The investor with a portfolio of sound stocks should expect their prices to fluctuate

The investor with a portfolio of sound stocks should expect their prices to fluctuate and should

• neither be concerned by sizable declines 
• nor become excited by sizable advances. 

He should always remember that market quotations are there for his convenience,

• either to be taken advantage of or 
• to be ignored. 

He should never 

• buy a stock because it has gone up or 
• sell one because it has gone down. 

He would not be far wrong if this motto read more simply: “Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.”

When to Buy? When Not to Buy? It is far from certain that the typical investor should regularly hold off buying until low market levels appear.

It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because

• this may involve a long wait, 
• very likely the loss of income, and 
• the possible missing of investment opportunities. 

On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. 

If he wants to be shrewd he can look for the ever-present bargain opportunities in individual securities.

It is far from certain that the typical investor should regularly hold off buying until low market levels appear

It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because

• this may involve a long wait, 
• very likely the loss of income, and 
• the possible missing of investment opportunities. 

On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. 

If he wants to be shrewd he can look for the ever-present bargain opportunities in individual securities.

If You Buy When The Market Is Down, When Do You Sell?

If You Buy When The Market Is Down, When Do You Sell?

March 6, 2007 @ 12:00 pm - Written by Trent

Yesterday, I discussed in detail my reasons for making a substantial stock buy even in the face of a 5% market drop in the last week. In response to that, Lazy Man made the following comment:

I think it’s interesting that everyone always says to buy when others are selling, but while the Dow was enjoying new all-time highs for a couple of months, I didn’t hear everyone say “sell because others are buying.” Because you don’t hear that side of things, we are reduced to always buying.

In theory, an individual should sell when the market is at the top, but it’s very difficult for an individual investor to clearly determine when the market is in fact at a top.

So when should an individual investor sell? There are two reasons why an individual investor (who isn’t a professional institutional investor) should sell:

The investment no longer makes you feel confident. If you regularly do homework in the investments you own, you’ll eventually begin to get a gut feeling about the investment. When this feeling is strongly positive, you buy, but when that positive feeling goes away, it’s time to sell.

You need the cash (or something really safe). The only other time to sell is when you need your investment out of the market and in something less volatile. For us younger people, this would be cash; for people nearing retirement, this could be bonds, so you aren’t vulnerable to short-term corrections (like what just happened).

In short, “sell because others are buying” is a great plan, but to actually use it, you have to be able to predict when the market is near the top, which is quite hard. It’s much easier to see that you’re getting a good buy when the market goes down than it is to see when the market is near a top so you can collect profits. The truth is that you should sell when you think the investment is getting weaker, regardless of the general market, and you should also sell when you need the money.

On the other hand, you should not sell just because others are selling. Ignore what the sheep are doing. Look at the numbers and see if anything has really changed. Usually, the fundamentals (P/E, for example) will get better during a selloff, which is why it makes sense to buy something you like anyway during a downturn.

http://www.thesimpledollar.com/2007/03/06/if-you-buy-when-the-market-is-down-when-do-you-sell/

When you should not sell.

When you should not sell.

The Stock has Dropped

By themselves, share price movements convey no useful information, especially because prices can move in ALL sorts of directions in a SHORT TERM for completely unfathomable reasons.

The long-run performance of stocks is largely based on the expected future cash flows of the companies attached to them - it has very little to do with what the stock did over the past week or month.

Always keep in mind that it doesn't matter what a stock has done since you bought it. There's nothing you can do to change the past, and the market cares not one whit whether you've made or lost money on the stock.

Other market participants - the folks setting the price of the stock - are looking to the future, and that's exactly what you should do when you're deciding whether to sell a stock.

The Stock Has Skyrocketed

Again, it matters little how those stocks have done in the past - what's important is how you expect the company to do in the future.

There's not a PRIORY reason for stocks that are up substantially to drop, just as there's no reason for stocks that have tanked to "have to come back eventually."

Most of us would be better investors if we could just block out all those graphs of past stock performance because they convey no useful information about the FUTURE.


So When Should You Sell?

Run through these 5 questions whenever you think about selling a stock, and you'll be in good shape.

1. Did you make a mistake?
2. Have the fundamentals deteriorated?
3. Has the stock risen too far above its intrinsic value?
4. Is there something better you can do with the money?
5. Do you have too much money in one stock?

Deja Vu: 5 "New" Rules For Safe Investing

Deja Vu: 5 "New" Rules For Safe Investing
by James E. McWhinney (Contact Author Biography)


Investors were hammered by massive declines as a recession swept the globe in 2008 and 2009. In the midst of the chaos, experts began calling many decades-old investment practices into question.

