Our Successful Investor business model has two parts. We publish investment advice, and we manage investor portfolios.

This two-business model has advantages for our subscribers. The stock market investing problems we encounter as money managers, and the solutions we come up with, help us give our readers unbiased, practical advice. This serves as a counterweight to advice you may encounter elsewhere that is based on misapplied theory, or tainted by conflicts of interest.

Selling half after a double is not always the best stock market investing strategy

An investor recently told us that he had sold half his shares of Bank of Nova Scotia (symbol BNS on Toronto) after it doubled for him.

(We continue to advise most investors to place the bulk of their holdings in the Finance sector of their portfolios in two or more of the big five Canadian banks. We cover all five big banks, including Bank of Nova Scotia, in The Successful Investor.)

Selling half after a double is a good stock market investing strategy for a high-risk investment such as a penny mine. In fact, in Stock Pickers Digest, our advisory for aggressive investing, we routinely advise selling half of any high-risk investment you own that doubles.

That way, you get back your initial stake. This can give you a clearer perspective on what to do with the other half of your investment. If you are too slow to sell speculative stuff, after all, your profits and even your principal can evaporate all too quickly. But it’s a mistake to apply this stock market investing rule to a high-quality stock like Bank of Nova Scotia.

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To succeed as an investor, you need to hold on to your best picks for lengthy periods. If you’re too quick to sell, you’ll never hold a stock that vastly outperforms the market, and you need a few of those to offset the inevitable disappointments.

Over the course of several years or decades, you’ll find that of all the stocks you own that vastly outperform the market, most were already well-established when you bought them.

That’s why you need to know the difference between well-established companies like Bank of Nova Scotia and the more speculative issues you may invest in occasionally. We would only sell a portion of a Successful Investor Wealth Management client’s holding in Bank of Nova Scotia if it made up an excessive portion of his or her portfolio.

Diversification — not share price — should be the main factor in sell decisions

It’s easy to sell too soon or too late. But you’ll limit the cost of poorly timed sales if you practice our three-pronged Successful Investor approach. That is, invest mainly in well-established companies; spread your money out across the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities); and downplay stocks that are in the broker/public-relations limelight.

When investing for our Successful Investor Wealth Management clients, we rarely put much more than 5% of a portfolio in any one stock. If a stock does so well that it comes to represent 10% of a client’s portfolio, then we at least consider selling part of it, to cut the risk.

However, you also need to consider your diversification across the five main economic sectors. For example, if your exposure to the Resources sector now exceeds, say, 30%, you may want to sell some of your Resource holdings to cut your risk in this volatile area.

To do that, start by selling any lower-quality Resource stocks you own, while hanging on to high-quality issues.

You can get our full analysis, including clear buy/sell/hold advice, on dozens of stocks you may be considering buying (or selling) in The Successful Investor. Click here to learn how you can get one month free when you subscribe today.