One way to calculate the price at which to sell
an investment that has increased in value is to set your price
objective at a percentage of the purchase price, such as 30% or
35%. Of course if you own a stock that's moving steadily
higher, you may want to postpone selling in anticipation of realizing
a larger return — provided that your analysis indicates that
the stock is sound and demand remains high. The same is true with
selling bonds if interest rates seem likely to be reduced in the
near future.
Another way to protect your gains is to sell some — say 50%
— but not all of your total holding when it hits your target
price. Or you might sell a third of the total when it has climbed
30% in value and another third when it is up 50%.
Preventing loss
One way to keep losses in check is to establish a stop-loss price
when you buy, just as you set an upside price for gains. You can
also calculate it as a percentage of the purchase price, though
you may want to use a smaller percentage — say 15% —
to establish what you're willing to tolerate in losses before
you sell.
You still have the flexibility to postpone selling if the price
hits your stop point because the market as a whole is falling.
That's true even if you've given your broker a stop-loss
order, provided you remember to cancel it. But if you continue
to put off the sale because you're waiting for the market
to turn around, you could end up magnifying your losses.
Thomas J. Dorsey, President and
co-founder of Dorsey, Wright &
Associates
It's not market timing
Market timing has a bad name among some responsible
investors. The phrase suggests an image of constant
trading to capitalize on tiny price changes. But that's
not the same thing as selling to prevent losses or
protect gains. While using a sell strategy effectively
depends on timing, it is a long-term approach to limiting
investment risk and enjoying investment return.
Thomas J. Dorsey, President and
co-founder of Dorsey, Wright &
Associates 