Is it time to try a new approach?

Let's take a look at five trusted investment strategies to examine whether they still hold up in a post-credit crisis. (For background reading, see Recession-Proof Your Portfolio.)

1. Buy and Hold

By 2009, the global economic malaise had erased a decade's worth of gains. Buying and holding turned out to be a one-way ticket to massive losses. From 2007 to 2008, many investors who followed this strategy saw their investments lose at least 50%. So does a down market mean that buy and hold is done and gone? The answer is "no". In fact, history has repeatedly proved the market's ability to recover. The markets came back after the bear market of 2000-2002. They came back after the bear market of 1990, and the crash of 1987. The markets even came back after the Great Depression, just as they have after every market downturn in history, regardless of its severity. (To learn more, read A Review Of Past Recessions.)

Assuming you have a solid portfolio, waiting for recovery can be well worth your time. A down market may even present an excellent opportunity to add holdings to your positions, and accelerate your recovery through dollar-cost averaging. (For more insight, see DCA: It Gets You In At The Bottom.)

2. Know Your Risk Appetite

The aftermath of a recession is a good time to reevaluate your appetite for risk. Ask yourself this: When the markets crashed, did you buy, hold or sell your stocks and lock in losses? Your behavior says more about your tolerance for risk than any "advice" you received from that risk quiz you took when you enrolled in your 401(k) plan at work. (For more insight, see Risk Tolerance Only Tells Half The Story.)

Once you're over the shock of the market decline, it's time to assess the damage, take at look what you have left, and figure out how long you will need to continue investing to achieve your goals. Is it time to take on more risk to make up for lost ground? Or should you rethink your goals?

3. Diversify

Diversification failed in 2008 as stock markets around the world swooned. Hedge funds and commodities tumbled too. Bond markets didn't fare much better as only U.S. Treasuries and cash offered shelter. Even real estate declined. Diversification is dead … or is it? While markets generally moved in one direction, they didn't all make moves of similar magnitude. So, while a diversified portfolio may not have staved off losses altogether, it could have helped reduce the damage. (For more insight, see The Importance Of Diversification.)

Fixed annuities, on the other hand, had their day in the sun in 2009 - after all, a 3% guarantee sure beat holding a portfolio that fell by half. Holding a bit of cash, a few certificates of deposit or a fixed annuity can help take the traditional strategic asset allocation diversification models a step further.

4. Know When to Sell

Indefinite growth is not a realistic expectation, yet investors often expect rising stocks to gain forever. Putting a price on the upside and the downside can provide solid guidelines for getting out while the getting is good. Similarly, if a company or an industry appears to be headed for trouble, it may be time to take your gains off of the table. There's no harm in walking away when you are ahead of the game. (To learn more about when to get out of a stock, see To Sell Or Not To Sell.)

5. Use Caution When Using Leverage

The events that occurred following the subprime mortgage meltdown in 2007 had many investors running from the use of leverage. As the banks learned, making massive financial bets with money you don't have, buying and selling complex investments that you don't fully understand and making loans to people who can't afford to repay them are bad ideas. (For background reading, check out The Fuel That Fed The Subprime Meltdown.)

On the other hand, leverage isn't all bad if it's used to maximize returns, while avoiding potentially catastrophic losses. This is where options come into the picture. If used wisely as a hedging strategy and not as speculation, options can provide protection. (For more on this strategy, see Reducing Risk With Options.)

Everything Old Is New Again

In hindsight, not one of these concepts is new. They just make a lot more sense now that they've been put in a real-world context. In the early stages of the 2008-2009 U.S. economic downturn, experts argued that the Europe and Asia were "decoupled" from America and that the rest of the world could continue to grow while the U.S. shrank. They were wrong. When America sneezed, the rest of the world got the flu, just like always.

Now think back to the dotcom bubble of the late 1990s, when the pundits argued that technology offered unlimited promise and that companies like America Online (AOL) were the wave of the future, even when many of these companies had no profits and no hope of generating any, but still traded at hundreds of times their cash flows. When the bubble burst and the dust settled, nothing had changed. The markets worked the same way they always had.

It's Different This Time – Or Is It?

In 2009, the global economy fell into recession and international markets fell in lockstep. Diversification couldn't provide adequate downside protection. Once again, the "experts" proclaim that the old rules of investing have failed. "It's different this time," they say. Maybe … but don't bet on it. These tried and true principles of wealth creation have withstood the test of time.

by James E. McWhinney, (Contact Author Biography)

James McWhinney has been a professional writer for nearly two decades. He has worked for many of the nation's top mutual fund providers and banks in addition to numerous magazines, websites and other publications. He specializes in financial services and travel.