Personal Investor: Is it time to take profits?
The S&P 500 is up 18 per cent over the past year. The TSX is up 25 per cent. Who thinks about selling?
Unfortunately, we humans are prone to only think about selling a stock when is down – a complete reversal of the buy low, sell high golden rule.
Some professional money managers have internal rules that when a stock rises by a certain percentage within a certain period of time (say, 30 per cent in one year) they must create an argument to keep it.
Here are five questions you should ask yourself or your financial advisor when a stock has had a health rise:
1. Has the price exceeded its intrinsic value? One of the best ways to measure the value of a stock is to compare its current price with earnings per share from the immediate past or immediate future. Ask yourself how the price-to-earnings ratio has changed since you purchased the stock. Would you still buy it at its current price?
2. Does the sector have potential for growth? Sectors rarely advance evenly. Perhaps stocks in a certain sector have outpaced the broader markets and the market is due for a shift.
3. Are external market conditions favorable? It’s difficult for any individual stock or sector to advance without a strong economy. Is the economy currently poised for growth or are there dark clouds on the horizon?
4. What do the technicals say? A stock might be rising but dwindling volume could signal a trend reversal. Technical analysis isn’t always right, but’s it’s right most of the time.
5. How soon to I need it? If you’re nearing retirement there may not be a better chance to turn a good performing stock into cash. As we get older, and the time draws near to start spending our savings, it’s good to shift equities into fixed income. Now may be the time.