Wednesday, March 18, 2015
Moraif, Buy, Hold, and Sell!
For decades investors were told to buy and hold. They bought into myths that perpetuated this advice: the market always comes back, don’t miss the 20 best trading days, don’t be the fool who sells at the bottom, diversity your portfolio … that’s all you need to do, you won’t make any money if you sell and sit in cash, and you haven’t lost any money unless you….
Moraif debunks these myths and tackles what I consider to be the toughest part of investing—selling. When should you take profits or cut your losses? He offers a couple of simple alternatives. First, looking at the equity market as a whole, you can use the 200-day moving average, preferably with a band around it to prevent whipsaw. Second, when it comes to individual stocks, you can use a stop-loss or, if you have a profit, a trailing stop-loss tied to the stock’s volatility.
When shouldn’t you sell? Single event-driven market selloffs are a bad time to bail because the market usually rebounds quickly. If, however, there’s more than one reason, especially if there’s an accumulation of ugly economic data, the investor should pay close attention.
Moraif’s book offers those who worry about their financial futures, particularly those who don’t have time to recover if something goes badly awry, a few basic risk management principles. He tries to take some of the angst out of selling and aims to give the investor “peace of mind, … a feeling of security in a world of volatility, risk, and economic unrest, … the chance to enjoy your retirement as you should—as a second childhood without parental supervision.” (p. 179) Would that disciplined investing lent itself to such emotional calm.