Holding Stocks during Earnings Announcements
Holding stocks during earnings announcements has inherent risks… but that’s not to say you shouldn’t do it. But, as we discussed in Trading Stocks Around Earnings such as Apple, those risks have to be managed. Instead, many investors who make new purchase just before earnings announcements, and sometimes immediately following, are not investing, but gambling in good fortune and gap-ups in the stock price. Unfortunately, it is far more unpredictable than one might imagine.
But what if you are already holding a stock around earnings season? Should you sell it in advance or hold on to it, perhaps even adding to your position? Today, we’ll look at a few brief tips to help you manage risk in these situations so you don’t have to simply hold your nose and wait to see what happens.
Strategies for Holding Stocks @ Earnings
Unfortunately, there are no hard and fast rules that I’ve discovered to help make the right decision all the time. So, what it eventually comes down to is how risk management should guide every stock trade. But when it comes to earnings, there are some special considerations that will help us protect capital, minimize risk, and maximize returns. Let’s take a few moments to look at some of these:
I’m Holding the Stock at a Healthy Profit – So you’re up… and obviously made a wise decision. But with the company’s forecast lurking around the corner, what are you to do to protect those profits? In this case, we don’t need to be as concerned with protecting capital… because we have a profit. So, it becomes a question of managing risk and maximizing returns. You may want to consider:
Selling a portion of your position – While you may not see as much upside, you also won’t lose everything you’ve made up to this point. It’s a way of rewarding yourself for great decisions without being too greedy. It’s also a great way to reallocate some cash for new opportunities without abandoning those that have been bringing your portfolio growth.
Holding your position – If you’re up enough that even the worse news wouldn’t eat away at your total gains to this point, you may want to hold steady… the risk of course is that you make less, but not risk any capital. The key for this decision is if you can know with absolute certainty that you’re capital is not at risk. Remember the first rule: Protect Capital.
I’m Holding the Stock at a Little Loss – Of course, using our risk management strategy, we’d never be holding a stock at a significant loss. So, if you’re down a little and concerned about further deterioration, you may want to consider the following:
Surrender and Sell – I’d rather take a little loss than gamble and risk more of my capital. Since protecting capital is so important for successful long-term investing, consider taking any and all steps to do so including admitting defeat.
But Please Don’t… – Now is not the time to double-down, buy more, or do other such actions which only increase your risk. Be honest with yourself… up to this point, you haven’t made money with this stock, so quit lying to yourself assuming you’ll somehow make money now. Error on the side of caution and humility… but please don’t add to your position. There are plenty of great stocks and opportunities out there where you can make money without taking unnecessary risks.
I‘m Holding the Stock for a Small Gain – This is perhaps the most difficult place to be. After all, you’re decision to this point has demonstrated some good thinking. Yet, the risk at earnings announcements is greater in most stocks than at any other single moment in time. Here’s some considerations:
Sell half of your position – Much like when the market trend is down and we only buy half positions as a risk management strategy, consider lessening your exposure by selling half. I suppose it is the “middle ground” approach… a way of doing something to protect half of your capital invested, minimize risk and allow for greater returns.
Sell your whole position – A small gain is always better than any loss. Therefore, some investor opt to sell it all, put the profits in their pockets and move on. Of course, this is the most conservative approach and one that never results in losses.
Just Wait and See – Unfortunately, this kind of inaction is simply disguised form of gambling. When you’re investment decisions become rooted in hope rather than fundamental and technical analysis, it’s time to sit out.
Buy, Sell, or Hold?
What approaches do you recognize in your own investment history? Are there other ways you’ve sought to manage the risk of earnings announcements with stocks you already hold? I’d love to hear your comments below… and don’t forget to Google+ this or retweet it if you enjoyed the discussion!
We don’t run away from risk, but we do recognize it’s power to cripple our investment portfolios… so we learn to manage it. If you’re not sleeping well at night based on the decisions your making, or you find yourself having regrets after earnings announcements are made, then opt for the more conservative approaches. Investing is full of inherit risks, but one of the most overlooked and potentially dangerous is holding stocks during earning announcements.
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