There’s an old Wall Street axiom that says “you can never go broke taking profits.” And it’s true that profits are not realized until you sell an investment and take the money out, as there’s always the risk that an unrealized gain will go away if you don’t take profits when you can.
But the other side of the coin is that if you sell too early, you might be giving up on an investment that could earn you much more in the future. In the stock market, stocks that are winners often continue to race higher, unless their fundamental story changes.
The flip side of selling a stock too early is falling in love with a stock and never selling it at all. It’s only natural to feel good when you look at your portfolio and one or a handful of stocks are doing exceedingly well. Not only does it validate your sense that you picked a good investment, but it also no doubt makes you feel good seeing how much money you are making.
But this is where human nature can get dangerous, as it’s hard to part with something that gives you those types of good feelings. Our own human biases make us tend to believe that what works now will always work, and that what’s failing now will always disappoint.
The problem is that if a stock goes up too far too fast, you might watch as those gains evaporate right in front of you. A more prudent move is often to trim back positions that have greatly outperformed with the intention of buying back into them after they give back some of their gains.
