Ask Colin

Do you recommend scaling out of a position?

What you are suggesting here is simply a variation on what I actually do. I sell half of my holding every time it doubles in price. This keeps the portfolio in balance.

However, having said that, it is breaking a mantra of investing, which is to let your profits run. I do it because as the portfolio gets out of balance and the large position starts to jerk my total equity around, there is great psychological pressure to take my profits before they get away from me. I find that selling half in this way, helps me to keep the remaining half running for me, in contrast to the situation where I sell the lot to relieve the pressure and see the price rise a great deal further without my being a participant.

What you are describing is to take part profits even earlier. I think that just where you take your partial profits depends on your tolerance for risk and for stress. In principle, the closer we stick to letting a profitable position run as long as possible, the better. When you find a great trend, you need to take away as much of it as you can. It sounds to me as though the person who advocated the method you describe is on the right track, but maybe they should try to train themselves to move even further towards letting profits run longer.

I have been doing this in some situations where a stock has doubled in price. If the trend is still strong at that point, I keep it running and act on the "sell half" guideline as soon as I see that trend start to falter. So, it is the same basic guideline with a small wrinkle.

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