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Knowing when to cash in is key to investing in stock market
At the very beginning, let me warn you that if you approach your stockbroker or money manager with the suggestion I am about to make, he is going to say I’m crazy.
Maybe I am. I’ve been told that many times. But in light of recent history, my suggestion makes sense, at least to me.
I talked to a lady the other day who was going over her quarterly portfolio statement.
“This says that I’ve made $60,000 so far this year,” she beamed.
Goodness! Making $60,000 in three quarters is something to crow about in this economy. But what will her statement show next quarter? So I asked a simple question.
“Have you ever thought about taking that $60,000 off the table and putting it in the bank, where you know it will be safe?” I asked.
She admitted that she had not, nor had her money manager made that suggestion.
Playing the stock market is much like playing a slot machine. You hit a pretty good jackpot and greed takes over. You have a tendency to keep right on playing so you can hit another, break the house and go home with everything including the kitchen sink.
Of course, it doesn’t work that way. The odds are stacked in the house’s favor and the computer chips in that slot machine are designed to make sure the kitchen sink stays at the casino.
Given the fact that the stock market has crashed twice in the past 11 years, the odds may also be stacked against you when you try to beat Wall Street. Like slot machines, the trick with stocks is knowing when to take your profits and run.
And it seems to me that a good time for the average person to do that is when she is up $60,000 through three-quarters of the year.
Yes, I know that those $60,000 in profits are subject to taxes and, depending on your particular situation, you might clear only $40,000.
So what? That’s $40,000 that is in the bank and safe, money you will not lose if the market goes south again.
And it is not like you had to go out and dig ditches to make that $40,000. In truth, all you did was sit back in your easy chair and watch the stocks rise. That was easy money.
Right now, with the Dow Jones average approaching an all-time high, it might be a good time to put some cold cash in a bank account. Yes, you’ll probably only get 2 percent return at best, but the money is there and it is government-insured.
The opposite thinking, of course, is that the stock market might go even higher and you could use that extra $60,000 to make more money. Pull that slot machine lever one more time. Walk away with the kitchen sink.
There are no guarantees when you’re dealing with Wall Street. Twice in little more than a decade, stocks have plunged. This is not your father’s market; investing in this day and time is as unpredictable as the weather.
Unlike the 1950s, ’60s and ’70s, today’s market booms or busts on any one of a thousand instantaneous news blurbs that flash across the Internet.
Right now stocks are booming, but there remains financial uncertainty in Europe and that much-talked-about “financial cliff” is still out there in the shadows.
Given the trends of the past 15 years, another major market sell-off seems inevitable. When it will occur is about the only question.
There are, of course, those optimists who think otherwise. In 1998, my broker told me, “There is no reason why the stock market can’t just keep going up and up and up! This is a new economy.”
It may be a new economy, but my broker, his peers and millions of investors found that the time-honored financial principles are the same.
I don’t know whether the lady took her $60,000 in profits off the table and put them in the bank, but I know I would have.
If she is going to pull that slot machine handle again, maybe she should do it with her initial investment and keep her profits secure.
That strategy may not work for everyone, but it has served me well over the years.
And I have come out of every recession in better shape than when I went in.
On top of that, I can sleep well at nights.
And there is much to be said for a good night’s sleep.