Sun, Mar 10, 2013
The markets are setting new highs, yet most investors are more frustrated than ever.
They should have made fortunes in the last four years. Most of them, however, have missed out on one of the largest stock market rallies in history.
The problem is a common mistake investors make when determining when to sell a stock.
Consider this. Back in early 2009 when the current stock market rally kicked off we advised readers to understand two things:
1. Stock market bubbles always go far higher and the busts fall far lower than most of us ever anticipate. As a result, most investors miss out on the big opportunities and sell at the worst possible times.
2. The Fed?s unprecedented response to the last crisis will likely fuel an unprecedented rally far greater than anyone could reasonably expect at the time.
Since then the advice turned out to be fantastically accurate. And more importantly, it has been extremely profitable.
Of course, we couldn?t see the future at the time. We just learned these lessons from history and applied them to the current market conditions.
But now with stocks setting new highs, most investors are about to make the same mistakes again. And that?s because trends show they?re going to sell too early.
Historical research from LPL Financial has found a startling trend that is reducing investors? returns.
The firm?s share below shows the average holding period for stocks over the last 70 years:
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The trend is obvious and has turned out to be costly. And now with the ability to buy and sell stocks with a few clicks of a mouse, the downtrend will likely continue well into the future.
The average holding period for stocks is in a long-term downtrend and the costs will likely grow for most investors.
However, investors wondering when they should sell a stock should take the contrarian approach. That?s to do the exact opposite of what most investors are doing right now.
As a result, we recommend having a defined strategy of when to sell a stock in place beforethey even buy a stock.
Simply put, making and following a selling strategy of a 25% trailing stop-loss will keep you in the uptrends as long as they?re going up and protect you from making big mistakes. Those mistakes include taking any significant losses and missing out on the really big gains to be had by selling too early.
Remember, in a market rally the Fed is committed to keeping going as long as possible despite the long-term consequences, holding on throughout the uptrend can and will be extremely profitable.
Good investing,
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Andrew Mickey
Executive Editor, Contrarian Insights
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