Talk about a painful grind.
Just when it looks as though the market is about to crash…stocks move higher.
This isn’t a new trend. It’s happened in fits and starts and to varying degrees for five years. Heck, perhaps longer.
What should you do? Buy before stocks go higher? Sell before they crash? Or, do nothing?
Here’s some news that could surprise (and confuse) you…you should do all three. Here, we’ll explain…
We know that telling you to buy, sell, and hold will seem confusing.
Especially when we’re telling you to do all three at the same time.
However, it’s not as confusing or crazy at it seems…not when you think about it.
Because the process of thinking about (or actually) buying, selling, and holding is something a serious, active investor should do every day.
That’s right, every day.
Now, that doesn’t mean you have to do something every day. You don’t have to place an order to buy or sell. In fact, deciding not to do something is being just as ‘active’ an active investor as doing something.
So, let’s show you what we mean in more detail…
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Some are up, some are down
Most investors have a singular view of stocks.
That is, they assume that all stocks are a buy right now, or all stocks are a sell right now.
Those investors don’t realise that on any given day on the market, there are a bunch of stocks going up, and a bunch of stocks going down.
Furthermore, they don’t realise that on any given day, some stocks are hitting a record high, while others are hitting a record low.
For proof, check out this table below. It shows that on Wednesday, on the Australian Securities Exchange, 36 stocks traded at a 52-week high, while 23 stocks traded at a 52-week low:
52-week highs, left; 52-week lows, right
[Click to enlarge]
So you see. The stock market doesn’t move as one. Each stock has unique properties. That may make it more or less likely to rise or fall with the general market.
As an example, if the macroeconomic outlook is shaky, stocks that are traditionally immune to an economic downturn may perform well.
On the other hand, stocks that are sensitive to economic conditions may not do as well.
You probably see where we’re going with this. That’s right. You can use this information to determine whether to add stocks to your portfolio, cut some loose, or do nothing.
It could mean that on a certain day, you decide that one of your stocks is at risk from a slowing economy. So, you sell it. At the same time, you decide that another one of your stocks stands to do well. So, you place an order with your broker to buy some more.
As for the rest of the stocks in your portfolio, you decide they’re just fine. You’re happy with them as they are…whatever happens in the short term.
Not always easy, but worth the effort
This is what it means to be an active investor.
Most folks think that active investing means being day trader — buying and selling multiple times per day, in order to make a quick few hundred bucks here and there.
If you want to be a day trader, that’s fine. But, we don’t recommend it. For a start, it’s a lot of hard work to make a profit, especially when you factor in transaction costs and tax liabilities.
The distinction we would make is to be ‘active’, but not ‘manic’.
Check on your stocks each day. But don’t feel the need to do something just for the sake of it. However, if one of your stocks does require more attention (ie. the stock price has fallen), don’t ignore it.
Find out why the price has fallen. Find out if there has been or is likely to be a major change in the business or in its industry. Or just see whether investors have sold the stock due to short term events that shouldn’t affect the company over the long run.
Being an active investor takes work, and it’s not always easy. We believe that if you can stick at it, in the long run you’ll do far better keeping your own eye on your investments, rather than leaving the job to someone else.
Editor’s Note: Part of being an active investor means checking out a whole range of stocks: dividend stocks, growth stocks, blue-chips, mid-caps, tech stocks, and…these little beauties. In our view, all investors’ portfolios should have at least some exposure to this type of stock.
PS: This article was originally published in Money Morning.