When to Sell?

08/18/2008 12:00 am EST


Terry Savage

Author, The Savage Truth on Money

Do you agree that it's easier to make a "buy" decision, than to decide to sell? After all, when you buy a stock you're presumably filled with optimism: business will be good, profits will rise, the market will move higher, and you'll find new wealth.

Selling is tougher. It's filled with emotion. What if you sell "too soon?"  That is, what if the stock moves higher after you sell? What if you are paralyzed, unable to sell because the stock was once higher? You feel like such a fool for not selling last week, last month-when you could have gotten more. There's nothing worse for your ego than selling when the stock drops, only to have it rebound the next week!

That's why most investors are better off with a plan to buy and hold a diversified portfolio of stocks. Over the long run, you can hardly go wrong. That's the way it's always worked in the past.  Sure, some stocks fall and never arise again. Think of the Pets.com sock puppet-and many other dot.coms. But we're talking about maintaining a diverse portfolio of stocks with earnings and at least a past history of growth.

But would you be better off selling some stocks? An analysis of the S&P 500 over the past 10 years shows that 486 of those companies (97%) experienced at least one price decline of 25 percent or more. And 347 of those stocks experienced at least one price decline of 50 percent or more! Now that's the kind of headache you'd like to avoid!

And that's the premise behind a new company called SmartStops.net. It takes advantage of a technique that many investors don't use-the "stop loss" order, which is placed below the current market and activated to become a market sell order when the stock reaches the pre-set price.

But what price should you use to set a stop loss? That's where SmartStops.net uses a proprietary algorithm to issue a stop-loss for each stock in your portfolio that you register for this service. The stop price changes daily, depending on market action. In fact, they've recently partnered with Ameritrade to automate the process, and other major brokerage firms are scheduled to sign up. 

You can either contact your broker to set an open order, and change the price when necessary. Or wait for an email announcing your stop has been triggered. You can try the service for free for the first 3 stocks you register at www.SmartStops.net.

I asked Chuck LeBeau, director of analytics at the company, whether widespread use of his service wouldn't create a target for the bears that are "gunning for the stops" to create an avalanche of sell orders.

His response: "I don't see where our impact is any different than a major brokerage firm making a sell recommendation-if they ever had the guts to tell their clients to sell a stock!  We believe that individual investors deserve to have timely sell advice-and they aren't getting that from Wall Street."

Good point. But that begs the question: will <<you>> sell your stocks as an act of self-discipline when they reach a certain point? And if you do, will you be able to move forward without looking back with regret?

I'm interested in your thoughts!

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