Tahoe-Truckee Mart Beat: Different strategies to manage stock positions
June 6, 2016
Will Rogers had some unique insight into stock investing when he said, "Don't gamble, take all of your savings and buy a good stock, hold it until it goes up, then sell it. If it don't go up, don't buy it."
That's great advice — just never buy stocks that don't go up and you'll never have a loss, quite simple.
If you do happen to buy a stock that drops in value there are some basic strategies to manage those situations. Stock investors should be prepared for periods of short term market decline; it's inevitable that they will occur periodically.
One strategy for a stock that has dropped is simply to hold long term until it rebounds. There's nothing wrong with having a long term focus and riding out some periods of volatility.
For example say you had purchased Chevron, CVX about a year ago on June 10, 2015, if you had bought it at the open you would have paid $102.52 per share.
By August 24, 2015, it had dropped over 30% down to a low of $69.58. By holding on, today it has rebounded; as of June 6 it traded over $102 again, and the investor who bought a year was back to even.
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Another strategy some people use is to average down. So, if you had bought Chevron as in the above example on June 10 and paid $102.52 and happened to catch the exact bottom and buy more at the low on August 24 for $69.58, your average price, assuming you purchased an equal number of shares, would now be $86.05.
You have to be careful when averaging down, because as you buy more shares you are also exposing yourself to greater risk. Decide in advance how large a position is right for you and don't get too much of your portfolio concentrated into any one stock.
Setting predetermined stop losses and sticking to them can work, too. You could decide that the maximum loss you're willing to take on any one stock is 10%, and if the stock drops by 10% you automatically sell the position and keep the loss limited to a relatively small amount.
Options can also be used in a variety of ways to manage stock positions.
There is no one best way to manage losing positions; every strategy has an advantage and a disadvantage. It is very important to understand your own risk tolerance and manage your portfolio accordingly.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.