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Selling Can Be Your Friend


Selling should not be made out to be anything other than what it is: locking in gains and taking a step back.


It dawned on me this morning as I was writing about eventually finding value when the dust settles that the piece makes the assumption that one navigates any sell off and doesn't bite the dust themselves.

If there is one thing I learned from my years working with an exceptional trading mentor, it is that one should never be afraid to sell. In fact, selling is one of the most powerful tools the individual possesses and in my opinion extremely underutilized. The word is out that there are problems, and these problems may or may not be big problems that result in significant financial damage. At this point, the sell off has been sharp, but if we continue to peel back the onion and reveal more damage, as the old saying goes, "we ain't seen nothing yet."

At this point, most average investors holding quality mutual funds are still enjoying gains for the year as well as a significant advance after a nice run off the 2002 bottom. In my opinion, these investors have yet to start pulling the plug and rather are viewing this as a minor pullback in a healthy bull market.

While it may or may not be, the fact remains that at this time, we have no idea just how big or how ugly the elephant sitting across the room is and average investors may find some peace of mind minimizing their exposure until we see how things play out.

I don't think it has to be extreme and I am not suggesting cashing all out and going into hiding, but one thing I am not hearing from the major financial media, nor would I ever expect to, is the suggestion to possibly lighten up and see how things play out.

If in fact we find a bottom sooner rather than later, you can always recommit capital without having missed much. However, should we continue lower from here, you will not only have saved yourself some financial capital, but emotional capital as well.

The major media will tell you just how terrible selling is and how you must remain in the game at all times, but the average investor should consider adopting a plan where a small piece of the portfolio is moved to cash periodically with certain price points and time frames in mind.

For example, consider repositioning 20% of your portfolio to cash while the S&P remains under 1475. Should the S&P drop under 1425 consider removing another 25%. Once you have a selling plan in place, the hard part is adopting a buying plan so you don't end up missing an actual bottom when it sets in.

Bottoms are formed through a series of price retests as well as a series of higher highs and higher lows. When this starts to take place, similar to the strategy utilized when moving out, adopt a strategy to move back in when certain price points to the upside are met.

It is easy to micromanage such a plan and one should not become overly anxious to move big in one direction or the other in an extreme short term, however looking to move in or out methodically and systematically may help you to dramatically improve your results and take back control of your portfolio.

The media will tell you just how terrible it is to sell, but one thing is for sure. Selling should not be made out to be anything other than what it is: locking in gains and taking a step back.

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