I recently lamented in How on Earth do you Decide WHEN to Sell Your Shares of a Successful Stock how difficult it can be to pick the time to sell. One strategy I (and others) sometimes use is to take “part profits.” Yes, it’s wishy-washy. But it works.
Let’s look again at my old friend Enbridge. We bought at $30.75, split adjusted. It’s trading today at $48.75. So each share is up $18 in just under 2 years. Our trading commission at BMO InvestorLine, where this stock is held, is $9.95. It’s held in an RRSP so there is no capital gains tax, although all monies withdrawn from the RRSP in the future will be taxed as income.
Calculate the Impact of the Sales Commission on Your Total Return Before Selling
You should calculate how many shares you would have to sell just to pay the trading commission. Then you’re ready for the next step.
Here’s the analysis for my situation:
With an $18 gain, we could sell one share and still make an $8 profit. That’s a return of more than 13% on the original 30.75 investment, since it has been just 2 years since we made the purchase. Cool! (Most of my investments report in negative numbers.)
In case anyone wants to know what math I used:
(48.75-30.75) = 18
(18-9.95) = 8.05
(8.05 / 30.75)*100 = 26%
(26%) / 2 = 13%
You can see where your mileage may vary.
If you have a sales commission of $29, obviously selling one share would lose you money. You’d have to sell 2 shares just to make $7. Still, for each share you sold after that you’d make the full $18 a share of profit.
Does the Sales Commission Use Up Too Much of the Profit?
If you are going to have to sell a quarter or half of your shares just to pay the sales commission, you may decide you don’t want to sell now. All decisions are 100% personal, but it doesn’t seem like a great profit will be made if so much of the growth in value in the stock will be going to pay fees.
An example of this might be if you bought 100 shares at $1 each including the fees paid to buy the stock. They are now worth $2 each. But you have a trading commission of $29. You would have to sell 29 shares just to pay the commission. Even though the stock has doubled in value, you might not want to sell.
Or you may feel that’s as high as the stock can go, so you’ll just have to accept the painful fee, sell, and take your $71 profit. It’s still a return of 71% and if you bought those shares in the last year, that’s an amazing annual rate of return compared to a GIC.
Defeating Analysis Paralysis by Taking Part Profits
The worst part of owning a very successful stock is deciding when to sell. You keep wondering if it is going to continue to climb into the stratosphere leaving you stranded on Earth wishing you had stayed aboard. Then you start agonizing that maybe it has run out of fuel and is about to nosedive down to plunge back into the ocean, sinking all your hopes fifty fathoms deep.
For the wishy-washy part profits are the answer.
Instead of selling all of your holding, you sell part. That leaves you with some bragging rights either way the stock goes.
If the stock continues to climb, admittedly you will not maximize your benefit from that improvement. However, if you put your part profits to work in another successful way you may not suffer a substantial setback.
If the stock plummets, you will still lose money, but hopefully your partial profits will offset the loss or enable you to make an overall profit.
How Much Should You Sell to Take the Partial Profit?
Of course now you’re back at a variation of the original question: how MUCH do you sell?
This is where the sales commissions may play a role.
With my Enbridge stock, I could actually sell one share at a time, since I make a lovely little profit on each one. It does, even to me, seem a bit silly to do that, though.
Making too many sales and paying too many fees makes even less sense if the commission uses up a substantial amount of the profits.
Do I Have to Sell in Groups of 100 Shares?
In the bad old days, this question was often simpler. Brokerages did not like to accept or fill orders for sales unless they were in multiples of 100 shares. The use of computerized trading has changed that significantly. Now the large brokerages like InvestorLine don’t seem to care whether you place an order to sell 10 shares, 100 or 1000. So keeping your sale in lots of 100 isn’t a factor for most sales.
The Wishy Washy Way to Pick the Percentage to Sell for a Part Profit
Luckily, the wishy washy world has developed a standardized decision to avoid excessive dithering. These
rules suggestions apply AFTER you have decided it is time to take partial profits and AFTER you have decided that the trading commissions will be a reasonably small cost. Not every stock should be sold when it’s up 50% or even 100%.
- If a stock is up 50%, take part profits by selling 25%.
- If a stock is up 100%, take part profits by selling 50%.
- If a stock is up 200%, take out your original investment by selling 100%.
All of these rules are based on the assumption that you have somewhere to invest those profits (or spend them) that will be safer and still generate a good return.
Getting Back to Enbridge and Part Profits
So what did we do with Enbridge? We sold down to our “core holding” position. We want to always have some Enbridge stock in our portfolio (at least based on our analysis of today). So we took as much profit as we could but now we have to leave it alone. It’s a dividend-paying long-term defensive stock. We just have to ignore that “paper” capital gain and leave it be.
Now we might just have to take a look at our CNR though….
How do you choose when to sell a skyrocket in flight? How much do you sell? Please share your strategies with a comment.