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Reasons to Sell or Short-Sell Stocks and Other Investments

Posted on by Joseph M. Brennan Jr.

This article is about some of the factors a disciplined investor considers when deciding whether or not to sell or short-sell stocks and other investments. Short-selling is a practice where an investor borrows shares of a stock or other investments, with the anticipation that prices will fall, and buys them later at hopefully lower prices. If the prices rise instead then the investor loses money. I’m not fond of short-selling myself, but at least wanted to share it since the factors that influence when to sell stocks or other investments are often some of the same factors an investor might consider when short-selling.

If you follow my stock market activities then you know that I have done quite a bit of selling lately and am now completely out of the stock market. From a seasonal standpoint, November is typically the time to buy (and not sell) stocks since the highest gains typically occur between November and April so you might question why I decided to sell out of this market. Well, there were two primary reasons: 1) I bought into the mid September-to-mid October market slump where the stock market lost nearly 10% and since then the stock market has gained over 11% over a period of about 3 weeks or so which is about a year and a half gain (on average) over a period of weeks. 2) My year end “stretch” goal for my investment account was 12% and I gained 16% as of Friday which is over a two year gain on average. When the overall market bottomed in mid-October, and I kept buying into it, my investment account was at a 6% loss, so it has risen 22% since then. Rather than continue taking risk I sold what I had to realize this gain and await an overall market pullback or other compelling investment opportunities before putting my cash to work.

Below are factors that I frequently consider when evaluating whether or not to sell shares of stocks or other investments that I’m holding at the time:

(1) Technical charts and indicators approaching extreme levels. For example, if you take a look at the slow stochastics chart below, at the bottom of the chart, for the S&P 500 Index (SPX) you can see that the lines are above 80 which indicates, from a statistical perspective, that the stock is overbought and is due for for a pullback. In addition, in the top chart, the prices are approaching the upper Bollinger Band at ~ 2067, another statistical indicator, which is perhaps even more concerning due to the significant widening of the upper and lower bands associated with the extreme price declines and the rapid recovery between 19 September and 7 November. I typically look at a variety of charts and indicators and generally take a “weighted average” across those that appear to best reflect the “personality” of the stocks or other investments that I am tracking to aid in “buy” and “sell” decision making. Tracking the S&P 500 Index (SPX) is a good index to track, because about 60% of stocks rise when the SPX rises and about 80% of stocks decline when the SPX falls. So the SPX is worth paying attention to.

Chart courtesy of stocks.com

Chart courtesy of stocks.com

(2) Stocks or other investments rising significantly above their means. Stocks tend to be mean reverting over time so prices significantly above or below the mean(s) tend to reverse and revert back to the means at some point.

(3) Stock prices approaching or exceeding their 1 year price targets. Analysts generally provide 12 month price targets for the stocks that they cover and they revise these over time. As such, it is likely that prices approaching or exceeding their 1 year price targets will have limited upside unless significant upside revisions are made by the analysts that cover the stock at some point in the future.

(4) Stocks or other investments which previously declined significantly, but have since nearly reverted back to their means or have recovered nicely from their previous declines.

(5) Stocks or other investments which previously gapped down significantly on a decline begin “filling in the gap”.

(6) Prices approaching resistance zones represented by moving averages or trend analyses.

(7) The percentage gain to date. I always try to lock-in a good gain when I see one even if the other indicators I look at are favorable towards the stocks or other investments that I am holding. This allows me to have cash available to take advantage of any other investment opportunities which might become highly favorable, in the future, in terms of the indicators that I generally look at to evaluate stocks. I typically consider about 7% per year to be an average annual return in the stock market although far above average returns have been observed in the past few years. It is likely, however, that annual gains will begin reverting back to their means at some point in the future.

(8) The risk-reward indicators that I generally look at become unfavorable in nature such as some of the factors indicated above or some of the fundamental indicators that I frequently look at.

(9) Other investment opportunities start becoming much more favorable than some of the ones I’m holding, but I am fully invested and have no cash on hand at the time to take advantage of these opportunities. When this happens I look to sell some of the stocks that I’m holding to free up cash so that I might capitalize on these other potentially more compelling opportunities.

(10) Reaching or exceeding my ultimate or year end target goals for my overall investment account. Anytime that you begin approaching your ultimate or year end target goals this should prompt you to reduce your stock market exposure to manage your risk.

