More About Selling
By Stuart Langridge, Thu Dec 8th
More About Selling Last month, I wrote about the importance of selling when itcomes to making money in the investment markets. Simply put, even the best investment in the world will lose it'sappeal sooner or later. When that happens, or when anotherinvestment looks even more inviting and potentially profitable,a reallocation of capital involves selling up and moving on.
Of course, there is another side to this: capital protection.Either your investment has increased substantially and you donot want to lose the gains you have made, or, the price isfalling and you want to protect the capital initially invested.Either scenario involves monitoring of your investment andmaking a sale when you start to become nervous. The easiest way to protect your capital when making aninvestment in shares or funds of some sort is by using a'stop-loss'. Quite simply, a stop-loss is a mechanical way of triggering asale. For example, if you buy shares at 100p and don't want tolose too much if they fall and you are / were wrong, setting alimit at which you sell is a useful solution. You might set thatlimit at 10% or 15%. That would mean should the shares fall to90p or 85p, you automatically sell. This has some good and bad features as a system. Firstly, it isdifficult to apply to shares that are highly volatile. If theshares often move by 5% or more in a week and a stop-loss settoo closely to the current price, it might force you to sellwhen you would rather not. In those circumstances, a limit of20% or more may be more appropriate. On the plus side, if you really do need to protect your capitalat all costs, selling should the price move against you is avital way of protecting yourself. Sure, you may guarantee tolose 10%, but if the price keeps on falling, you may have saveda lot of money indeed. Shares often rise or fall in a ratherpredictable way - when things are good and a company is growingand generating good profits, prices rise and rise. If however,things are bleak and losses are being made, the fall can lastfor months or years and massive amounts can be wiped from acompany's value. It therefore makes sense to try and benefit
from this trend,this is why many people use a 'trailing stop-loss'. This is amore active track of share prices and performance and isdesigned to let you (and I'm quoting a very famous investmentsaying) 'run your profits and cut your losses'. To use a trailing stop-loss, set a number of points orpercentage below your current share price. This will be yourminimum - the automatic trigger to sell if the price isbreached. However, should the share price rise, your stop-lossis moved upwards in the same ratio as the share price. Thus,your trigger will still be (for example) 15% below the currentprice, but that will be higher than it once was. The further up a price goes, the farther the trigger is reset.This has the effect of locking in a majority of your profits.Should the price go into reverse, you sell at your new higherlevel, but if the price keeps rising and rising, you get toprofit from those gains. Now obviously, if I have just explained the above in a fewparagraphs, it is far to simple for fund managers and investmentbankers to be following. They have complex computer programmesthat calculate how a price has moved in relation to an index, asector and the rest of a portfolio. Decisions are far morecomplex. This of course is for pro's that manage dozens ofshares and not the likes of us that manage a few at a time. Butfor managing a few at a time, the above is a simple andeffective method to lose much less and profit more in the market. If you want to really see it in action, the best thing I cansuggest is to find a few sheets of graph paper, draw a graph andstart following a share price each day. Add the stop-loss at,say, 10% below the current price and keep plotting the graphover a few weeks. Every time the shares hit a new high, increasethat stop-loss. If the share price stays the same or falls justplot an extra day without altering the stop-loss. Pretty soon,it will all become very clear and remarkably simple to operate. About the author:Stuart Langridge is a financial planning consultant toexpatriates in the Benelux region. To subscribe and receive hisfree monthly email newsletter and a free copy of his 70 pageebook about financial planning, please click on the followinglink:http://www.freefinancialguide.com/dt/t.php?cid=32&ad=AD_NAME_HERE&cpc=0 |
