Editor's Note: You might find some losing positions when you give your portfolio a year-end review. It happens - which is why we're revisiting this strategy piece from Shah today. In it, he reveals how to handle those losers with confidence. Here's Shah...
While there's no really bad time to kick underperforming stock positions out of your portfolio, some times are actually better than others.
The good news is, if you're sitting on losing positions, now may be a great time to exit them.
It's great because stocks are near all-time highs. That makes it easier to see which stocks in your portfolio haven't participated in the long run-up we've had.
It's also a good time because some investing themes that saw big gains are fading, some are dead in the water, and others are just starting to take shape.
And with this investing strategy, you can handle those losing positions with confidence.
So let's get to work...
Why You Shouldn't Be Afraid to Get Rid of Losing Stocks
The length of time you hold a position doesn't matter, as long as it's working for you. That is, if the price of the stock you own has been rising steadily, or if it pays a good, secure dividend.
Hold onto those positions.
But if your investments are not working for you after giving them a reasonable period of time to do what you expect them to do, chances are they're not all of a sudden going to explode higher and prove you right.
Too many investors fall in love with their positions. They think the stocks in their portfolio that were once expected to be the next big thing, or that were once high-fliers, will eventually start moving up or will come back after they fall out of favor.
Because there's no way of knowing whether a "dead in the water" stock will all of a sudden take off, or whether a fallen angel will ever rise again, you're almost always better off getting rid of those stocks and replacing them with more promising prospects.
But hold on right there.
I know what you're thinking. In fact, I know why most investors don't sell those positions that they think will come back to life. They're afraid to sell them because they're afraid they'll take losses on the positions and then watch them skyrocket to all-time highs.
I say, good luck with that. It could happen. But if it doesn't, you're left with a big loser. Not only will you not make money on those positions, you won't have a chance to make money in other opportunities because you didn't "take the risk."
That's how most investors look at selling loser positions - they actually think that selling them is taking a risk!
You can break that bad habit by telling yourself losers hold onto losing positions and winners buy winning positions. So sell your losing position and if it starts to act like a winner again, buy it back.
I don't like to sit on losers too long. I hate the feeling of being wrong, but I hate losing money more. So I'll sell my losers, cry for a second, and move on.
After I sell them, I look at them as if they're new positions I'm interested in. If they act like I want and expect them to start acting, I'll buy them back.
That's how you deal emotionally with losers you're afraid to sell. You look at them like new positions after you sell them. That way you can tell yourself you won't miss out on them bouncing back to the moon because you'll get back in when they start moving.
You have to sell losers because that's the only way to free your mind... and your capital.
Sometimes you'll want to sell because the stock isn't performing, sometimes because the investment theme you bought into isn't working, and sometimes you'll want to sell because there are better opportunities right in front of you.
Here's what I mean...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
A Few Ways to Handle a Bad Position
A while back, we were sitting on a few underperforming positions in my Capital Wave Forecast service.
One position was a gold stock. We got into gold because we saw geopolitical risks all around us, and because central banks have been printing money like crazy, which devalues currencies and over time is a positive for gold prices.
But gold didn't performed as we expected it to. So I had my subscribers put down a stop loss to sell our gold position if the stock made a new low. Our stop was hit and we were out of the position.
That's an example of playing a theme. If it doesn't work, take your loss and get out. Could we have continued to hold the position under the belief that gold would eventually rise? Sure. But I was wrong about gold. It hadn't been acting like it should. So it was time to move on.
We also bought a big drug manufacturer. The play there was to ride the coattails of a lot of big hedge funds that were taking massive positions and were agitating to get the company to sell itself for a nice fat premium. But that hadn't happened, and the stock slipped a little from where we had bought it.
This is a different example of taking a position that may not pan out. So what if it doesn't? We'll get out with a small loss and jump on another trade, or put that capital to work in a fat dividend-yielding stock.
On this position, however, we didn't just sell out and move on. We're stayed in it but were prepared to sell if it kept going down.
Bottom Line: Getting Out on Your Terms
Here's how to exit a position when you don't want to just pull the plug immediately.
We picked a spot where we wanted to get out with a loss that wouldn't kill us but still gave us a chance to see if the company could be put into play to be sold. We had a stop-loss order down to sell our stock at that "we're done" price.
You can take down extraordinary gains when you understand how Wall Street really works. Shah's been on the inside, and in his free, twice-weekly Wall Street Insights & Indictments, he reveals how to trade the bigger picture for maximum returns. To get his insight and start beating the Street, just click here.
In the meantime, if the stock started to rise, which it slowly started doing, we'd raise our stop and lessen our loss as the position went our way. If it turned into a winner, great. If it didn't and we got taken out, so what? It was a small loss and was worth the risk based on what the reward might be.
That's how you should get out of all your losers now.
Because we're coming into the end of the year and we might get a rally into the new year, it's a great time to go through your losers and put down a stop to sell them a buck or two below where they are now. If you get stopped out, say goodbye and get ready to get into better positions.
If we rally higher from here, keep moving your stop-loss orders higher as the stock goes higher. Don't stick your stop-loss order right under the stock - give it a little room to wiggle. You never know, maybe it will get back to breakeven or even turn into a winner.
It's possible.
But because it hasn't happened so far, it's not too likely it will turn out that way.
In the meantime, you're cleaning house, getting rid of losers, and making way for winners.
Up Next: Five Days in the Life of a Night Trader...
He's rich. He's influential. And his lifestyle is the envy of the investing world...
On Wednesday, after the markets closed, he hit a few buttons on his smartphone.
On Thursday, he went golfing.
On Friday, his entire portfolio was up 83%.
On Saturday and Sunday, he stayed at a five-star resort in the Inner Harbor.
On Monday, he checked his account again and saw 102% additional total gains.
In all, the Night Trader saw 217% total gains in less than a week. And now, he's sharing his strategy for the first time ever. Go here now...
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.