The 3 simple ways to realize capital gains

When is it time to sell?

We tend to focus on when to buy, time the market, or cost-averaging our best stock, but somehow we neglect to time the exit of our stocks.

Here are 3 simple ways that should make sense for you to “realize” capital gains on your stocks:

1. Your gains are more than 50%

It's time to rebalance and take your gains, hence decreasing your money exposure to that stock. You are increasing your risks and chance to lose it all by not selling. By selling 50% of your shares, you will at least "secure" your initial capital.

You have to remember that prices going higher automatically increase your exposure to higher price risk.

This is an universal rule for portfolio management and this rule can become very dangerous when you ignore it or neglect it.

I have too many personal experiences not to ignore that rule anymore.

2. Your prices have reached a new all-time high

Is that stock reaching a new all-time high? then maybe it's time to sell and take any gains you have for that stock because you might not have a chance to see that new high in the future.

A new all-time high can attract all kind of positive and negative attention for that stock, and it's very likely the market will misprice this new high eventually.

Some short-sellers might think that new high is not justified and will test some kind of Technical Analysis price band or some clueless investors might see this as some kind of validation of value and go all in without any fundamental justification except that new high.

3. The 52wk Price momentum is more than 100%

This technical signal tells you that it in the last 12 months the stock price has doubled.

Even though this might sound great if you own that stock, and it might feel counter-intuitive to sell, it also signals that too many people are jumping on the same crowded bandwagon, and we all know what that could mean next: run for the exit.

This happens too many times in particular with SmallCap stocks. Of course there are exceptions and it is less likely to happen when the stock is a LargeCap or a big MidCap.

But why take the chance and lose it all? Start selling 30%-40% of your shares to secure at least any capital gains you might have.

What do you think? Do you have your own playbook for exiting stocks in your portfolio?

if yes, what is it?