I know all the wisdom -- "buy and hold", "the trend is always upwards in the long run", monkeys beating Wall Street traders, and all that.

I'm in it for the long term, and want to accumulate wealth that grows with the indexes.

But holding can be so hard when the stocks I've picked have greatly increased in value. Is the real "buy and hold" adage about holding until you're satisfied with the gains or holding no matter what? Am I to believe that a stock that I picked up at $15, that's now at $25, will be $30, $40, $50 in the future no matter what?

So I guess my question sums up to: Do "pro" traders, or at least experienced traders, have a stop condition with respect to gains on bought and held assets?

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    Your question is contradictory. You are asking what pro traders do with respect to buy and hold. Traders are not buy and holders in it for the long term. – Bob Baerker Jan 7 at 6:08

I think the key thing to remember is that past performance is an extremely weak indicator of future performance. In other words:

  • If a stock has recently fallen dramatically, it will probably rise somewhat.
  • If a stock has recently fallen somewhat, it will probably rise somewhat.
  • If a stock has recently stayed essentially flat, it will probably rise somewhat.
  • If a stock has recently risen somewhat, it will probably rise somewhat.
  • If a stock has recently risen dramatically, it will probably rise somewhat.

There are lots of good reasons to sell stock, but "the stock recently went up a lot" is not one of them. (For that matter, "the stock recently went down a lot" is not one of them, either.)

Is the real "buy and hold" adage about holding until you're satisfied with the gains or holding no matter what.

If you're "satisfied with the gains" in the sense that your financial situation has changed and you now want to reduce your exposure to the stock market, then go ahead and do that.

If you're "satisfied with the gains" in the sense that this one particular stock is up 70% and that's pretty dang good, then hold it. After all, if a stock has recently risen dramatically, then in the future it will probably rise somewhat. (But you may want to sell some of it in order to rebalance your portfolio.)

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    If the reason you originally bought the stock is just as valid now as it was when you bought it, there's no particular reason to sell it. As you point out, an exception might be if you now have too much exposure to that one particular asset. – David Schwartz Jan 6 at 5:58

Of course, I'm no "pro-trader", but I'm quite sure that "pro-traders" have such a stop condition.

First of all, there are lots of trading strategies - e.g. momentum-trader will definitely use different exit-signs than value investors. Since you wrote about buy-and-hold I assume that we are talking about some kind of value/growth-investors (without defining exactly what strategy makes up such a value/growth-investor), because buy-and-hold only makes you earning money if you buy the right stocks to hold. Therefore, you need some "metric" how you find out which companies you want to buy - in many cases buy-and-hold is closely linked to value since both are interested in stocks' developments over long periods of time.

In my mind, the idea behind buy-and-hold is to buy a stock that is cheap/underrated and hold it until the share price reaches a level that exceeds the "fair value". The calculation/estimation of the fair value depends on the specific strategy of the investor. Of course, it can be a limit like 40$ but often it can depend on more sophisticated numbers from the balance sheet or secondary metrics like P/E ratio and so on. Since a single number can't provide enough information to draw a conclusion about a company's value pro investors definitely combine a couple of information from the balance sheet.

So, to come to your qualified objection that it seems strange to believe that the stock price is going to rise "forever", let's take a simple example. Assume we have 1979 and the audio-tape first walkman is released. A value investor notices that Company A which produces high-quality walkmen and sells them for a fair price is underrated regarding his metric (so it is significantly below "his" fair value). He decides to buy the stock (e.g. for 10$ per share). In the first months, the stock goes down for 8% but since he is a value-investor he doesn't care about such short-term fluctuations. Then, the stock price rises and falls, such that one year later the stock still is 5% cheaper than he bought it. Maybe the buy-and-hold investor re-checks his calculations and if he still believes in the company he decides to wait for another year. Suppose now the stock rises and in 1985 and Company A is the market leader and its price is 25$.

But technology has changed - meanwhile, the first discmen have been released by other companies but Company A missed to develop such a product. The tape-based walkmen's popularity has exceeded it's top since a new, better technology was developed. But Company A's success heavily relies on tape-based walkmen. So even for a buy-and-hold investor, there is no reason to believe that Company A's stock price will rise even more. Contrary, he worries that the price will drop significantly so he probably will sell his stocks.

Therefore, the main attribute for buy-and-hold investors is that they don't care about short-term fluctuation in share price (in the time-scale of days, weeks or even months) but they do care about changes over years and of course they do care about future prospects of the companies they hold. So they definatelly have a stop condition, but I would not expect this to be a bare number like "50$".

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  • The sell signal for a buy-and-hold investor is "I want to access the money". On average, things will work out. That also implies that picking individual stocks is not a good strategy for such a passive long-term investor. – amon Jan 5 at 12:45
  • Yes good answer but perhaps I should have specified my investor profile better. :D If instead of individual stocks, what would you say about my question if talking about mutual funds? – nperson325681 Jan 5 at 15:02
  • @unperson325680 but your question refers to "the stocks I've picked", not the index funds you've picked. – RonJohn Jan 5 at 16:09
  • @unperson325680 a portfolio of growth & value stocks must be actively managed. But you must develop an investment strategy and a plan to implement that strategy. That will tell you when to sell and buy stocks. – RonJohn Jan 5 at 16:17
  • @unperson325680 Even if you've bought index mutual funds, they need to be looked at every quarter: if, for example, your plan is to to have an 80:20 mix of stocks and bonds, and there's been a run-up in the value of your stock fund, then it's time to sell just enough to bring it down to 80% of your portfolio, and use that cash to buy bonds. If you're getting older, maybe you want to reorient more towards dividend funds., or a 70:30 ration, etc. – RonJohn Jan 5 at 16:20

A huge part of long-term investing strategy is avoiding costs.

And part of a tax strategy is avoiding short-term capital gains tax. Taxes will vary in your country, but you will want to hold stocks at least a year, unless the likely losses will exceed the tax differential between short-term capital gains rate (e.g. 22%) and the long-term capital gains rate (e.g. 10%). Of course your tax rates will vary, but this is so large as to be your likely #1 cost.

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If you are doing something with that received value [ie: making a downpayment on a house in the next few years, etc.], then selling what you have and moving to a more conservative portfolio can make sense.

This is different than simply selling the shares and immediately reinvesting in something in the same asset class. That makes you more of a trader, not an investor, and be very, very careful that you understand the difference. Trading securities can be one of the riskiest things you will ever do in your life.

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I'm going to ignore the general advice in all the other answers, because it's correct....

The stock price alone, in a vacuum, shouldn't determine whether or not you should sell a stock. If your only options are "sell" and "don't sell" then you definitely shouldn't sell.

However, you should look at your portfolio and decide "would I buy this stock at this price today ?" for every single stock you own. If you wouldn't, you should sell it. Disclaimer: unless you have a better security in mind to invest your money into you still shouldn't sell the stock. If you have a fair amount of stocks that you would buy at the current price today then obviously you can just invest more money into those stocks.

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