Creating Your Own Mutual Fund

So far we have discussed why it is good for you to create your own mutual, investing responsibly to avoid panic, creating a budget, various investments, how to create a mutual fund, and in the last lesson we talked about a strategy on how to buy stock. So, it naturally goes that we should talk about the just as equally important when to sell the stock you have acquired. After all this is when you actually realize the fruits of your labor.

One important forewarning: there is no real or simple formula in selling as there was in the lesson on how to buy. So how do you know when to sell in order to get the highest possible return on your investment? Talking to people and reading various books throughout my years I have heard several different methods. Let’s take some time to look at different ideas. Remember, it is your money, your mutual fund and it is up to you to decide which method works best for you, your understanding, and your goals. It is also a good idea to explore other methods as you invest. You may find a combination of ideas and create your own system as I have.

Almost all the people I have talked to use a system based on a goal. Some use a financial goal such as they will sell when they have earned a certain amount. They will buy their shares or other investment and hold it until it reaches a certain trigger amount and they will then sell it all. Then they will start again. For example: I invest $1,000 and plan to sell when it hits $1,500. When it does, and this could take some time for it to hit this level, I sell it all and then reinvest it in another investment. This is definitely only for the patient and to be done with money which will not be needed in the near future. It is a waiting game.

Another spin on this style of determining when to sell is when a person uses the investment as a sort of savings account for a specific goal such as a major purchase, a vacation, or even retirement. In these scenarios they make a plan and develop a rate of investment per pay period to reach the goal by the set time. Such as I may decide to take the family on a nice vacation to some tropical location in two years and make plans accordingly. I look into the prices and figure out how much to put away each pay period. I would then buy shares and continue to add to it. When it reaches the point between price increases and dividends I need to make the purchase I sell. If not, then I just continue and readjust my purchase goal date.

Similar to waiting on a goal is a system which is close to Selling Short. Selling Short is normally when you borrow stock from your broker which is up in value which you believe will decrease in value shortly and immediately sell the shares with the idea of purchasing the shares at a lower price to repay your debt. For example: let’s say that Company A’s stock is at its highest it has been in some time. But I have reason to believe that the bubble is about to burst so I borrow 500 shares and sell them at $100 a piece giving me $50,000. I then wait for the price to drop and it does to $45 a share. I buy 500 shares for $22,500 and repay the debt. I have made $27,500 minus any fees my broker charged me which typically accumulates each day I haven’t paid the debt. So, if the price finally drops far later than what I had anticipated, doesn’t decline, or even worse, goes up higher I am out of that money and have taken a serious loss. I don’t recommend this for a beginner.

However, you can look at stocks which have a cyclical trend. As I have mentioned before about how the retail industry’s stocks tend to climb in value up into the holidays and drop quickly in January through March. For Example: I start to invest in a retailer in January. I put what I can each pay period into shares with my application. As the year progresses my number of shares slowly accumulates and the price climbs steadily. Then around December I think the stock has reached its pinnacle for the year. I sell it for $1,000 of which so much represents the money I had invested and so much is from the effect of the price increasing over the year. I invested $800 and the effect netted me $200. I wait a couple of weeks as the holidays wane and the price drops and settles. I then take my $1,000 and buy shares at the lower price in the same or a different retailer beginning the process again.

Another way to help you understand what is going on is to imagine that I take $100 and buy a retailer’s stock in January and allow it to ride for the year. In December shortly after Black Friday I see the value is now $150 which I believe is as high as it will go and I sell. I wait a couple of weeks as described above and then when the price seems to be at its lowest I use the $150 to purchase more shares. If things go as they did the year before in December it is now worth $225. I then just continue until I reached my investment goals.

