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Examiner
  • Ron Finke: When to sell? It can be a tough call

  • How does one know whether and when to sell due to a panic such as the Patriot Day Boston bombing? The following commentary will examine that question from a historical viewpoint and include a few general rules about selling investments.

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  • How does one know whether and when to sell due to a panic such as the Patriot Day Boston bombing? The following commentary will examine that question from a historical viewpoint and include a few general rules about selling investments.
    I used that older form of English in the first paragraph because this topic reminds me of the proverb, “A stitch in time saves nine.” I would almost wager that most young people have no idea what that means. What about darning a sock? Same result. Due to higher value of labor and lesser amounts of time for domestic chores, few of us spend any effort on mending clothes.
    The concept will still preach, however. In simplest terms, a problem that is easily fixed when it is first noticed or diagnosed will save lots of time and hassle if you actually pay a little attention and fix it. And so it is with your investments. Everyone knows to buy low and sell high, but no one ever wants to sell. Ever.
    I was talking with someone recently who bought Apple stock a year and a half ago in the $380 range. It was $421 as of Tuesday morning, and he still has a profit of $35 or so a share. But he knows it topped out at $705 last September. His maximum potential profit was about $320 a share. This is now a bitter pill to swallow.
    The buy-and-hold folks will assure you that no one knows from day to day when to sell. That may be correct, so far as it goes. But if Apple drops 39 percent in seven months, don’t you think a person could notice that the trend changed? A few stitches won’t fix it – the whole seat of the pants is ripped out! (In his defense, this gentleman said he told his broker he wanted to sell it. What’s up with that?)
    I often mention the rule of William J. O’Neil, founder of Investors Business Daily: Don’t lose more than 8 percent. In Apple’s case, that would have forced a sale on Oct. 8, 2012, when it dropped to a close of $638.
    What about the long-term capital gains tax? On a $253 gain per share, you would have paid $53 tax (21 percent) if you live in Missouri and been $200 to the good. I suppose the good news is that if you never make much money, you don’t have to pay much tax. If and when Apple’s down trend ends, you can buy it back and perhaps make another wonderful gain.
    Now for the history lesson. When Pearl Harbor was attacked on Dec. 7, 1941, the Dow 30 index was already 39 percent below its 1937 high. On Dec. 8 and 9, it dropped another 5.6 percent. It rebounded until early January but then continued its decline. Before 9/11, the market was already in decline also. When it reopened on Sept. 17, the Dow dropped 14 percent through Sept. 21. By year end, it was higher than before the dastardly attack.
    Page 2 of 2 - As usual, the context is all important. Does the incident change the existing trend? Currently, markets may seem relatively high and big-money people are probably looking for an excuse to reap some profits. Are we likely to declare war on some country? No. Will there be more bombings? Probably. Will life in the United States continue? Definitely.
    My initial instinct is that the bombing will not change the upward stock market trend. But I can’t go to sleep and assume that will be the case. Vigilance and action will be necessary to protect the principal you have.
    (Past performance is no guarantee of future results. All data from Worden Brothers, Inc., TeleChart software, 2013.)
    Ron Finke is president of Stewardship Capital, a registered investment adviser. This is general advice and not meant to contain specific recommendations. Reach Finke at rcfinke@stewcap.com.
     
     

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