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Is a Big Share Price Gain a Signal to Sell and Take Profits?

By Motley Fool Staff – Jun 5, 2019 at 3:25PM

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The problem with this strategy is that people are worse than they think at market timing.

If Abigail Van Buren and Ann Landers had teamed up and become personal finance and investing experts -- and if they'd kept working into the podcast era -- one can imagine the result might have been a little bit like the Motley Fool Answers' monthly mailbag episodes. (Though they probably would have done less "awfulizing.") Certainly, there are plenty of us who could use some guidance in the money realm -- so many, in fact, that two advice givers are hardly enough. So for this podcast, hosts Alison Southwick and Robert Brokamp have brought back one of their more popular guests, senior analyst Emily Flippen, to chime in.

In this segment, they tackle a question from a 20-something listener -- and The Fool loves to hear about young people who are already diving into the world of investing. He's curious about whether a strategy that he's tried with some success is actually smart: automatically selling a stock after it delivers a certain level of return. Short answer: No. Don't do that. For a more detailed answer, allow the gang to explain what works better.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on May 29, 2019.

Alison Southwick: The next question comes from Vijesh. "I am 27 years old and currently have my Roth IRA split almost equally between a target date index fund and individual stocks. My question is whether you think it is a good strategy to automatically sell a stock after it earns a certain amount. For example, I purchased McCormick stock in January and had it set to sell as soon as I made 10%, which happened to be in March, a fairly quick and nice return."

Emily Flippen: Yes, it's a good question, and congratulations on the 10% return on McCormick! I will say we tend to invest a little differently here at The Fool, and that's because studies continuously show us that long-term buy-and-hold investing tends to outperform trying to time the market. It's a funny thing about humans. We're really bad at that. We're really bad at figuring out the right time to put money in and take money out. We see media. We hear news and it makes us nervous.

We tend to buy and hold stocks for long periods of time. We tend to say three- to five-year time horizons and then you can reevaluate. Using McCormick as an example, it's actually up 15% over the year and 30% over the lows from the year, so theoretically, depending on what time somebody might have purchased McCormick, a 10% return was leaving a little bit of money on the table, despite the fact that a 10% return is also great.

So I think for those investors who maybe are a little bit more prone to be nervous about the market -- who want to put money in or take money out actively -- that sometimes index funds tend to be the best thing. If a 10% return on an investment makes you nervous, or a 10% drop in an investment makes you nervous, well sometimes if you respond to that, you could be leaving money on the table.

Southwick: I don't check my scorecard very often to see how well my stocks have performed, and this is going to make me sound really dumb. I'm looking at my scorecard to see how well my portfolio of individual stocks has performed and I was like, "Oh, huh! That's funny! The stocks I've held the longest have performed the best!" And then I was like, "Oh, wait! That's what we preach here at The Motley Fool." So yes, genius over here finally put together what we've been preaching the whole time.

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