Each of the above are indications that it might make sense to sell some shares; especially when two or more of these factors are present. Selling shares when such opportunities arise allows you to effectively manage risk and have cash available to take advantage of future compelling investment opportunities.

Being a disciplined investor involves tracking multiple investment alternatives and taking actions to capitalize on those which become highly favorable investment opportunities over time and exiting those which become less favorable. By periodically rotating out of investments which become less favorable and into investment opportunities which become more favorable in nature you will realize consistent gains over time. You won’t make winning investments all of the time, but the point is to use strategies and techniques which allow you to make winning investments for much of the time

This article informs some of the factors a disciplined investor considers when deciding whether or not to sell or short-sell stocks and other investments. Part of being a successful investor, and realizing consistent gains over time, involves recognizing indicators of when to reduce your stock market exposure, and risk overall, by selling shares of stocks or other investments.

Please contact me if you need any assistance with any of your financial planning, management, and/or investing needs as this is one of the areas that I actively perform life coaching and training in. Also feel free to click on “Financial Planning, Management, and Investing Related Posts” on the sidebar to the right or below (depending on which device you are using)  for helpful tips on how to become a solid investor.

Other articles that I’ve written related to financial planning, management, and investing include:

(1) Risk: How Much Should You Take When Investing Your Money?
(2) Using Technical Indicators and Charts to Guide Stock Market Activities and Using Price Averaging to Manage Risk
(3) Using Bollinger Bands, Stochastics, and Other Indicators to Guide Stock Market Activities
(4) Using Moving Averages and Price Averaging to Realize Consistent Gains in the Stock Market

These articles provide helpful tips on how to become a solid investor so read through some of these if you think they might be helpful to you. In addition, in case some of you would like to follow along, here is where I regularly post about my stock market activities. So feel free to visit this page if you’d like to follow what I’m doing in the stock market at any given time.

For those that did not know, I generally perform life coaching and training services in two primary areas: 1) Personal and Professional Improvement, Development, and Growth, and 2) Financial Planning, Management, and Investing. As such, I generally alternate the articles that I write via my blogs between these two topic areas. This particular article is associated with the second area that I life coach in. So if you don’t have much interest in financial planning, management, and investing, rest assured that the next article that I write will be in the area that you might have greater interest in; the personal and professional improvement, development, and growth area. You can also follow me on Twitter if you like at: Joseph M Brennan Jr @ BrighterDaysLC

 

Joseph M. Brennan Jr.
CEO/Life Coach – Brighter Days Life Coaching
“Your Brighter Days Life Coach for Life”

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Risk: How Much Should You Take When Investing Your Money?

Posted on by Joseph M. Brennan Jr.

Perhaps the most important consideration when making investment decisions involves risk. However, what many people fail to realize is that not only can it be detrimental to their financial future to take too much risk, but it can also be detrimental to their financial future to not take enough risk. Largely, due to the bursting of the dot com bubble in 2000 and the subsequent financial crisis of 2008, many of today’s investors associate risk with emotional comfort level and, as such, primarily rely on cash savings or conservative investments to empower their financial future. However, what many of these investors fail to realize is that it could take a lifetime (or longer) to reach their financial goals in this fashion. Thus, even though they might tell themselves that they are taking little or no risk at all via the financial decisions they are making today they are, in fact, taking substantial risks in terms of empowering their financial future.

So, just what is the right balance between taking too much risk and not taking enough risk? This is a question that I frequently work with people to determine when coaching them on how to manage risk over the life of their investments. I do this in several ways to include:

A. Determining the risk category for each investment goal whether it’s a down payment for a home, an education fund, down payments for investment properties, or a retirement fund. The two primary considerations for determining the appropriate risk categories are:

(1) The defined amount needed upon reaching the investment goal (i.e., how do you know when the goal has been met?). To remain relevant, this amount may need to be adjusted over time. For example, when first establishing a financial goal for a down payment on a home you might initially estimate that you need $20,000 for this down payment, but later, due to home price increases and the type, size, and location of the home that you then desire you might discover that you actually need $30,000.

