This goes against everything our great overlord Buffett taught us with his buy and hold strategy.
Somebody was giving me investment advice and they said that I should regularly sell my profits, then instantly buy back in to the same stock to “lock in the gains”.
And I should ideally do this forever over the lifetime of my investment instead of buying and holding. He said this is the only way to lock in profits and compound your investment.
This is how he said it should be done:
So let’s just say I buy €100 worth of Amazon.
Next week it rises to €110.
Rather than keeping the gains, I should sell the €10 worth of gains, then buy back €10 worth of Amazon stock. Now I have €110 worth of Amazon stock.
Does this make sense to anybody here? Does anybody here do this style of investment?
Apparently my style of investing (buy, hold, regular topping up) is the wrong way to do it.
First off, you need to know what your goals are for investing. Secondly you need to have a plan for how to achieve that. Everyone’s style of investing will be different and will not be suitable for everyone. Your circumstances and risk tolerance levels will determine the strategies that you should pursue. Never blindly follow what someone else says. That is a recipe for disaster.
My goal is just regular boring long term (20 yrs +) growth. That’s about it.
It certainly does not make sense to me. By following this strategy you end up owning slightly less AMZN stock because of the spread between buy and sell prices. For a UK investor this strategy has no effect on your tax position except for the nuisance of creating a small capital gain or loss which you may have to record and report.
Who ever gave you this advice, listen to what he says, but always do opposite, surely you will profit.
He said you can’t make gains on your gains. Which is why you need to sell your gains, and buy the same stock with the gains.
I think you should just keep your gains in the stock, rather than selling and buying again.
Sounds like they’re trying to emulate compounding, but that only works if the stock goes down at all between selling and re-purchasing, which if you’re doing immediately it’ll barely move.
Well that’s the thing, he said it’s the only way to get compounding returns. As you can’t earn gains on your gains - they need to be sold and reinvested. But he also said you should sell and buy back in immediately. So no chance for the stock to go down or up.
This whole thing just goes against everything I’ve read about long term investing and Buffet style exponential growth.
But if you buy £100 AMZN and sell at £200, you have 100% gains.
You re-buy at £200, you still have the same number of shares, because you sold at the value of £200 and bought at the value of £200. Although, per @Richard.W s comment, probably at the expense of further FX divergence, which you’ve already paid once before so already at a loss.
If it goes down to £100, you have the same number of shares and you now have a 50% (unrealised) loss.
I’ll admit my one burning question myself with buy and hold strategy (specifically for growth stocks, not dividend stocks) is where does the compounding come in. And I still haven’t seen an explanation that I can get my head around. But selling and immediately buying is the same as holding to me. The only difference is you’ve realised the gains and incurred more FX impact than needed.
Sounds to me he misunderstood compounding and mixes up two strategies. The Buy and hold as you said
And one where you would take out either your initial investment or the profits. In this strategy you would buy stock and once it has gone up to your predicted price earning you a profit. Then you would take out your initial investment (or profit) and put them elsewhere.
For instance if i would buy 100 stocks worth €1 each and I believe that the stock price can go up to at least €1,50, when the stock gains this 50% I would have €150 invested in the stock, take out my original investment of €100 and leave the €50 invested thus keeping the ~33 stocks (sold €100 worth of shares for €1,50 each = 66) now you basically have 33 free shares
In this example I took out my original investment but if you believe in the company and its future even more you can either stay in fully for longer or only take out your profit. This way you can protect some of your original investment.
I could not agree more, the only thing that would change is the calculated profit since your buy price is updated.
Even this is not the full story, at least for a UK investor. The buy price remains that of your original traunch of shares . Example
2 Jan buy 10 shares for $1000
6 June sell 5 shares for $600
7 June buy 5 shares for $601
Now you own 10 shares, with cost $1000. The repurchase of 5 shares is within 30 days after the sale of 5 shares so these two trades are matched for tax purposes and the basis cost of the 10 shares remains $1000. All you have done is create a capital gains loss of $1 by those trades of 6-7 June.
However, if the second two trades are reversed then a different result is obtained:
2 Jan buy 10 shares for $1000
6 June buy 5 more shares for $601
7 June sell 5 shares for $600
Now you own 10 shares with a basis cost of 10*(1601/15) = 1067.33 and you have realised a taxable capital gain on the 5 shares sold of 600-5*106.73 = 66.33.
I have sometimes carried out the second transaction to realise gains that I want to use against my £12,300 capital gains tax free allowance, which is use-it-or-lose-it in each tax year. I end up owning the same number of shares but with a higher capital gains tax base, which will save me money in future years.
*The first of these results is what happens if the two 5 share trades are done on the same day, irrespective of their order.
I’d say buy and bold then sell only if you need the money. Be it for a purchase of the house or retirement. Taxes and death are two only sure things in life and as such they are not worth your time to worry about them.
I actually did this in the beginning with RR and I sold x amount to skim the profits (small profits £5/10) but the profits weren’t what I expected as I didn’t take into account (realise) the complexity of it.
It was a good to trial it first hand but I’d not do that because
1 - the amount of hard work that goes into that strategy would surely consume your entire day?
2 - what about stamp duty etc?
3 - you won’t receive consistent dividends?
I’m only new but that’s defo not a route I’d personally take, sounds way too demanding.
Also doesn’t make any sense. I say keep the gains in the stock, and earn gains on your gains.
He said it’s impossible to earn gains on your gains because Trading 212 would go bankrupt if you could do this.
As far as i understand compounding from a DGI point of view, it is that you buy more shares of the company that gave you the dividend with the dividend so you have more shares which results in more dividend (Or course if and when the company is stable and keeps paying dividend) for the snowball effect. That is one part. You also have the company growing their dividend so it can keep up with inflation. Also tried to get the gain from the stock only to see the stock price rising.
There is no exact right or wrong answer.
I have a mixture tbh. The swing trades I make I can see 10-20% in the same day I’ll lock it at least 50% profit and let the rest ride or sometimes 100% and I’ll keep tabs wait for another dip and re-entry and repeat.
If i feel that a penny stock is due a pump and I can get a decent entry I might forfeit a days 10-20% gain for a potential 100-500% gain and just let it ride if the setup is good and I believe it can keep running.
If its only making 5% I might let it ride, or if I think its run its course I’ll take it all the profit and run.
There’s always times where you wish you’d kept more in, but plently of times where its dumped hard even with the best DD, and you’re happy you made that £100 profit rather than a £500 unrealised loss.
After having too many pumps where its gone up 100% the day after selling I tend to keep some left in.
The key thing I keep telling myself is don’t be too greedy. Like when a stock is already up 30% and the MACD is about to crossover and the RSI about 80% it’s time to go.
Always good to have an entry and exit price on every trade, and avoid chasing.
Long term not so much, if I feel the market is about to turn very sour I might sell half and hold the funds ready to buy back on the dip. If you are holding for years/decades its not as critical.
Totally agree if you’re into day trading, take profits and run. But I’m not planning on selling until I’m 150 years old. I’m talking about long term here.
Well yeah long its only if you want to the funds, or if you think the general market is about to turn shit, or the business is about to release something thats going to destroy themselves
Don’t 212 earn money via CFD platform predominately?
I too say keep the gains in the stock. I’m slightly more passive as I’m in for 10/15 years and just know I prefer a simpler life
Think this is that perfect explain why you should always always use many people, information, book etc when learning what to do and not do.
Then working out what fits you and the way you work.