A lot of press time has been paid to candidate Hillary Clinton’s proposed new rules on taxing capital gains.
I suspect nothing will come of it, unless she becomes our next President.
Even then, any such changes would have to be agreed to by both houses of Congress.
This may simply be political positioning before the election, but the proposal is important because it highlights the complications added to the business of portfolio management. In this case it is incorporating the impact of taxes, or more accurately, the change in taxes relative to your portfolio management decisions.
If you are an investor you are also a portfolio manager. This is no different from owning anything else. If you bought it, you must tend to it until you ultimately sell it. This is true of your investments but also your home, other properties, cars and all the stuff that you own. How well your investments turn out depends largely on how well you manage your portfolio, not so much on the initial investment selection.
In my recent book I noted how the dart board investment selection strategy often beats the stock market averages if the investments are held for one year. In other words, if you randomly select ten stocks from the NYSE and NASDAQ, your results would often beat the market averages in the year following your purchase.
This is not to say that you should hold these ten investments forever. The presumption is that you would sell the ten investments at the end of a year. This is a sell strategy but nobody uses it for a host of good reasons. Still, the hypothetical investment strategy points to management as the important part of the process, not the original investment selections.
In other words, what you buy is less important than how you manage the investments after you have bought them. Or rather, what is your sell strategy? Few investors make this distinction in my estimation.
The commission-driven brokerage business loves this process. You buy something and generate a commission for your broker. Your broker loves you. Later you sell that thing and buy something else and generate two commissions. Your broker loves you even more! Listening to your commissioned broker’s recommendations is not an investment management strategy. It is good for your broker but may or may not be good for your portfolio’s net worth or investment performance.
Lest you believe that buying mutual funds answers the questions about what and when to sell, think again. Many mutual funds that market their products as long term investments are rather like ducks, sitting serenely on the water while vigorously paddling their webbed feet under the surface.
A lot of mutual funds do a ton of short-term trading that their investors never see. However, the question remains: when do you sell your mutual fund to maximize your investment performance? You still need to manage your portfolio of mutual funds and have a sell strategy for them.
Years ago Peter Lynch managed the Fidelity Magellan Fund and over a twelve year period produced magical returns. However, a Dalbar study determined that the average investor in Fidelity Magellan fund over this same period lost money. Sounds like their sell strategy left something to be desired as they snatched defeat from the jaws of victory.
I want all of my readers to know that a buy and hold through hell or high water is not a sell strategy either. The economy is dynamic and companies typically have lifecycles that should not be ignored. Just because your investments were good enough for your parents determines nothing about how good they might be for you. Burying your head in this particular sand only means that you have no idea how to manage your portfolio. It also means it is time to get some help.
I have a simple sell strategy that you can employ. Nothing is guaranteed here, of course, as future events might be quite different from past events. With all the caveats aside, first, if you buy an investment and it falls 8% in price, sell it. Next, if your investment is doing well, hold it until it declines below its fifty day moving average.
If you are a slow trader, you might wait for the decline in the price to fall below the 200 day moving average. If your investment is trending down in price, sell it and find another suitable candidate. You many decide on a more complicated and involved sell strategy; just be certain that you have one and are really managing your portfolio. Of course, if managing your portfolio seems onerous and complicated, you should employ an investment advisor to do this for you.
