Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Sunday, January 23, 2011

Words of Wisdom from Wall Street

Investors generally spend most of their time trying to figure out what stock to buy and at what price to buy, and then pay little or no attention to when to sell. An old Wall Street adage is good advice for investors to keep in mind: “No tree grows to the sky.”

In many cases, investors follow the herd, buying the latest hot asset for fear of missing the action. Even if they are lucky enough to buy before the frenzy starts, it’s not uncommon for them to buy some more as the asset approaches its peak, because they are just so sure the investment’s price will continue to rise. They can’t stand the thought that they might miss out on further gains.

Then the unexpected happens. Some news breaks that sends the asset price down ten, twenty, thirty percent or more, in a matter of days. Some, who now are underwater, buy more because they can’t stand the thought of losing.

Others hold on for sentimental reasons. They received a stock from their dad or their grandma. They can’t possibly sell a stock that was so good for all those years. Dad wouldn’t be happy.

We’ve written time and again about how important it is when you buy a stock, to set a price at which you will sell and then when it reaches that price – sell! And then, don’t look back. If you made a good profit, be happy that you did and begin looking for your next investment. Find something else that’s undervalued with good prospects. Surely there’s something else out there that is a better buy.

The event that causes the downturn in price is often quite unexpected (An oil spill, fraud, terrorism, a natural disaster, law suit, etc.). Others are more predictable. The price rises and rises with claims that it will still go higher. Often, we’re inundated with TV ads that tout the merits of the investment, seemingly hour after hour. It seems to us that the more ads there are on TV preaching the merits of an investment, the less likely the investment will continue to rise in price (think gold!).

A Wall Street Journal article this week by Carolyn Cui and Liam Pleven titled “From China, Signs That Gold’s Rally Isn’t Endless” (Friday, January 21) stated: “The precious- metals selloff accelerated on Thursday amid worries the rally of the past few years may be petering out and concerns that China will slam the breaks on its economy.” The article went on to say that on Thursday gold fell 1.7% and was down 5% for the year. Silver, the article noted, was down 11% for the year.

Just this last week, Steve Jobs announced he was taking a medical leave of absence from Apple. Apple stock dropped from $348 a share to $326 (a loss of 6.3% in just four days). It may not continue the downward trend, but who knows for sure?

Whatever you do, you need to avoid letting your emotions drive your investment decisions. You need to harvest that tree before it gets top heavy and falls to the earth; or before it gets diseased and begins to rot. Remember, no tree grows to the sky!


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