Another approach to the question of when to sell is not to sell. There are many investments out there that pay very good and steady interest or dividend. In most of these cases the price is stable keeping pace with inflation and the investor just accumulate shares or bonds for the dividend or interest payments. These are what are known as income investments because they generate a highly predictable income for the shares or bond owners. These are usually the stocks of utilities, banks, or a very large and well established company or the bonds with periodic interest payments issued by federal, state, and municipal governments. In many cases the investors never sell their shares and just pass them down to their next of kin. In the case of bonds they hold them until they mature and repurchase others with the intent of holding them until they mature.

Others sell when they see the price start to drop. They may invest over a period of time or have made one huge purchase. They hold the stock as long as the price is up or they expect dividends and then sell after the dividend is paid or the price starts to slip a certain percentage. This is obviously not a very good way of determining when to sell because you could have just bought the investment while the price was at $10 a share and a week later it falls to $9. Unfortunately, this is how a lot of the inexperienced determine when they will sell.

I have always told people that my rule for selling is very simple. Do the exact opposite of what the market is doing. The market is an aggregate of all investor activities and is a great indicator of how the investors perceive the economy. When the market goes up or down it is from the actions of the vast majority of the investors. So, when the market is dropping it is because the perceptions of the vast majority of investors are not good or are cautious. They are panicking and trying to unload investments before they lose money not really realizing in a lot of cases it is their opinions and actions which are driving the price down. Of course the exact opposite would be to purchase shares as the bulk of the market drives them down for you. This gives you the opportunity to pick up shares at bargain basement prices.

When to sell? Again looking at the market, when the Dow Jones, NASDAQ, S&P 500, and others are climbing look at the stocks you own. See if they are climbing as well. The markets are going up because investors feel confident and good about the economic outlook and their purchases are driving the prices up by buying. What is the exact opposite of what the market is doing? You should look at your stock and if they are rising you need to decide if you want to sell or just hold onto the stock based on your goals and your comfort levels.

Again, I highly recommend sticking with stock from companies which are well established especially when you are just starting to invest.

True, you may decide to sell but then you find the price keeps rising. You may decide to hold and all of a sudden the price falls. This can and does happen even to the most experienced of investors. Don’t worry, don’t beat yourself up, and most of all move on and forward. Life is full of people who would, could, and should have themselves to death. Learn from the experience and continue to move forward. If you sold and the price continued to go higher, pick a stock which is down, put the money back in continuing to let it ride, or wait until market drops again and it will, then reinvest. At least you have made some money. If you decided to hold and the price dropped, this is just another opportunity for you to pick up more shares. Everything does have a positive side to it.

You never really know what the high price will be but there are markers to help you have an idea of what to expect. This is the 52 Week Hi and Low. These are available on stock pages in newspapers and when looking up stocks on the internet. I personally use the 52 Week High which is the highest price the stock had recorded in the past 52 weeks while the 52 Week Low is the lowest price the stock has hit in the past 52 Weeks. Other investments such as currency and bonds also have markers to help you to know when to sell. I will tell you that the 52 Week High and Low are not absolutes. When you dig into a stock’s history for five year or longer you may find there have been moments since its inception when it has either surpassed the current 52 Week High or has plummeted below the 52 Week Low. In fact I have seen 52 Week Highs become the new Low. However the 52 Week High is a good marker for knowing when to scrutinize a stock and consider selling.

To help you in your decision to sell or hold as a stock approaches its 52 Week High you may want to research the company. Most business journals have a company index page which lists all the companies mentioned in their articles and gives the page number of where the company you are following first appears in an article. Some even print the company’s name in bold the first time it is mentioned in the article so it is easy to find. Even if it is just a quick mention, the company will be in bold and it will appear in the index. Perhaps what you read may give you the idea or a feeling the stock can exceed its current 52 Week High?

Again, if you sell and it goes higher, don’t kick yourself. If you bought as I had instructed chances are high that you have made some money which you can place in another investment, spend on yourself, or just wait until the stock you sold drops again and pick it up. And if you decided to hold and the price drops, just pick up more shares at the lower price for when the speculators drive it up again.