When should you sell your stocks?
Not long ago, we indicated that a 150 point decline in the value of the S&P 500 would be a "clear sell signal" for investors.
But then, a week later, we suggested that there might be a less clear sell signal, one that could be used to shrink the amount of a haircut that an investor would have to take when reacting to a pending break down in stock prices. After all, given today's stock prices, a 150-point plunge in the S&P 500's index value would represent nearly a 10% haircut for an investor. Isn't there some way to reduce the size of the hit that would allow an investor to keep more of the gains in the value of their shares after the stock market has started to turn south?
Well, sure there is! An investor could determine some other price level that if stock prices were to fall below, would signal them to sell their stocks.
But how to set that value? If an investor were to set that value too high, they might find themselves exiting the market too soon, long before the rally they had been riding really ends, such as might happen with a short term market reaction to a news (or "noise") event. If an investor were to set that value too low, they would be back to taking a large haircut before finally acting to preserve their gains and cut their losses.
Both possibilities can cost real money. In the first case, the investor not only rings up transaction costs (commissions, fees, etc.) from executing the trades to exit their positions, they also lose out on the gains that the market can still deliver before they might recognize the situation and re-enter the market, where they will pay those transaction fees all over again. In the second case, they are committing to either lesser gains or larger losses as the cost of not acting soon enough.
Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
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