(2) How much money you presently have, how much money you still need to reach your latest adjusted goal, and what your time horizon is for reaching this goal. If, for a given investment goal, an analysis is performed and the determination made that it falls into a high risk category then you will need to invest in higher risk investments in order to meet this financial goal within your desired time frame. Otherwise it will take longer to reach this goal. The good news about being in a high risk category is that you do not have to be very precise in terms of market timing and/or the investment selected to progress towards the financial goal. On the other hand, if, for a given investment goal, this analysis is performed and a determination made that it falls into a low risk category than you will need to invest in lower risk investments to better ensure that you will not lose a significant portion of what you presently have should the markets experience significant declines. Otherwise, you run the risk, again, that it will take longer to reach this goal. In other words, it doesn’t make sense to take a lot of risk when you do not have to if you can meet this financial goal without taking this additional risk. The bad news about being in a low risk category is that you have to be much more precise in terms of not buying at the wrong time, or not buying the wrong investments, in order to sufficiently progress towards the financial goal. Unfortunately, as stated previously, many of today’s investors associate risk with emotional comfort level and thus rely on cash savings or conservative investments to empower their financial future. Furthermore, many of them have not even taken the steps to define what each of their investment goals are. If they did, they might be surprised at how long it might take to reach these investment goals by relying on cash savings and conservative investments. For example, if you had a total of $10,000 today, save an additional $2,000 per year plus a 5% increase for each future year, and invest all of this in emotionally comfortable conservative investments earning 3% a year, and plan to retire when you have a million dollars then it would take you 67 years to reach this retirement goal. Sixty seven years! However, it’s actually much worse than that. If you estimate that you might need $1,000,000 in today’s dollars to retire how much would that need to be 67 years from now? Well, assuming an average inflation rate of 2% per year, then your investment goal would need to be $3,800,000 dollars. So, although many of today’s investors invest in emotionally, comfortable, conservative investments what they do not realize is that they may not be able to reach their financial goals in their entire lifetimes! So, defining and refining their investment goals and re-evaluating progress and time frames are essential to ensure the appropriate investment risks are being taken. An investment which is emotionally comfortable today may not result in the gains needed to realize the investment goals within the desired timeframes. Recently, I coached a woman who wanted to retire in five years time, but was investing all of her money in a conservative bond fund. After performing some analyses we determined that her current savings would have to grow ten fold in order to reach her investment goal. Using an above average return rate of 8% per year it would take about 28 years or so to reach this goal. If she wanted to retire much sooner than that then the only chance she’d have of making it would be via high risk investments. Please do not wait until you are five years from reaching a major financial goal without understanding the appropriate level of risk to take to ensure your success. You don’t want to be forced into a high risk investment with little time to recover should the markets not cooperate. Making these assessments early on, and making adjustments and managing risk all along the way, is critical and will accelerate your progress towards reaching each of your financial goals.

B. Track and perform risk-reward assessments across various investment alternatives and invest in those which are appropriate with respect to the risk category associated with each investment goal. I perform risk-reward assessments based on various indicators and financial data that I regularly review and evaluate. I’ve discussed some of these via some of my previous articles: Using Bollinger Bands, Stochastics, and Other Indicators to Guide Stock Market Activities and Using Technical Indicators and Charts to Guide Stock Market Activities and Using Price Averaging to Manage Risk.

C. Invest in a disciplined fashion in accordance with the risk category associated with each investment goal using investment strategies appropriate for the risk category. I work with people to develop investment strategies in this fashion. One of the many strategies that I use is averaging into the stock pricing when buying and averaging out of the stock pricing when selling which is something that I discussed in one of my previous articles: Using Technical Indicators and Charts to Guide Stock Market Activities and Using Price Averaging to Manage Risk.

So, effectively managing risk and finding the right balance between taking too much risk and not taking enough risk, all along the way, is critical for empowering your financial future. Do not rely on cash savings and conservative investments if it will take nearly a lifetime (or longer) to reach your financial goals. Likewise, if you have made substantial progress towards reaching your financial goals, do not take so much risk that you stand to lose a large percentage of this progress if the markets significantly decline. I can help you to determine the right balance between these two extremes. And achieving the correct balance is critical if you hope to have the money you need to reach each of your future financial goals.

