[Editor’s note: This is Part II of a new series on when (and how) to close investment or trade positions. See also:
Be sure to stay tuned for more tips and tools to protect and grow your wealth!]
“But what if I sell now and it turns out to be the bottom?”
I’ve talked to several investors during this bear market who are stuck in losing positions they want to be out of.
They’ve made the decision to sell (at some point). But they don’t want to pull the trigger just yet.
Instead, they’re waiting for a bounce and hoping the market will give them just a bit of their investment back.
Good luck with that!
Unfortunately, this kind of thinking often keeps us in losing positions far longer than we should. Meanwhile, prices fall and the losses keep adding up.
Today, I want to show you a trick that can almost guarantee you won’t sell at the bottom. And this tool also helps you make a more rational decision instead of letting your emotions dictate when you sell.
Dollar Cost Averaging — In Reverse
Some of you may have heard me talk about “dollar cost averaging” when buying shares of stock.
With this method, you decide how much you want to invest in a new position. And instead of putting all of that cash to work at once, you gradually build your position.
You might spend 20% of your cash for this position today. Then you might add another 20% next week — followed by 20% for the following 3 weeks.
This way, if your stock trades lower over the next several weeks, you’ll be able to buy more shares with the same amount of money.
But if the stock trades higher over the next several weeks, at least you have some of your position already working for you.
This same method can be used for selling a position that has deteriorated. (Like high-priced growth stocks in today’s bear market — you definitely want to get rid of these.)
Instead of selling the entire position at once, you could sell 20% today, another 20% next week and so forth.
This way, you can start reducing your risk immediately. And you’d be amazed at how much clarity that decision can bring.
Meanwhile, if we wind up getting a bear market rally, you’ll be able to sell some of your position at a higher price. That’s a win as well!
This Works for Selling Winning Plays Too!
Sometimes it can be difficult to know when to sell a winning position! (It’s a good problem to have, but one you still need to figure out.)
Dollar Cost Averaging — in reverse — can work in this situation too.
It’s incredibly difficult to sell an investment at the exact peak.
Optimistic investors can sometimes drive stocks much higher than you ever expected. And what may look like a normal pullback today could turn into a more serious decline very quickly.
If you’re holding a stock that has traded higher and is now likely too expensive (and likely to fall at some point), consider using the same method.
Take a certain percentage of your position and sell it today.
Then set a plan for selling the rest of your position in stages, at predetermined dates until your shares are gone.
Once again, this helps to take emotions out of your decision making.
And it also diversifies the timing of your sale so no one spike or pullback has a material effect on your total profit.
Let The Market Sell Your Shares Automatically
In our next installment, we’ll talk about an easy way to let the market automatically sell your shares.
This way you have more mental bandwidth freed up for finding new investments — or for focusing on the things that really matter in your life!
And in the meantime, I’d love to hear from you! Please comment or send me an email [[email protected]] and let me know what challenges YOU face when selling a position.
Here’s to growing and protecting your wealth!