The Alchemist: Divorce

Posted in Money Matters on April 16, 2003

The following is this week’s installment of The Alchemist, a column by Mensan Al Thomas, author of If It Doesn’t Go Up, Don’t Buy It. Click ‘Read More’ below for this week’s article, “Divorce.”

The Alchemist: Divorce

by Al Thomas


The most recent statistics show that about 50% of all
marriages end in divorce. It is not very encouraging to enter into any
kind of relationship knowing that it only has a 50/50 chance of being
successful. Failure at anything is never pleasant, but there is one good
thing about divorce. You are now free to try again and hopefully this
time you will not make the same mistake.

Now I want you to think about divorce and the stock market.
Do you own any stock or mutual funds that are selling for less than you
paid for them? If you have owned any equities during this past three
years I will be willing to bet you have some losers in your portfolio.
Don’t you think it is time to think about a divorce, a divorce from a
losing situation?

Suppose you sold everything today and put it all in a money
market account paying 1%? I know what you think about 1%. Suppose you
had dumped those losers 2 years ago and been in cash all this time?
Would you be money ahead at 1%? I’ll bet you would.

You may be saying you don’t know whether this is a good
time to sell or buy more. Here in one way to make that decision. Analyze
the stock or fund you have. If you would not buy more of it now then the
smart thing to do would be to sell. And don’t fall for the big Wall
Street lie about dollar cost averaging.

Here is another way to determine how and when to sell — let the market
tell you. You can place a stop-loss order with your broker for any
amount you wish. Say your stock is selling for $20/share. I like to
limit my loss to about 10% so I have my broker enter an order to sell me
out if the stock drops to $18. If it keeps advancing I raise the stop
loss order every week so that it is trailing along behind about 10%.
When it advances to $30 my stop would then be at $27. This way I don’t
have to guess about where to get out. Brokers don’t like to do this
because they have to watch your account, but don’t let him talk you out
of it. You don’t want to lose everything like you might in a divorce.
Limit the damage. If you own mutual funds you will have to watch these
yourself as you cannot place a stop-loss order; you have to call the
broker to tell him to sell.

When you are in a bad marriage things just seem to get worse and worse.
You could lose everything. When you are in a long-term bear market as we
are now it is the same. Your financial assets become less and less. At
least in the stock market you can limit your losses. Don’t call a
lawyer, call the broker and get out.


Copyright Albert W. Thomas. All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” www.mutualfundmagic.com. Comments to al@mutualfundmagic.com.