Managing risk and maintaining the correct balance of risk is key to progressing towards your financial future and the freedom that it brings. The impact of not doing this smartly is the same either way. If you do not take enough risk you will not reach your financial goals within your desired timeframes and if you take too much risk you will not reach your financial goals within your desired timeframes. The optimal level of risk to take at any given time is fluid and dependent upon your specific financial goal, the progress to date, and the associated timeframe. Any change to any one of these aspects will influence the level of risk appropriate for meeting the specified or refined financial goal within the specified or refined timeframe. Sticking to the same plan independent of these considerations will threaten your financial future and the financial freedom that it brings. I can help you to achieve this balance every step of the way.

This article informs how to manage risk and how to find the right balance between taking too much risk and not taking enough risk for each of your investment goals. Part of being a successful investor, and realizing consistent gains over time, involves managing risk and finding the right balance between these two extremes in a fluid, disciplined fashion over time.

For those that did not know, I generally perform life coaching and training services in two primary areas: 1) Personal and Professional Improvement, Development, and Growth, and 2) Financial Planning, Management, and Investing. As such, I generally alternate the articles that I write via my blogs between these two topic areas. This particular article is associated with the second area that I life coach in. So if you don’t have much interest in financial planning, management, and investing, rest assured that the next article that I write will be in the area that you might have greater interest in; the personal and professional improvement, development, and growth area.

 

Joseph M. Brennan Jr.
CEO/Life Coach – Brighter Days Life Coaching
“Your Brighter Days Life Coach for Life”

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Using Technical Indicators and Charts to Guide Stock Market Activities and Using Price Averaging to Manage Risk

Posted on by Joseph M. Brennan Jr.

Generally, I like to use a series of indicators to evaluate the risk-reward potential of various stocks as well as inform and guide actions that I take in the stock market in a disciplined fashion. Two of these I discussed in a previous article, Using Bollinger Bands, Stochastics, and Other Indicators to Guide Stock Market Activities. This article discusses the Relative Strength Index (RSI) and ways to manage risk via price averaging. A couple of days ago, in the stock market, I decided to sell additional shares of my Unisys (UIS) stock based on the RSI and other indicators and financial data that I generally look at while using dollar cost averaging to manage risk.

I initially bought the UIS stock a few months ago, because the risk-reward indicators and financial data that I generally look at appeared to be highly favorable at that time. Since then, the stock had both declined significantly and increased significantly at various points in time. When the stock declined significantly, I performed a risk-reward assessment based on the indicators, charts, and financial data that I frequently look at and determined that the pricing of the stock was highly favorable. I then started aggressively buying as a result. When the stock began to rise I continued performing risk-reward assessments and when the pricing of the stock began to approach less favorable conditions I started selling shares. One of the indicators that I sometimes look at when making these determinations is the RSI as depicted on the following chart.

UIS Candlestick and RSI Chart courtesy of StockCharts.com

UIS Candlestick and RSI Chart courtesy of StockCharts.com

When the RSI line rises above the 70 level and then hooks down then that is the textbook definition of a sell signal. When the RSI line falls below the 30 level and then hooks upwards then that is the textbook definition of a buy signal. In my experience, I’ve found that doing some buying and selling as the RSI line approaches those two extremes has resulted in consistent gains over time. I don’t usually like to wait until the textbook definition is met before starting to buy and sell as it will most likely take a long time for these conditions to be met. I just execute my “buy” and “sell” activities in accordance with the risk profile associated with the investment goal I am trying to reach. If the investment goal I am trying to reach is in a high risk category then I will most likely wait at least until the textbook definition is met for the RSI before selling shares and not wait for the textbook definition to be met for the RSI when buying shares. If the investment goal I am trying to reach is in a low risk category then I will most likely do the opposite; only buying shares when the textbook definition is met for the RSI and selling shares prior to the textbook definition to be met on the sell side.

As I discussed in a previous article, Using Bollinger Bands, Stochastics, and Other Indicators to Guide Stock Market Activities, other potential reasons for selling shares of the UIS stock still held true in that the UIS stock had not only “reverted to the mean” but had risen above both the 20 day and 50 day Exponential Moving Averages (EMA). I discuss moving averages in further detail in my article, Using Moving Averages and Price Averaging to Realize Consistent Gains in the Stock Market. In addition to the EMA aspects, the UIS stock had continued “filling in the gap” between the 23 July gap down in the stock price and the previous day’s closing stock price.

