Dear Daily Crux reader, You're probably getting worried. For most of the year, stocks have soared. As the Dow Industrials, the S&P 500, and other major markets have rallied to new all-time highs, more and more investors are wondering if stocks have run too far, too fast. If you're like most people, you're probably thinking it might be time to sell and "take some money off the table." It's a common reaction… but it could also be a serious mistake, says our colleague Dr. David "Doc" Eifrig, editor of Retirement Millionaire. To see why this move can be dangerous – and to get Doc's simple advice on what to do instead – read on… Good investing, Justin Brill Managing Editor, The Daily Crux www.thedailycrux.com |
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Doc Eifrig: How to know when to sell The Daily Crux: Doc, you recently wrote about a powerful and timely idea for Retirement Millionaire subscribers: How to know when to sell. Why is this idea so important? Dr. David Eifrig: Well, as even novice investors know, buying a stock is pretty easy… but selling is much harder. For most of us, our minds are naturally wired to do exactly the wrong thing. Let me give you an example… Suppose you own two different stocks, and you bought both of them for $25 a share some time ago. Today, one has rallied to $50 a share, and one has fallen to $10 a share. If you were forced to sell one of them, which would you choose? Studies have shown most people choose to sell the first one – the one that had rallied 100% – to "lock in" their gains. Most people would rather hang on to the losing stock, hoping it will "come back." It's a natural human impulse to sell our winners too soon and hold our losers too long… But it's a terrible way to invest. Studies also show that "winning" stocks tend to outperform "losing" stocks over short to intermediate time frames. In other words, stocks that are moving up tend to keep moving up, and stocks that are falling tend to keep falling, much longer than most folks expect. This is simply confirmation for the classic investment advice to "let your winners run and cut your losers short." It's a favorite of some of the world's most successful investors and traders, so you'd be wise to take it to heart. Crux: OK, it's clear that selling your winners too soon is a mistake… but how do you know when "too soon" is too soon? Eifrig: Unfortunately, there's no single rule about when to sell… but it doesn't have to be complicated, either. The right time to sell is determined by two factors: the reason you bought to begin with, and your trailing stop. Naturally, both of these should be decided at the time of your initial investment. You should have an idea of exactly what you expect to get out of the investment, and what would cause you to sell. So whenever you buy a stock, I recommend you do three things. First, write down why you bought it. A long-term investor may buy a quality dividend-paying stock because it has a stable business, consistent cash flows, and is trading at a cheap valuation, while a trader may buy the same stock because it's severely oversold and starting a rebound. Second, write down when you'll sell it. To use the same example, the long-term investor may plan to hold the stock forever, so long as the business remains stable and cash flows are consistent. On the other hand, the trader may plan to sell once the stock reaches a particular price, when it becomes overbought, or simply when it hits a trailing stop. Third, I recommend reviewing your investments every six months to a year. During this review, ask yourself a simple question for each position you hold: If you didn't own this stock, would you buy it today or recommend it to friends or family members? If the answer is no, it's probably time to sell, even if the stock in question is a "winner." ----------Advertisement--------- A clever $20 device that thwarts burglars While in prison, one of the most notorious criminals of our time interviewed 100 -plus convicted crooks. He wanted to know what would deter burglars from breaking into someone's home. The answer will surprise you. It has nothing do to with alarms, guns, dogs, or cameras— but you can buy it in just about any city or town. The full details are revealed here… --------------------------------- Crux: That's sound advice for "letting your winners run"… What about "cutting your losers short?" Eifrig: Selling the "losers" is easier. In Retirement Millionaire, we typically recommend 25% trailing stops… and we sell if a stock falls that far from its highest peak during our holding period. You may use different percentage stops depending on your risk tolerance and position size, but the idea is the same. Trailing stops do help protect your gains while letting your winners run, but they're especially important for cutting your losers. If a position goes against you right away, a trailing stop can keep a small loss from turning into a catastrophic loss. There are other strategies you can use to cut your losers short, but it's tough to beat the power and simplicity of trailing stops to keep your emotions in check and protect your capital. Crux: Sounds good, Doc. Thanks for talking with us again. Eifrig: My pleasure. Editor's note: Retirement Millionaire readers depend on Doc to cut through common myths, misinformation, and half-truths to bring them the safest and most effective ways to boost their health, wealth, and happiness. Doc's latest report could be his most important to date. He's sharing advice that could literally save the lives of you and your loved ones. It's a simple plan to prepare any crisis your family may face – man-made, economic, or natural disaster. And unlike other plans you'll find out there, it's based on facts – real probabilities and the latest scientific and medical research – not hype. Click here for all the details. |
Sunday, 9 June 2013
Posted by Britannia Radio at 20:46