Investment Notes:
From Ken Ferrone, Vice President, First Savings Financial Services
The measurement or fraction of one-half gets talked about in many different ways. A glass ½ full or empty of course brings images of a person who is either an optimist or a pessimist. Certainly growing up getting ½ the questions right on a test would produce a grade of 50%, or an F, which is not something any student should strive for or be proud of.
Within the investment world a ½ decision can be a very costly mistake. When one purchases an investment (whether it be a stock, bond, mutual fund, or any other type of security or commodity), they MUST keep in mind that they have only fulfilled ½ of their responsibility. The other half of their responsibility is the SELL decision. In a lot of cases this Sell decision can actually be more important than their initial buy decision.
After purchasing an investment (lets say 100 shares of an individual stock), the investor must decide at what price is that stock fully valued (monitoring the fundamentals and earnings, etc. of the company will not be discussed at this time, although this definitely needs to be factored into the equation to have the most updated picture and price target). The investor must decide at what price(s) they will either sell their full investment or a piece of their investment.
In an example, to watch a stock earn 100% and subsequently lose 60% means a 20% loss from their initial investment (assuming no sales along the way). On the other hand a person who sells ½ their position after making 100% can then look at the 60% drop as an opportunity to possibly more than double their shares (assuming they still like the fundamentals of the stock). Even if the stock never corrects by that 60%, the sell decision still means that the investor is ‘playing with house money’ and has nothing to lose (so to say). Think of all the people who invested in Enron or Lehman Brothers (to name just two) and never sold any shares as they went up and up!
By no means are we advocating short-term trading and getting in and out of positions quickly (remember this is market timing and studies show you must be correct over 80% of the time to break even). However, we are advocating monitoring your price target for your investment (adjust as necessary), and sell all or a part of the investment over time. This will be a form of rebalancing (sell high) that will allow you to purchase another investment (buy low).
Keep in mind any investment purchased or sold should also be looked at in view of each investor’s asset allocation strategy and their personal risk tolerance.
Securities and products offered through First Savings Securities, Inc. Member FINRA / SIPC
NOT FDIC INSURED – MAY LOSE VALUE – NO BANK GUARANTEE – NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations. To determine which investment(s) are right for you, consult your financial advisor before investing.
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