By: Spencer Israel
This is surely a question some people have had to ask themselves this year.
Whether it’s Overstock (up a ridiculous 6,300% from mid-March to mid-August), Novavax (at one point up over 4,600% this year), Zoom (up 600% year-to-date and rising after its most recent earnings report), or Tesla (up a measly 488% in 2020 as of Sept 1), there are dozens of stocks that have made gravity-defying moves this year.
So, what do you do if you happen to own one of these high-flying monsters? Here are some options for people thinking about selling in this situation.
Take Some Chips Off The Table
A general rule of investing is if you are constantly sweating a position, you’ve probably taken on too much risk. If it will help you sleep at night, take some risk off.
One common rule of thumb when deciding how much of an investment to sell is to sell your original investment so the rest of your position is pure profit. Or you could approach it from the other direction and think in terms of how much you want hold. Are you comfortable holding half your position? 75%? Whatever number you come to, that will tell you how much to sell.
Take ALL The Chips Off The Table
Look, it has (usually) paid to buy and hold in 2020. Unless we’re talking about the handful of out-of-favor industries (oil and gas, travel, utilities, commercial real estate, mall-based retail) every opportunity in stocks this year has been a buying opportunity.
But we have no way of knowing how long this party will last. At some point, it’s going to end and short-term dips will no longer lead to new highs.
And so the old adage “nobody ever went broke taking a profit” applies here. If you accept that you’re not going to time any investment perfectly, being too early is better for your regret minimization framework than being too late.
Set A Trailing Stop
This is the most tactical option. A trailing stop allows you to set a stop-loss order at a predetermined percentage or dollar amount below the current share price.
This order acts as a stopgap that continually follows the stock as it moves higher. If the stock falls to where the trailing stop is set it will trigger either a market or limit order, depending on which order type you used.
For example, if Stock ABC is at $100 per share and you set a trailing stop at 20%, your sell order will be triggered when the stock falls 20% from its high. So if ABC rises to $150 and then falls 20% to $120, your stop-loss order will be triggered and your order may get filled.
The benefit of a trailing stop is it takes emotion out of the equation by automating when you sell. But the catch is determining where to set your trailing stop.
Set it too close to the current price and you may get filled on a slight downtrend only to see the stock go even higher. The further away you set it, the more potential gains you’re giving up. The trick is to find the balance between the two.
These are your options if you’re thinking about selling. You may also decide to buy more or merely hold on to what you’ve got. That may also work.
The important thing is to have a plan and stick to it. Once you decide what to do, don’t second guess yourself. That’s a recipe that will lead to regret one way or the other.
The author is not long any of the stocks mentioned above.
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