb, it’s not that difficult.
Watch the video to learn about this handy rule. Or, if you prefer, scroll down this page to read the full transcript of the video and find out what I said.
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For more information on this topic, check out “10 Tips for Sane, Successful Stock Investing” and “8 Basics That Beginning Investors Must Know.” You can also go to the search at the top of this page, put in the word “investing” and find plenty of information on just about everything relating to this topic.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, everyone, and welcome to your “2-Minute Money Manager.” I’m Stacy Johnson, and this answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.
Our question today comes from Theresa:
“I’d like to know what I should do now that my initial investment in stocks has doubled. Do I cash out the amount that I’ve earned and leave the initial investment until it doubles again? What’s the correct rule of thumb? I’m afraid that if I don’t withdraw the earned amount, I might lose it when the market takes a downturn.”
Well, Theresa, congratulations on doubling your investment! Now, you’re facing the conundrum all investors face: when to sell. Get out too soon, and you’ll miss potential profits. Sell too late, and you may not only lose your profit, but your original investment.
I’ve been investing in stocks for 40 years or so, and I can tell you that you’ll rarely be certain about when to ring the register. But if you ask me if it’s time to sell, my reply will be, “I don’t know: Why’d you buy in the first place?”
And here lies the lesson: The time to sell a stock is when the reasons you bought it are no longer valid.
For example, a couple of years ago, I bought Facebook. Why’d I buy it? Because I saw that everybody around me was using Facebook, the company’s income was rising meteorically, and the price of the stock seemed reasonable compared to the earnings it was generating.
I was either lucky or right: After I bought it, it doubled.
Not so long ago, Facebook had a major issue. The profiles of millions of Americans were misappropriated and used for nefarious purposes. The results were a steep decline in the stock, a tidal wave of negative publicity, the CEO being called before Congress and demands for potentially profit-destroying regulation.
At the time, it raised a question: Should I take my money and run? I thought about it long and hard.
To decide what to do, I revisited my original investment theme. As I said, I bought Facebook because everyone seemed to be using it and based on its earnings and potential, it was priced fairly. Even in the midst of Facebook’s difficulties, those things were still true. Therefore, I decided to keep my shares.
What about the overall market? If the stock market takes a huge hit — even bigger than the relatively modest declines we’ve seen recently — all my stocks will go down, including Facebook. But I’m a long-term investor and have learned over the years that I’m not smart enough to time the market. This is also why I don’t have enough money in stocks to keep me up at night.
Bottom line, Theresa: When you face a decision to sell, revisit the reasons you bought. If you’re genuinely afraid of losing your profit, take it. Or, sell part of your position to recoup your original investment. But I’d urge you never to try timing the market. You won’t be successful. Nobody is.
One last piece of advice: Resist the temptation to take little profits and to let your losses run.
What a lot of investors do is get a small gain on a stock, then sell it. After all, as the old expression goes, “You can’t go broke taking a profit.” But when they own a stock that goes down, they hold on to it, saying something like, “Well, when it comes back I’ll sell it then.” The problem? It never does. The result? A portfolio of losers.
The way to make money in the stock market is to do the opposite of what most investors do. In other words, let your profits run and cut your losses short. Sell when you own something that isn’t working out, and the theme you thought was there doesn’t hold water. Keep the winners for as long as your theme is intact. That’s what’s going to make you rich.
Have a profitable day, and meet me right here next time! And if you liked what you heard, do me a solid and share this.
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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