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Don’t Forget – Know When To Sell

I’ve mentioned before that a very important aspect of investing and making money in the stock market is knowing when to sell. Again, the common saying is buy low – sell high.

Right?

Yet, how many of us have also been taught to invest in the stock market on a regularly basis and hold our investments for the long term. If you look at the chart for the S&P500 you can clearly see that it does indeed go gradually up from the very first day it was first measured to today.

Historical Chart of the S&P 500 Stock Index

Historical Chart of the S&P 500

There are of course some down times… Times like the great depression. Times like late 2007 and 2008.

But what do “they” tell us to do? I don’t know about you, but it seems to me “they” always advise us to just hold on to our stocks because the value of those stocks will eventually go back up. “They” tell us we will only lose our money if we sell during these down times. But what happens if we hold on to our securities during these down times and we lose ALL of the profit we had earned over all of the years? How many years will we have to wait to regain all of the value of our stocks? Chances are that it could be many years. What if you’re older and are relying on your stock investments for your retirement? Will you even be alive to see the values of your stocks go back up to what they were before the last downturn?

I’m bringing this up over and over again because I believe the average person doesn’t realize the importance of knowing when to sell their stocks so that they can limit their losses. It seems so logical to me now, but I’m one of those who always believed if the market crashes it’s no big deal. It will eventually come back up. The key word here is eventually. Like I said before, will that eventually happen while we are still alive?

Guess what? I don’t believe this hogwash anymore. We need to pay attention to the market and watch our investments so that if we see the market losing value we can sell our stocks and limit our loss.

This is how the rich do it and if you want to be wealthy, this is how you will need to learn to do it. Just before the down turn of the market in 2007 and 2008 many members of Congress, who are privileged with insider information, sold their stocks and got out of the market. They limited their losses and kept themselves from being financially ruined like many of the common American citizens experienced when they lost their life savings.

As a side note, to this day it is illegal for individuals to use insider information when trading stocks unless they are members of Congress. Yes, you read that correctly. It is ok for members of Congress, the leaders of our country who are supposed to be looking out for us, to utilize insider trading without going to jail for it. It’s perfectly legal. Matter of fact, based on a study done by Alan Ziobrowski, Ph.D., the average stock performance for US Senators from 1993 to 1998 beat the stock market average by 12%.

Let me put this in perspective for you. There are professional mutual fund managers out there who are paid to invest in stocks who can’t beat the market. These are people who do it for a living, yet it is very rare for a professionally managed mutual fund to beat the market, let alone beat it by 12%. I don’t know about you, but I have very little respect for politicians in general and I highly doubt they are more intelligent than professional mutual fund managers.

Now that I’ve ranted about the evils of our leaders in Congress, let’s get back on track with our knowing when to sell. We have to have an exit strategy.

If you invest in a stock at $80 a share and it goes up to $100 per share you might want to put in a stop/loss order for $95 a share. In general terms, what this means is if your stock ever drops down to $95 per share it will be sold. Now let’s say your stock rallies and it goes up to $110/share. Great!! You are making some money. Now you can go back and cancel your stop/loss order for $95 per share and set a new one for $105 per share. You are not charged anything to place these orders until they are carried out. By doing this you are limiting your risk and controlling your loss. Again, this is just the basics. I encourage you to get out there and get educated. Look for books on investing and go find some quality websites where you can go to increase your knowledge on investing.

I’ve been doing a lot of reading on Investopedia.com lately and I think it’s a great place to start.

I’ve got one gripe, and it’s the reason I’m sitting here right now typing out this post.

I just went through the beginning investor tutorial on investopedia.com and they don’t even hint at the idea of knowing when to sell. As a matter of fact they hint a whole lot at buying and holding no matter what. It kind of makes me wonder if the people that run investopedia.com are members of “they”. I’m really eager to see if and when investopedia talks about the idea of selling to limit your losses.

But who am I to talk. I’m just some yahoo who is learning this stuff for the first time and wanting to share what I’m learning as I go through the process.

Although I do have that one gripe I’m still recommending investopedia.com as a place to go to start learning about investing. It’s all about taking action and getting out there to learn what you have to learn to become financially literate. Start there and start looking for some books on Amazon. Keep an open-mind and stay focused on your continuous financial improvement.

Now Go Be Successful In All Areas of Your Life!!


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