When Do We Sell In the Model Portfolio

During the week, we received another interesting question:

“Some of the model portfolio picks are doing pretty well. Is there a good rule
for when to move up stops to protect profits? Thanks”

Here’s how we approach taking profits:

In the ideal scenario, we’d like to add to our winners when and if they set up properly again. Soros likes to repeat that “it is not important if you are right or wrong, but how much money you make when you are right and how much money you lose when you are wrong”. We follow the same principle. We keep our losses small by never adding to a loser and selling when our loss is still in the single digits: 5% to 9%. We add to our winners and we let them rise for as long as reasonable.

No one could predict how long a trend will last and how far it will go; and yet there are some simple selling rules that have been helpful for the most part. Benjamin Graham had a very spot on expression about this topic – “You don’t have to know a man’s exact weight to know that he’s fat.”

We take partial profits (sell 1/2), when:

1. We are up >20% on a position, especially if the initial allocation is 10% and it is in a large cap. We open new positions with 5% to 10% allocation.
2. When weekly RSI gets above 80 – this is a severely overbought technical condition that often leads to mean-reversion or consolidation through time.

We keep raising our stops as the stocks we own climb and form new bases. In some situations, we don’t wait for our stops to get hit before we exit:

1. When the general market starts to show signs of weakness, we will proactively decrease our long exposure in order to protect profits and minimize the potential drawdown.
2. If a stock starts to show notable relative weakness and the number of its distribution days increases, we will sell it. RH was a good recent example.

Read also: How do we pick stocks for the Model Portfolio

  • Prasad Bhima

    Hi Ivaylo, what is the call on WDAY after results? It looks like post market it is down pretty bad! Please suggest.

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