It was funny actually.
We all thought the stock market will suddenly plunge into a correction, which is by the way good, and some ask if it is time to sell. Others on the other hand is asking if it is time to buy(and I am one of those been holding cash for the longest time and I am not linking it). Well by now I know some ave an ear to ear smile in their face because they portfolio is all green. That means their stock holdings are now at a profit. But with that the real question is did I really profit?
Back in October 20212 I posted “How to properly determined your stock investment earnings?” which you can reread by clicking here. I did touch some part in that post. Now with the PSEi always surprising us it has come to our senses that it is really unpredictable and thus cashing in your profits might be a headache. Yes you are torn whether to sell now at 10% profit or wait some more till it reaches 50% profit.
Here is the deal: unless that 10% or 50% is sold and turned into cold cash you have no profit yet. Yes that’s just a flashy green number but unless you sell your stock at a profit you will never have profit. As mentioned what you see is what we call unrealized profit or in some more less complicated lingo paper profit.
The thing about it is that it is just an indicator that you have already profited and if you sell your stock right now you will get 10% or 50%. So the question is still there: When do you know if it is time to cash in?
The problem with a trending market is that you seem to want more because you believe there is more. Thus you end up waiting and waiting until the trend reverses and worst the downward trend are sometimes faster than the upward trend. If you don’t act fast you might even lose those 10% or 50% that you saw days ago.
Way way back, it was 2011, I wrote about the Seven Rules of Stock Investing(again you can read it here which I insist this time) of which one rule says “Pocket your profits, moderate your greed.” It is hard to resist temptation to hold on to your profiting stock because your greed will truly come out. That is why so many investors gets burn so to speak when they start to spot a trending stock and start buying it and holding it till it is so high but suddenly the price drops. The worst is when they have placed all their fund on this one single stock and after waiting and holding on it just went down.
I know you have been dying to ask me: What should we do then to avoid that scenario?
Well I learned two things from my unofficial mentor(bro Jerry I guess that will be your codename from here on):
1. Set Target Price
2. Set aside at least a certain percent of your fund as cash.
Target Price what is it?
Well target price which others call “TP”, sell price, limit price, psychological ceiling etc., is that point at which you are comfortable selling your stock at a profit. Such could be a certain percentage, a certain amount, or anything that you accept right return of investment.
Such target price should always be achievable or realistic after considering the nature of the stock you are holding. You might be holding a stock of which the industry it belongs to is down and you expect a return of 80% that my friend won’t happen. Again always make it realistic at which you are comfortable.
For some they might be comfortable having a 5% profit from each stock no matter what industry(I guess I am one of those) while others are comfortable once they earned above 1,000.00 pesos from the stock, while I guess the rest would surely want a 30-80% profit or even more a two or three bagger.
On the other hand why do you have to set aside a portion of your fund as cash?
Yes you would argue that such cash could have added a few more shares and eventually earned but hear the logic first.
Such set aside fund is actually your buying fund for stocks that are of good standing but suddenly drops. Such fund should be use for buying opportunities.
At times some stocks experience a sudden drop in their trend but eventually goes back to the trend. Such events could be a sudden change in the a management but replaced with a better management, a catastrophe that is just for a short period, economic crisis in other countries that just affected ours in a few days, and etc. At those times if you don’t have that money you lost that great opportunity. Also at times specially when you are cost-averaging you can use that money to buy more than the usual number of stocks you buy when the share price drops thus making your cost per share smaller which translate to a higher profit when the stock’s price rises.
So when to cash in your profit?
Cash in once your stock’s price goes above your target price and buy using your set aside fund to have lower price per share and eventually sell high.