Average up vs Take Profits

22nd May '18 by lexington

7 comments 3508 reads

Hi all,
A beginner question here, so if this has already been discussed please feel free to point me to the thread. I've read about the value of averaging up, but also numerous people suggest taking profits at 20-30% to lock them in. Then I suppose there are mid-way points like adding a trailing stop... I was just curious as to how others handle this. Does it come down to the individual stock and your belief in its prospects? I've got a few shares that are 20-40% up. I don't want to miss a good run but equally don't want to lose it if they fall back.

Just found this discussion, but am interested in any other thoughts.

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About the Author

Lexington

Premium Member

7 comments

rpannell

22nd May '18

The first rule for investing - run your profits and cut your losses.
If you cannot cope with possibly losing a profit, you can always put in a trailing stop loss with enough wiggle room to allow for rule #1. A must read book for beginners on how to cope with profits is "The art of execution" by Freeman Shor.

Effortless Cool

22nd May '18

To a large extent, I think, the approach depends on the "story" you bought into when you made the investment in the first place.

If it was a growth story then, as the investment can be seeing to be delivering on its potential, averaging up may be a good strategy as there is perhaps a growing likelihood of making a good return on each incremental investment, i.e. the story continues.

If it was a value story, however, then the increase in price may represent the end of your story - crystallisation of the value opportunity. In those circumstances, taking profits will normally be the best option.

In summary, clarity about why you are invested helps drive clarity about when to sell.

willhampson

22nd May '18

Hi Lexington, completely agree with rpannell. I think best practice is to have a trailing stop loss; this can either be arranged with your broker (if they offer it), or have a mental stop loss in your head. Personally, I do the latter but I can see the advantage of having it automated to cut-out any emotions.

There are times I don't stick to this, however. For example, if due to the rise in a stock I now feel uncomfortable with the weighting of my holding I will just cut some (never anything wrong with taking profits).

Another exception is if I have bought something with a specific return in mind, which I appreciate sort of contradicts the above re having a trailing stop loss. I don't do this often, but will occasionally buy a stock for a short/medium term recovery. I think these are special cases (and am not recommending this approach), but, for example, I have done this with Scapa (LON:SCPA) recently during the dip last month and have exited this morning as it hit my target price.

Finally, hopefully this doesn't apply to you, but if you are dabbling in penny stocks, especially O&G explorers, I would very much sell into the spikes. These things can drop so fast that I don't think a trailing stop loss approach would work.

Rusty2

22nd May '18

"Does it come down to the individual stock?"

Yes I think it does, I find it's good to review shares each time there is a major announcement such as interim figures or full results. I usually sell on bad news. Some I buy with a plan to sell after a quick gain unless there is some reason to hold for longer or momentum is strong, this is a "Naked Trader" type approach but other shares I have a view to holding for the longer term such as Lord Lee type of investment. Looking at my best winners I regret taking profits along the way. My early mistake was selling out too soon for a quick profit. Depends what sort of investor or trader you are. Momentum and value investing are very different from each other.

whitmad

22nd May '18

At its current price, ignoring the history of your ownership of the stock and whether you have a paper profit or loss, the question is "Would I buy it now at this price." If the answer is "yes", don't sell. If the answer is "absolutely not", sell it. There's a grey area in between where you have to factor in the cost of overtrading if you were to sell and buy something else.

Another factor to consider is whether a holding has grown so much that it is a significant proportion of your portfolio. You may wish to sell part of your holding to reduce concentration risk.

Personally, I do not register the concept of "locking in profits". You sell something, you then have cash, which you then use to buy something else. If the something else offers a better risk/reward then it makes sense. Otherwise not. Holding cash is just another position - one with low rewards and low risk. The only time you really take profits is when you take money out of your trading account to buy a house/car/holiday/whatever - otherwise you are just juggling positions with different risk/reward characteristics.

lexington

23rd May '18

Thanks everyone, some great insights here. Appreciate all of your contributions.

Trigger14

23rd May '18

As others have said the right thing to do depends on the specific situation. However, if you’re like most people, you’re going to be biased to want to lock in profits. In general, there’s no good reason to do this - just the psychological reward of chalking up a win (and probably more significantly the elimination of the anxiety of it possibly falling back to a loss). Because other investors tend to sell winners too quickly you will tend to outperform if you do the opposite and run your winners. I find that even knowing this it is often a struggle to resist the temptation to sell my winners. So I try to discipline myself to never sell unless the story changes and the price is falling.

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Average up vs Take Profits

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Lexington

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