When to Take Profits | IBD-university

 You don't need to hit home runs to win the investing game. Focus on getting base hits. To grow your portfolio substantially, take most gains in the 20%-25% range.

Though contrary to human nature, the best way to sell a stock is while it's on the way up, still advancing and looking strong to everyone.

As IBD founder William J. O'Neil says, "The secret is to hop off the elevator on one of the floors on the way up and not ride it back down again."

So after a significant advance of 20% to 25%, sell into strength. When you sell like this, you won't be caught in heart-rending 20% to 40% corrections that can hit market leaders.

Why 20%-25%?

Typically, growth stocks tend to advance 20% to 25% after breaking out of a proper base, then decline and set up new bases, and in some cases resume their advances.

So in most cases (see the 8-week hold-rule exception), you're better off locking in your gains to avoid watching your profits disappear as the stock corrects. And you can potentially compound those gains by shifting that money into other stocks that are just starting a price run.

By following this disciplined approach, you'll regularly nail down the kind of solid gains that lead to large, overall profits in your portfolio.

The Rule of 72

This simple calculation shows how effective following the 20%-25% profit-taking rule can be.

Here's how it works: Take the percentage gain you have in a stock. Divide 72 by that number. The answer tells you how many times you have to compound that gain to double your money. If you get three 24% gains — and re-invest your profits each time — you will nearly double your money. It's much easier to get three 20%-25% gains out of different stocks than it is to get a 100% profit out of one stock. Those smaller gains still lead to big overall profits.

The table below shows how that works:

Calculating the 20%-25% Gain

The 20%-25% profit-taking zone is based on the stock's ideal buy point. That may differ from your own purchase price.

As we saw in How to Buy Stocks the ideal buying range is from the ideal buy point up to 5% above that price.

So let's say you bought 2% above the ideal buy point. If the stock then goes up 20%-25% from the ideal buy point, your profit would be 18% to 23%. See the chart below for an example of how this works.

The 20%-25% Profit-Taking Rule in Action

View the chart markups below to see how — and why — you want to take most profits once a stock is up 20%-25% from its most recent buy point.