Suddenly stopping...from Belmar, NJ along the way to NYC.
A question came up recently from a client... "we invested in the
stock recently, and it went up nicely at first. But recently, the
stock has started to fall. I'm not sure if we should close this
position out... or should we just hang on. What do you advise?"
The answer is... "it depends."
It depends on several factors. And it depends on the answers to some questions. Some of the questions include:
- is this a long-term investment, or a trade?
- If it is a trade... where is the logical point for a stop loss?
- if this is a long-term investment... where's the support line?
When an investment breaks the support line, this is a clear time to
take action. Investments can zigzag up and down - and still remain in
long term uptrends, if they don't break that support line. But once
that line is crossed, the story has now changed. Instead of an
investment that's heading "northbound" on the Garden State Parkway, you
have now crossed over and are heading "southbound."
This "northbound/southbound" discussion is important to grasp.
Stocks, mutual funds, exchange traded funds... any investment... never
move in straight lines. There will often be times where we have
exceptional short-term gains - or exceptional short-term losses - in a
long term investment. But the investment has never broken the support
line while we've owned it.
Let's put this in really simple terms: you may start out from the
Belmar (or somewhere along the Jersey shore), on your way to New York
City. To get to your destination, you'll be traveling north on the Garden State Parkway - northbound. Along the way, you may pull off and visit grandma in Red Bank, NJ. You may also take a few minutes, pull off an fill up the gas tank, near Hazlet. Later on, you may stop and get a quick bite to eat, near Woodbridge, New Jersey. All this is accomplished while you're heading northbound on the Garden State Parkway, toward Manhattan.
So you're "trip" from Point A to Point B had several detours along
the way. But you never changed direction - never changed trend.
Now, suppose you wanted to take this trip - but found yourself driving "southbound" on the parkway... toward Atlantic City. Do you think you'll be able to reach your destination, if you're heading the wrong way?
When an investment breaks the support line, it changes direction.
Stocks that are trading above their support line are heading in an
upward direction. Some investments move faster than others. Once a
stock, mutual fund, exchange traded fund - any investment - breaks
through that support line, it's now heading towards Atlantic City, New Jersey. And, since I am not a gambler, this is not really where I want to go.
Some advisors (and clients) will tell you to place a stop loss order
10% below your purchase price - and then continually nudge up your stop
price, as the stock moves up. 10% seems like an arbitrary number.
When it comes trades, I'd like to stack the odds in our favor before
entering - finding an opportunity that makes sense for our portfolio,
and is close to the support line. This gives us a much closer (stop
point)... if the support line is broken, we leave the investment behind...no excuses.
Thomas Mullooly is the owner of Mullooly Asset Management, LLC, NJ Fee Only Investment Advisor, providing guidance for your 401k account. Mullooly Asset is a fee-only alternative to stockbrokers and financial planners.
Tom's popular email alerts help folks to reduce the risks in their portfolios. To learn how to stop making investing mistakes or if you would like a free look at your 401k account at work - or your 403b annuity, or section 457 deferred compensation plan at work, visit www.mullooly.net today!
- Article Word Count: 524
- |
- Total Views: 29
- |
- permalink