I am not a huge fan or expert on basketball. However, I think the second most important factor next to scoring is rebounding after a failed shot. Not every shot is good, but the rebound allows an opportunity to keep the ball, shoot again, and deny the other team its chance. Today we apply the concept of the rebound to investing.
We have just experienced a fairly typical adjustment in stock markets. Regardless of what we call these down turns, they will occur like waves on the oceans. They are therapeutic for bull markets, much as a safety valve on the top of any pressure cooker. If a trend line for an entire market or a single stock goes almost straight up for long, it will most likely be descending in a similar way sooner than later.
When downtrends occur, put them to advantage by noting the relative changes in behavior of parts of a market or among industries or stocks. Now we can see changes in trends. One method we use in managing for better results is to sell investments when they are trending to lower price or value.
Seeing indicators that Mr. Market could head further south, I chose to place a floor below our investments before I went on vacation in early August. We set them manually for the mutual funds. (Sell s
top orders can be set electronically for stocks and Exchange Traded Funds, but not for mutual funds.) Our associates monitored them and sold the few that violated my limits. We sold them at higher prices and the resulting cash in the accounts did not suffer any big loss in late August and late September when we saw a double bottom pattern.
With that cash, I will now be buying different sector positions based upon the strength of the rebound they have had since those two low points. Through Monday’s close, the S&P 500 had rebounded by 7.2 percent since September 29th. Therefore we look for investments performing better than that. How and where?
Each day, Investor’s Business Daily has a listing of the top 40 and the worst 40 groups of stocks over the past 1, 3, and 6 weeks with relative rankings. This makes it easy to look for an industry that was performing less well earlier but is building new momentum. For example, yesterday’s edition (13th) shows that Wholesale Electronics stocks were 74th (of 197) 6 weeks ago but are ranked 12th this week, a major move upward.
Everyone jokes about buying low and selling high, but no one really ever wants to sell. What if it goes higher after you sell? That happens sometimes, but investment gains are dependent on probabilities rather than specific outliers. Use the law of averages for your benefit.
What about taxes on gains harvested? Most investors don’t like to pay taxes, but I have seen many instances where the tax tail wagged the dog and caused great injury. If you don’t gain, you don’t have to pay much tax. I would rather pay all the taxes I can when I get to keep the lion’s share under the present system. Most middle class money is in tax sheltered accounts anyway.
Now is also a great time to sell losers that are not rebounding well in order to save taxes. In this World Series race, don’t you hope Ned Yost pulls out the pitchers when their performance is bad? Likewise, don’t fall in love with investments or other things that can’t love you back!
(Past performance is no guarantee of future results. Advice is intended to be general in nature. Statistics from Investor’s Business Daily, 10/13/2015, B2, and TC2000, Worden Bros., Inc., 2015.)