Optimizing Your Stock Strategy: Should You Adjust Profits or Hold for More Growth?

Introduction

Deciding whether to adjust your stock investments after achieving a reasonable profit can be a complex decision. This choice should ideally be made beforehand. Investing without a clear strategy can transform your investment into a form of gambling, with significant risks. This article aims to guide you through the decision-making process and explore the factors you need to consider.

Original Intent and Stock Holding Time

When you invest in stocks, the period over which you intend to hold your investments is crucial. For long-term investors, the duration is often tied to the lifecycle of the business you are investing in. Companies typically have a business cycle that can range from one year to up to 15 years, and sometimes even longer in the case of technology stocks. This is because technological advancements can lead to prolonged exponential growth and price trends.

During this period, any profits you see on paper are considered unrealized profits. This is why gains on long-term investments are not subject to taxation until the stocks are sold. Unrealized gains reflect potential profit, which can increase or decrease as the company progresses through its business cycle.

Tax Considerations

It's important to understand the tax implications. Long-term investments offer certain tax advantages. Unrealized gains are only taxed when the stock is sold. Dividends, on the other hand, need to be paid out and are taxable at the time they are received. An aging company may offer dividends as an additional form of income, which can be taxed as regular income.

Short-term Trading vs. Long-term Investing

If you require additional monthly income to bolster your cash flow or improve your lifestyle, trading may be an option. Trading involves holding stocks for shorter durations, ranging from a few days to a few months. This approach is more suited for traders who can manage the high volatility of the market. However, trading can be challenging, especially with the changes in market structure since the 1990s.

Market Trends and Economic Cycles

The landscape of the stock market is influenced by broader economic cycles. For instance, after significant global pandemics, such as the Spanish Flu of 1917-1920, there is often a significant economic surge that follows. Similarly, we are currently in the early stages of a bull market due to the pandemic. This era is also being termed the "Fourth Industrial Revolution," with numerous industries and business groups predicting prolonged growth and a surge in Initial Public Offerings (IPOs).

While the market is experiencing rapid growth, it's important to note that intermediate and minor corrections are likely to occur. These can offer strategic opportunities for adjusting your investments, especially if a company reaches a peak and begins to age, leading to lower price action.

Conclusion

Before investing, it's essential to define your purchase intent and align it with your financial goals. Whether you opt for long-term holding or short-term trading, the key is to understand the cyclical nature of the market and the specific needs of each investment. By making informed decisions, you can optimize your investment strategy to maximize potential returns while minimizing risks.