QUICK QUOTES
Make the Money - Take the Money
In Chapters 5 & 6 of our publication, When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), we discuss various investment strategies and risk management.
In the investment world, many Financial Advisors focus on long-term strategies, gearing towards retirement age, tax-deferred, compounding, and/or “hands-off” types of investments, all of which can be very lucrative over time. Fund Managers also like to structure portfolios for the long-term, as most adjust the stock holdings about once every quarter, and do little else, though they are paid commissions. Most mutual funds are based on a “theme” (high or low risk, income, etc.), of which there are many to choose, but it can be argued that these managers are actually only concerned about beating the S&P 500 each year, not your actual profit. As we also often suggest, a precise, structured, Risk Management plan is essential for successful investing and trading.
“Make the Money, Take the Money,” is based on a different strategy, mainly for shorter-term traders of the equities markets (or any other investment types for that matter). The premise of this statement, often suggested by legendary commodities investor Rick Rule, is that realizing gains along an investment path is more beneficial than leaving one’s whole portfolio vulnerable to risk for its entirety.
While all investors should consider age, capital, risk tolerance, financial education, varying trading strategies, and life situations, we choose to employ the practice of selling half of a position once it doubles. This strategy protects your initial investment, ensuring profit all the way back to $0, which is very unlikely when investing in established companies, but leaves capital in the position for further growth. A low percentage of stocks actually double, and fewer sustain those gains, making this approach rather safe. There is always the possibility that the stock will continue higher, in which case only half the potential gains will be realized. On the flip side, none of the initial capital is at risk, which is now available to diversify into another investment or trade, and peace of mind has been accomplished with the winning trade.
This reminds us of another famous quote – “No one ever went broke taking profits,” by financier Bernard Baruch. Since capital preservation is a main goal to remain in the investment arena, it prevents larger potential drawdowns, and removes some of the emotion/stress from selling decisions.
Some of the perceived negative aspects to this strategy includes the loss of potential compounding due to dividend payments as well. Recognizing the correct stocks to sell at certain levels helps alleviate this issue, as many high growth stocks pay very low yield, if any at all. Interest paying stocks are also subject to price downturns (including after distribution). Fees and commissions can also add up, however, that issue is normally isolated to frequent options traders.
There are also tax implications, of course, when selling an asset/equity, which depends on the amount of time held, and one’s trading frequency. Taxes allowance should be included in a pre-determined plan, which is always suggested, but fearing the capital gains taxes can impede the rational thought behind the decision to sell. Tax rates can always increase in the future (have they ever decreased?), and a larger, one-time, profit could potentially move an individual into a higher tax bracket.
Experienced traders will often buy and sell in tiers, as they target certain prices, percentage gains/losses, and other advanced strategies that are better left to the professionals. Most “retail,” traders (you and me) do not possess an account size that is suitable for this type of strategy. Consistency and risk management are the keys to successful investing, and realizing gains along the way provides an important psychological advantage.
Remember to develop your own plan, including avoiding turning small losses into large losses, and don’t let emotion affect your investing/trading strategies!
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of the financial markets.
