I have helped a few people get started with online investing. Randall, a retired businessman had never handled his own investments. He was scared, but excited to take control of his retirement.
Like most of us, he had experienced drawdowns in his managed account, but just tossed the quarterly reports, assuming he was in good hands. The experts were doing their best and ‘buy and hold’ would work out in the long term. Or so he thought.
He took a check into an online broker, and filled out paperwork. Two days later his account was ready to invest in any stock he wanted to buy.
Randall had visions of making big bucks, and showing everyone how good an investor he was. He watched the TV business channels and investing shows. He bought their recommendations. Then September 2008 came, and the market slide over the next 60 days, Randall did not know what happened. He followed the “experts” advice; he bought all of their recommendations. His losses were significant.
What mistakes did Randall make? Hint: he owned 35 stocks, he did not use trailing stop losses, and he had uneven positions. Randall bought all of his stocks beginning in August 2008. He was almost fully invested by the end of September. Money was burning a hole in his account; he felt pressure to get it invested.
He looked at every stock recommendation as an opportunity not to be missed, and bought blindly. He was heavily invested in consumer and technology companies. He had heard of these companies, and was comfortable investing in “something he knew.”
Thirty-five stocks are too many different companies to follow. This can lead to staring at the screen, and seeing nothing. We recommend never owning over 20 stocks. If you find a company that you believe offers an exceptional opportunity, sell something you already have. Replace the weak with the strong.
Uneven positions…galtstock recommends equal dollar distribution in your position sizing. If fully invested means owning 20 stocks, each stock should be 5% of your total stock investment funds. For example, if your stock account is $100,000 then each stock position should be as close to $5000 as possible. It does not matter if the stock price is $5 or $100 per share; keep the total position close to 5% of your total stock account. This way, a 10% gain in one stock is equal to a 10% loss in another.
We recommend always using a 20% trailing stop. A trailing stop starts as 20% off the purchase price and adjusts up with the price of the stock. Do not enter in your computer! Monitor closing prices, if you close below the trailing stop, sell the next day.
Your selection of companies to own should be in different sectors of the business world. You do not want to be invested in companies that only operate in the corner mall, any more than you want to be all in for utilities or natural resources. Try to cover a few different sectors; you never know which one will experience the next bull market.
Randall made a right move to set up his online account. He can control his costs with low expenses. Add diversity of assets, trailing stops, position sizing and he is ready to enjoy his retirement and watch his account grow.
Randall joined our Long-Term Portfolio service. We help him make intelligent decisions to protect his future. We recommend the stocks (one every two weeks), monitor trailing stops, and give him a weekly update on his holdings.
According to Russell Jones of the API (American Petroleum Institute), “carbon permits would add 77 cents a gallon to the price of gasoline” and increase our reliance on imported fuel that does not pay the full tax. Thanks to Pelosi and her enablers! And you were upset with the Republicans for spending too much. Read about the Carbon Law. It is a good thing that people that make less than $250,000 don't buy gasoline, otherwise this would be a tax increase.
Does your billfold feel lighter this evening? The dollar lost 0.6% TODAY. It used to take months to lose that much, now we can do it in a few hours.
Where is the market going? Who knows? Insiders have been net sellers of their companies stock for the last 14 weeks. According to TrimTabs, insiders of S&P 500 listed companies sold $2.6 billion in shares while only buying $120 million in June. Insiders are voting with their money. Insider money says sell into strength, a theme we have been pushing for the last 45 days. The precipice appears very close.
Google has a problem in China, pornography sites pop up when you do a search. I am shocked! The Chinese want a chip put in all computers that will filter out pornography, and political sites. The New York Times has a must read article on a new China Crackdown.
Palm (PALM) beat the street’s expectations, reporting sales of $86.7 million compared to estimates of $80.6 million. The price has rallied, up 15% today! The new Palm Pre smartphone is making news as a competitor to the Apple iphone and Rimm’s Blackberry. The problem is the losses, $91.5 million or 78 cents per share. How do you lose $91 million on sales of $86 million? Gross sales were $296 million for the same quarter a year ago. Sounds like a short to me. It is hitting new highs. Let the price run, give it another week, then sell it….hard Every bubble pops, the bigger the louder.
Disclosure: No Positions