I recently wrote about stop orders. Briefly, they allow an investor to set a threshold that, should the market price for stocks he owns reach that threshold, his stocks will be sold into the market, even if the investor is not watching the markets at that particular moment. This post is about another tool in a similar vein that investors should be aware of. It can be used to ride a stock on its way up, and then to sell that same stock close to its top. At worst, a trailing stop helps you cut your losses. At best, it lets you automate the process of getting out while you’re ahead.
The general philosophy of most dividend investors is that once a quality company is bought, it should be held for years, decades, or, as Buffet has famously said, forever. (Notice that forever is his favourite holding period. He didn’t say that he never sells; occasionally, circumstances dictate that stocks should be sold.)
Market gyrations are part of the game, but occasionally, market or personal circumstances may dictate that you don’t want to wait out a price recovery after a drop. The best way to dodge that bullet is to sell before the stock price falls too far.
Unlike Buffet, I am not a professional investor. I don’t spend my life devoted to evaluating companies and making decisions based on my own unique insight. I also can’t spend hours per day watching, analysing, and dissecting the markets. Even so, there are times when I start to ask myself if it’s time to get out of the pool. Many investors, whether to take advantage of a recent run-up, or in anticipation of a potential precipitous drop, wonder if they should sell. For most of us, this kind of uncertainty isn’t a lot of fun. If, like me, you don’t watch the markets closely, a lot can happen while you’re away. By the time you realize that your fears of a price fall have come to pass, it’s often too late. The good news (and the point of this article) is that there is a way to automate the selling of shares before they fall too far, even if you’re not glued to your computer all day.
Once in a while, something clever comes out of just about everybody’s mouth. Even mine.
A few weeks ago, I was driving my daughter somewhere when the subject of money came up. As most seven-year-olds are, she is eager to please (most of the time), and she knows that I spend a lot of time reading and learning about money and investments. I don’t remember exactly how the conversation went up to that point, but she said, with all the gravity she could muster, “We have to learn about money because it’s so important.”
Without thinking, I answered with what I think was some pretty good fatherly advice: “The reason we have to learn about money is because it is so unimportant.”