Each of these were indications that the UIS stock might have been getting a little pricey and that it might have made sense to sell some shares to manage risk and have cash available to take advantage of future investment opportunities that became available. The UIS stock has had a pretty good run since the 23 July drop, gaining nearly 20%, so it made sense to sell some shares and await the next favorable investment opportunity to put those dollars to work.

Price averaging is a technique that I frequently use to manage risk and to realize consistent gains in the stock market. I like to price average into stocks when buying them and to price average out of stocks when selling them. It is nearly impossible to get the absolute best price when buying and selling stocks, but via price averaging you will often get a good price. I generally use this price averaging process over multiple time frames. For example, when my risk reward assessment of a stock becomes highly favorable, via the indicators and financial data that I generally look at, and I plan to begin purchasing shares of the stock then I will usually monitor the stock price during the day and try to buy about half of the stock when the price approaches the low of the mid-morning part of the day and then buy the remaining half towards the end of the day; resulting in a price that is the average between these two prices. This ensures that at least I did not buy the stock at the highest point during the day and that I purchased the shares for a somewhat reasonable price. Following these initial purchases, I generally monitor the price of the shares throughout the days and weeks that follow and anytime the stock falls significantly from my currently averaged price point, and my risk-reward assessment for the stock remains favorable, I buy additional shares which essentially brings down the average price that I paid for the shares overall.

In a similar fashion, I price average out of stocks when selling shares. For example, when my risk reward assessment of a stock becomes unfavorable in nature, via the indicators and financial data that I generally look at, and I decide that I want to begin selling shares of the stock then I will usually monitor the stock price during the day and try to sell about half of the stock when the price approaches the high of the mid-morning part of the day and then sell the remaining half towards the end of the day; again resulting in a price that is the average between these two prices. This ensures that at least I did not sell the stock at the lowest point of the day and that I sold the shares for a somewhat reasonable price. Following the initial sales of my shares, I then generally monitor the price of the shares throughout the days and weeks that follow and anytime the stock rises significantly from my currently averaged price point, and my risk-reward assessment for the stock remains unfavorable, I sell additional shares which brings up the average price that I sold the shares for overall.

Price averaging is a wonderful way in which to manage risk and to realize consistent gains over time. So I encourage you to use this price averaging process when performing your investment activities. Again, it is extremely difficult to get the “best” price, but not so difficult to get a “good” price. Price averaging can help to ensure that you always get a decent price both when buying and selling shares. I have even successfully used this price averaging process to transform large initial losses into eventual gains. For example, I once experienced a 33% loss on a bad call I made on HG Gregg (HGG), but I kept buying the stock on the way down which eventually resulted in an overall gain of 5%.

So… That’s where things stand for me in the stock market right now. I’ll let you know how things go. Either way I have a plan. If the UIS stock rises significantly, or the risk-reward becomes substantially more unfavorable in nature via the indicators and financial data that I look at, then I’ll be a seller of additional shares, but if the UIS stock falls significantly, and the risk-reward becomes favorable in nature via these indicators and data, then I’ll be a buyer.

This article informs how to evaluate the risk-reward potential of various investment alternatives and how to manage risk and realize consistent gains in your investments over time using techniques such as price averaging and various indicators such as the RSI. Part of being a disciplined investor, and realizing consistent gains over time, involves recognizing favorable versus unfavorable conditions, taking actions accordingly, and patiently waiting until the next compelling buy or sell investment opportunity arises; one in which the risk-reward becomes favorable for you, from either the buyer or seller perspective, according to your risk profile. If you operate in this fashion you will experience much success as an investor.

For those that did not know, I generally perform life coaching and training services in two primary areas: 1) Personal and Professional Improvement, Development, and Growth, and 2) Financial Planning, Management, and Investing. As such, I generally alternate the articles that I write via my blogs between these two topic areas. This particular article is associated with the second area that I life coach in. So if you do not have much interest in financial planning, management, and investing, rest assured that the next article that I write will be in the area that you might have greater interest in; the personal and professional improvement, development, and growth area.

 

Joseph M. Brennan Jr.
CEO/Life Coach – Brighter Days Life Coaching
“Your Brighter Days Life Coach for Life”
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Make a Bad Day Better
Make a Good Day Better
Create a Brighter Life