Investors usually do not have an aversion to buying an asset. The real gut wrenching decision is when - and whether - to sell . What most do not realize ( or do not want to realize ) is the overwhelming importance of the sell decision. Let the reasons and techniques nerves of a seller can soothe .
Finding reasons not to actively sell is as simple as finding a reason to avoid . A root canal Have you ever heard (or told yourself) , "I can not sell , it's too low ! " Or , " The XYZ brokerage analyst says the price goes through the roof ! "Or , " I do not want to pay the capital gains tax "
Let's look at each of these ' justifications ' in the context of their impact on an investment portfolio and techniques to avoid having to come up with them :
" I can not sell , it's too low ! "
If the price of an asset has declined dramatically , there is usually a fundamental problem . Often that fundamental problem than a technical problem . In other words, if market participants see dramatic declines in price charts , panic sets in and " heard " starts to get the price down even more hunting ( reference the NASDAQ index from February 2000 to September 2002 ) . Once an asset has been trampled , it is extremely difficult and time consuming to resuscitate .
Selling Technique : First of all , do not let the prices fall " too low " . Ask a predetermined point to sell as asset prices fall and stick to it . Performing a stop loss order so discipline is not a problem . Note - Selecting a selling point does not need complicated process . Either determine where your " pain threshold " is losing in terms of market value or percentage and mark that point . Or look at a historical price chart and look for " floors" , the price points where the price seems repeatedly bounce backup . If the price falls below that point , it is often a point of no return .
If you still "like" safety , although the price has dropped , setting a price for the asset to buy after a positive price return has developed . Finding the absolute price bottom is like trying to catch . A falling knife Use a "buy stop" to ensure that you buy at a predetermined point security.
" The XYZ brokerage analyst says the price goes through the roof ! "
We have observed numerous cases in which Wall Street analysts were punished for filling their pockets or their business , by producing biased research articles designed to influence in their favor . Prices Analyst hype can only take it to a point , after which it should be . On its own merits a security Investors beware!
Avoidance Technique : Let's assume that analyst Rich Buyhype is good and actively advances up . First , let's follow the previous technique and execute a stop loss order . Then, if the asset appreciates in price , periodically stop loss price commensurate with the price up . This is known as a ' trailing stop . " Most brokers will allow their investors to change their stop losses easy with no fees .
"I do not want to pay the capital gains tax "
An overwhelming amount of stock investors would like to have paid capital gains tax in 1999 . Most would have paid considerably less than they eventually lost in market value in the next 2 years . Consider the capital gains tax does not apply to the value of the asset. Only for the amount of profit , A 15 % capital gains tax payment is less than a 15 % loss of market value, unless the asset does not cost base .
Avoidance Technique : Unfortunately, we can not avoid paying taxes on unrealized gains . But we can sell assets and losses greater than to avoid the tax. Paid Do not let the tax tail wag the investment dog . If an asset hits your stop point , sell it and do not look back , whether it is a profit or a loss. After all , unless the tax law changes , should the sale to pay at some point your winnings.
summary
Sell to lock in your profits a security can be a very useful strategy , but it is sometimes difficult to implement. If you do not have the discipline to sell at a predetermined point ( most investors do not) , put a stop loss order so that trade will happen automatically. Use the trailing stop loss technique as your active appreciate to lock in your profits . These strategies work especially well in situations where capital gains are not a problem . However, keep in mind the many of the richest investors pay substantial taxes because they have the right to designate to lock in profits and avoid big losses .
Visit our website at to learn more about selling discipline and active investing.
Rob Hounshell is President and Chief Investment Strategist of Limestone Capital , a registered investment advisory . He holds the Chartered Financial Analyst and Certified Financial Planner designations . Is he managing investments for 18 years .
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