Why selling successful stocks can feel incorrect—but may be beneficial
Our minds tend to predict consistent trends. When a stock increases, we expect it to keep climbing (greed/FOMO). Reducing investments based on risk exposure confronts that predisposition without forsaking a robust company.
Prune rather than obliterate
The goal isn’t to sell off all your profits. It’s to take some off the table and rebalance—keeping numerous shares to gain if the growth continues (think Apple/Microsoft) while averting portfolio concentration risks (imagine a sudden –50% plunge).
Establish your risk in dollars, not feelings
Start with a distinct, personal loss threshold (for instance, “I can tolerate losing $25K on any one stock”). Translate this into maximum position size utilizing a worst-case decline (Mike assumes –50% for easier decision-making). Example:
- If $25K is your maximum loss, then your max position is ? $50K.
- When it surpasses that (say $55K), reduce (for instance, to $40–45K).
This removes uncertainty and “what if” scenarios.
Mike’s guidelines (adopt these or formulate your own)
- Individual position limit: ~10% of total investable assets (not limited to a single account). A –50% loss would mean a ~5% overall decrease—manageable, not catastrophic.
- Sector limit: ~20% indicates caution; >30% requires immediate action. Diversify by sub-industry (for example, software vs semiconductors vs consumer technology) to mitigate sector effects.
- Sales criteria beyond size: Investment rationale weakens, or Dividend Triangle (Revenue, EPS, Dividend growth) trends deteriorate over several quarters/years. These apply equally to winners and losers.
Timing & market environment
New peaks foster complacency. Reducing holdings at extremes (the late ’21 instance with AAPL/MSFT) can soften the subsequent decline—even if those stocks later bounce back—because you can reinvest in other quality choices to preserve balance.
Process triumphs over perfection