Figuring out when to sell a stock is never easy. And most experts wisely recommend keeping your emotions out of the decision. Of course, every rule has its exceptions. So let’s revise this one.
Edwin Lefevre, one of the greatest investors of all time (he made a fortune back in the 1920s) routinely used fear and hope – two emotions that often lead investors astray – to determine whether to get out of a trade or stick with it. But he used them in a very specific way. Here it is…
- If a stock was losing money: Instead of hoping it would turn around, he would fear losing more money and sell out of his position.
- If a stock was making money: Instead of fearing it was hitting a high, he would hope to make more money and hold on.
This approach gets you out of stocks that can keep dropping in value. It also keeps you in stocks that can continue rising. Of course, once that winning stock starts losing money and you “fear losing more money,” you sell your position and capture a profit.
Edwin used his strategy strictly for short-term investing (any trade that lasts under a month). But you could still apply it to longer-term investing. All you have to do is set a stop-loss point at your personal “pain threshold.” That is, if it hurts when a stock drops 10 percent from where you bought it, use 10 percent as your sell point. If it hurts when a stock drops 25 percent, use that as your sell point.[Ed. Note: Charles Delvalle is a contributing editor to ETR’s Investor’s Daily Edge newsletter, and a regular contributor to INCOME. INCOME lets you in on the safest high-dividend-paying companies, with the goal of providing you with a total return (dividends plus capital gains) of at least 14 percent per year.]