Profit should be realised from sales of stocks in the following situations:
(I) when the stock is obviously overpriced, or
(II) when the sale of the stock frees the capital to be reinvested into another stock with potentially better return.
- Not taking profit in the above situations can harm your portfolio and compromise its returns.
- In other circumstances, let the winners run.
Underperforming stocks should also be sold early.
- Hanging onto underperforming stocks is costly too.
- There is the opportunity cost that the capital can be better employed for higher return.
- Also, hanging onto these lack-lustre stocks reduces the overall return of your portfolio.
Reducing serious loss
When the fundamentals of a stock have deteriorated, sell to protect your portfolio.
- This decision should be make quickly based on the facts and situations, in order to keep your losses small.