When to Buy? When to Sell?

For the first time since October 2008 Main Street America has rediscovered the stock market. Money is flowing into mutual funds at an increasing clip. Usually this is a bad sign. That kind of money tends to show up in the later stages of a bull run. So inquiring minds might ask, “When should I buy and when should I sell?” There are many correct answers and an equal number of wrong answers.

But let’s keep this very simple.

As usual, let me offer a disclaimer. I am an extremely conservative value investor. I own individual stocks, bond funds, CDs, mutual funds, exchange traded funds, precious metal, and keep more cash (bank accounts and money market funds) than I should have because, like Oliver Cromwell I believe the maxim, “Trust in God but keep your powder dry.”

The obvious answer would be to buy in the first quarter of 2009. At that time a blind monkey with a handful of darts could pick winners from a list of stocks. Unfortunately, after a 40% drop in the value of their 401K accounts, mom and pop America were dumping their holdings at just exactly the wrong time. Baron Rothschild observed, “The time to buy is when there is blood in the streets.” Main Street America should have been selling those stocks late in 2007; just exactly the time when they were buying everything is sight.

I can not predict the future. I didn’t know when the stock market would hit bottom. I don’t know when the current bull run will end. However, I do know that we are now closer to a top than we were in March of 2009. Therefore I have more money in cash and bonds than is usual. When nearing a bottom I will, hopefully, have more money in stocks than in cash and bonds. I believe an age appropriate range for someone of my age, 62, should fall between 40% and 55% of my net worth excluding my primary residence in stocks.

Old Conventional Wisdom: Age in bonds and cash. Hence in my case, 62% in bonds and 38% in stocks.

New Conventional Wisdom: Age – 15% in bonds and cash. Hence in my case, 47% in bonds and 53% in stocks.

There is another useful answer, dollar cost averaging, “The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.” (Investopedia) Every month, month after month, put the same percentage of your salary in your stocks and bonds. When they get out of balance, move some money from one to the other. Otherwise ignore what the market is doing. If you choose to reinvest your dividends (always think about dividends) compound interest will go to work on your money. If you invest in mutual funds, make certain they are low cost mutual funds. Over the course of 30 years, even if the market goes nowhere (an unlikely scenario given the risk of inflation) you will find that you have accumulated a considerable amount of money.

Oh, when to sell? There are three reasons I sell.

1)I need the money. I am retired now. I just took a partial distribution from an investment so that I can delay Social Security until I reach full retirement age. That decision is a pure actuarial gamble. I am betting I will live past 78. If you think you will die before 78 (or you need the money) take early Social Security.

2)The price of the stock has dropped and I don’t think it going to come back. At some point (usually the best decision is a predetermined decision) cut your losses, take you tax deduction, and move on to something else.

3)The stock has risen so fast that you can no longer sleep at night. Once, early in my adventures in investment, I bought a stock that increased dramatically for no good reason. Given that I wasn’t very well diversified at this point in time, the size of my position in these shares was way out of whack. I actually had a bad dream about the price tanking. I sold the shares for a nice profit. Then they tanked. I don’t recommend buying and selling on the basis of dreams, but I wouldn’t ignore them either.