Selling - All, Some, or None?

Posted by Dan Hung

May 23, 2008

A popular technique in portfolio management is to sell incremental amounts of your holdings to lock in profits as your investment’s value rises. A lot of people refer to this as “taking some off the table.” The basic principle is that one can preserve their capital by selling part of the holdings. The strongest of these strategies usually involves setting allocations for each of your positions. For example, you decide that all new positions you add to your portfolio will be $1000. As that investment grows beyond the initial allocation, say to $1500 or $2000, you begin to sell shares to bring the investment back down to a single allocation (the initial $1000) until you have recouped the initial investment. The idea here is that you strategically sell to recoup invested capital but remain committed to the stock in the same weighting that you initially decided. Furthermore, upon recouping your initial investment, the money you have committed to the stock leaves you “playing with the house’s money.”

Now, this strategy works quite well in allowing you to capitalize on a good stock pick while at the same time offering protection of your invested capital, but unfortunately it increases the number of transactions involved in a round trip investment as it necessitates multiple sales. Obviously, you’re not going to sell incrementally on every 1%, 5% or even 10% gain. Furthermore, the ability to sell shares incrementally also depends on how many shares you’re able to buy. If you bought 2 shares of Google at $500, selling just one share at $600 would decrease your exposure below your target amount.

Herein lies one of the difficulties of having a small portfolio and one of the reasons it is so difficult preserve capital in a small portfolio. There is very little room for error as partial selling is typically impossible unless you manage to get a double in your stock pick. It’s also the reason why you’ll rarely see me announce partial “taking some off the table” sales in my portfolios on this site. Unfortunately, it also increases risk since, as positions grow, the portfolio becomes disproportionately weighted to the best performers which will at some point also become the most overvalued.