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Pragmatic Investing Practices And Techniques An Excerpt from the Updated Edition of Full Of Bull, Unscramble Wall Street Doubletalk To Protect And Build Your Portfolio After you have a grasp of overall investment strategies, there are some pragmatic investing practices that I recommend. These are the mechanics that should help optimize results and prevent emotional reactions that can cause an investor to make the wrong transaction decision. Think of it like football. After a winning game plan has been established, each individual play must be executed. It is important to have good technique. Do Not Be In Denial; Move On When a stock holding has cratered and the prospects for the company have turned bleak, do not get trapped in a state of denial. Take the loss and move on. Holding on despite continuing price erosion just compounds the first mistake. Investors sometimes hold the naive attitude, "I can't afford such a big loss. I'll just hold on to it." Bad move. Your investment capital can always be better engaged in a more promising stock. When You've Decided, Take Action After researching, analyzing, and considering, and finally determining an investment choice, pull the trigger. Do not sit around and hesitate. Make the move. And do not quibble over pennies per share in price. Limit orders are appropriate when the stock is not actively traded. But do no try to low-ball a purchase price or be too greedy on a sell. Implementation is more critical on the sale. Do not try to be too cute and waste time on the exit. Your order might not get completed. Trust your conclusion. Have confidence in your decision. There is nothing more exasperating than making the correct investment decision and not benefiting because you have procrastinated or messed up the simple process of concluding the transaction. Flag Your Purchase Date; Focus on the One-Year Mark Note the date when a stock investment passes the one-year holding period, which is when the reduced 15% federal long-term capital gains tax rate kicks in. After a stock has been owned for a year, it is easier to take a long-term view and ascertain whether your original investment thesis is proving to be correct. Early in my career, I was embarrassed a few times when I--stupidly--pulled the trigger on a sale a mere week or two before the holding period went long-term; that is, just before the one-year mark. I should never have sacrificed the bargain 15% tax rate. The corollary to this advice is to avoid allowing tax considerations to overrule or heavily influence basic investment decisions. Your objective should be sound long-term investing, not juggling year-end tax liabilities. The amount sacrificed in making the wrong investment call dwarfs the pittance of savings in taxes. Sure, sometimes it might be worth waiting a week or two to gain a tax advantage, if the circumstances allow. But usually it is a risky maneuver. When you've decided, take action. Short-Term Trading Positions Should Be Contracted Once in a while, there might be a rare short-term trading opportunity, say when a stock has plummeted on an overreaction to negative news and a "dead cat bounce" or rebound is expected, or when favorable news seems imminent or you anticipate a forthcoming negative event. If it is a trade, stick to the short-term plan, and eliminate the position within a limited time frame regardless of whether the idea was a winner or a nonevent. Do not let the stock sit around and clutter up your portfolio with only a modest gain. If it is a trading position, do not be pacified or lulled beyond a short couple months' span. Avoid Selling the Day of a Dramatic Downgrade Most of the damage to a stock has already has been done within an hour or so after a summary drop in an investment opinion is issued by a brokerage analyst. Do not get caught up in the emotional rush to the door. There is invariably a bounce back the next day, or within a week or so. Hold your fire for a better selling opportunity after the dust settles. And you probably should not sell anyway. Do not do what Wall Street says. The same goes for a striking opinion upgrade. Wait a day or two for the excitement to abate and the stock to back off. And this holds true for stocks that are added to or deleted from brokerage recommended lists. Delay any transaction until the initial commotion wanes. ©2008 Stephen T. McClellan, CFA For more information about investing in todays' stock market, read the Updated Edition of Full Of Bull, Unscramble Wall Street Doubletalk To Prevent And Build Your Portfolio, by Stephen T. McClellan.
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