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Selling Sets Up Next Great Buying Opportunity

By Doug Fabian
President, Fabian Investment Resources
Host, The Doug Fabian Show

The mainstream media argue that buy-n-hold tames market volatility -- balances the forces of fear and greed. Nonsense! How harmonious will you feel if your portfolio loses 1/2 its value and doesn't snap back? 

If you want your yin to yang -- if you're looking for peace of mind, plus profit -- then develop your maverick reasoning. Specifically, use the market trends, stop-loss protection points and 5/10/20 vision for deciding when to sell. 

1.) Using the Market Trends. Mavericks use big-time benchmarks like the S&P 500 and Russell 2000 to decide when to invest in, avoid, or sell certain assets. Why are these "marks" so important? Because they tell you when the U.S. market is trending up or down. 

For example, let's say you're using the S&P 500 as your indicator for large-cap assets. If the current price of the S&P is lower than its 9 month, or 39-week average (39 WAR), the U.S. large-cap market is in a downtrend. Similarly, when the price travels above its 9-month average (a.k.a. 39 WAR), large-caps are in an uptrend.

2.) Employing a Stop-Loss Strategy. Many of the individual stocks and stock funds that rose dramatically from November to March -- some of which I recommended -- have given back everything in April alone. But mavericks using the stop-loss protection that I advocate so strongly, have locked in the majority of their profits.

A stop-loss is a pre-set percentage that one is willing to give back on unrealized gains. For instance, if you have a 12% stop-loss, you will sell your fund when it drops 12% from the highest point it reaches from the date of purchase.

Example? You buy Fund X at 50 on 5/01/00. Fund X moves to 75 over the next 4 months -- a 50% unrealized gain. Then it hits an October broad market sell-off and drops to 66. That's a 12% drawdown, your stop-loss has been hit, and you sell. But you pick up a healthy 32% gain!!!

3.) Filling Your Eyes with 5/10/20 Vision. Everyone who listens to me religiously -- or even once in full, fat moon -- knows the maverick growth goal. We strive for a 20% compounded rate of return annually. Yet, mavericks do more than strive for 20%; we use the goal to decide what to buy, sell and hold in our portfolio.

Specifically, we track what we own each quarter, looking for 5% over 3 months, 10% over 6 months and 20% each year. For instance, let's assume you own Large-Cap Fund Z, and it's only up 1% in a 3-month period when the S&P 500 and other large-caps are averaging 7%. That would be an indication to sell, and rotate up to a large-cap with near-term strength. 

These 3 approaches to selling -- trending, stop-loss protection and 5/10/20 vision -- will go al long way toward giving you the cash for a better buying opportunity. 

Doug Fabian is president of Fabian Premium Investment Resource and editor of the company's four subscription-based newsletter products. For more information on these services and the highly rated Fabian Plan, including how it can help you attain your goals of growth and income using today's best no-load mutual funds, visit the Fabian web site at http://www.fabian.com/.