Monday, October 5, 2015

How Best to Minimize Losses on Stock Trades

Welcome back everyone!  Today's financial literacy installment deals with selling shares of stock for a loss, and how best to do it so that capital losses are minimized.  I believe I have shared on this blog several times that I keep my so called, "emergency fund," almost fully invested at all times.  I hardly ever keep a bunch of cash on hand; perhaps less than 10% of my emergency fund is cash liquid.  It's a strategy that has been gaining more acceptance as of late.  Here's a great article on not following conventional emergency fund wisdom by the good people at Safety Net Funds:...

Back in August, I shared I had been notified by the property management company I use to take care of my three out of state rentals that a tree on one of my properties needed to be cut down.  See: Ask these 6 questions when buying an out of state rental.  This was one of those obviously unexpected expenses, and it set me back over $2500!  The rents covered most of it; however, I had to stroke three mortgage payments in September.  Enter the need to sell stock.

The timing could not have been any worse.  I mean, September was an awful month for stock market investors.  One of my positions, McDermott (MDR) was trading within a narrow range ($4.52-$4.54) that was three quarters of a point from my cost basis.  This is a five dollar stock so that was quite significant at the time.  I had made up my mind to wait for a rally day, and one was sure to come along with all of the volatility in the market, to sell all 310 shares of MDR as close to my cost basis as possible.  I wouldn't have sold a single share of MDR if I did not have to.  The tree situation forced me into a liquidation event to raise the money I needed to cover my monthly expenses, including my three rental property mortgages.

On September 17, the market rallied.  The price action at the time gave me a sense of a potential intraday top for the stock.  I used a limit order with an asking price of $5.23, only 6.5 cents from being even with my cost basis.  The trade was executed.  At close, the stock settled at $5.12 so my trade was a good one.  I lost money on this stock.  A grand total of $20.17.  Considering that MDR closed at $3.46 on August 26th, this mere $20 hit to my portfolio was a huge victory for me.

It's property tax season and for a home owner like me without a monthly escrow account drawing funds, making the bi-annual payments is challenging.  April's installment is the easiest to make.  I use my tax refund money to take care of April's first half of the annual total.  Whatever cash I have left over, I transfer it to my Brokerage account, my "emergency fund," and invest with it.  Risky, yes.  This year I started a position in Actuant (ATU) stock.  My plan is to hold until 2016 when the stock and company is slated to outperform as economic conditions improve.  However, I had to sell shares to raise money to pay for December's property tax installment.

Again, I waited for a market rally day and daily monitoring of the stock to attempt to get as close to my cost basis ($22.50) as possible before selling some shares for a loss.  Now, this stock has beat the past two quarters, giving me a nice uptrend as new investors piled in.  Today the stock was up over 9% when I first took a look at it early in the morning.  Using a limit order, I set my asking price for $20.76.  The trade executed later in the day.  I sold 50 shares, losing $225.72 in the process.

Investing in the stock market is a mental endeavor.  As an investor, you have to understand how to work with any type of market: up, sideways, or down.  You also have to master the difficult skill of minimizing your losses when you are forced to sell, i.e., when you need to liquidate to cover your business or personal expenses.  I have shared with you two trades where I lost money.  Why?  To teach you how to approach a tough spot (needing to liquidate) without emotion or haste.  Losing the least amount of money is just as much of a skill as making as much money as possible.  By waiting for a rally day, estimating price action, setting a limit order, and grabbing an intraday high, you will get the most upside of a losing trade and live to fight another day!

Thanks for reading.  See you next time!      

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