Q.
Greetings, I am relatively new to investing but I have been studying Mr. Lichello's methods since 1993. I have been using his methods on my retirement money and now have an IRA with Schwab for about $48000. In April I bought stocks for the first time and have a portfolio of 6. I am using the AIM to manage the portfolio. It now is signaling me to sell. Which stocks do you choose to sell? The ones which have increased the most? or the least?
Thanks, Seeker
A.
Hi Seeker,
When using AIM to manage a basket of stocks, you are acting much as a mutual fund manager acts. This is a tuff call from 'over here', but there are some things to consider that may lead you to the correct choice as to which stock(s) to sell. I've done the same form of management in the past, so know your delemma.
First thing I would look at is the appropriatness of each equity to the AIM system. It wouldn't do you any good to sell off jucy AIM stocks and be left with steady growers that won't generate much AIM activity. You are going to want the remaining stocks to have high BETA (volatility), low price stability, probably low long term debt, and good but irratic growth. Obviously you want stocks that are in industries that have excellent long term potential (electronics VS horseshoes).
Next, examine the motives that got you involved with the stock in the first place. Were you looking for long term growth, or were you following a momentum trend that was to have known limits. Sell stocks that have reached short term goals in place of selling stocks that still have good long term potential.
In assembling a basket of stocks, be careful not to mix stocks from different parts of the business cycle. Although it may give the overall account more stability, it tends to confuse the picture when AIM calls for a decision. For instance don't mix capital equipment issues with their customers. The cap. equip. companies lag their customers in the business cycle. In this case, the customer's stocks might be going up and the cap. equip. cos. aren't. You might look at this picture and want to sell the cap. equips. because they are not 'performing'. The error would be that maybe the customer's stocks had already peaked and the cap equip guys had just started their run.
So, if you have a real mixed bag of stocks that you are AIMing, it's a harder decision than if you have separate AIM accounts for industry groups (or individual stocks). The more of a mixed bag it is, the more I tend to sell what's up and hold the remainder. This assumes that I'm still satisfied with the fundamentals of the remainder. (if I'm not, I'd do a non-AIM sale of the stock and pick up an equal value of an issue that is better suited to AIM and has better fundamentals)
My own experience with a group of stocks (about 10) was that after a couple of years of AIMing, the portfolio had 'concentrated' into about 4 stocks. These tended to be very good AIM stocks on their own. Also, I now had fairly large positions in these from concentrating the total value into fewer and fewer issues. It was at that point that I divided the portfolio into separate AIM accounts for each issue. They each went on their own way after that.
One last thought about IRA's. It's impossibe to gain any benefit from a LOSS in an IRA. There's no taxable gains, so there's no offset. This is what led me to use a mutual fund for my IRA, as it's harder to actually loose money with mutuals. With individual stocks there's a much higher probablility that I'd make an error in selection.
Thanks for the great question.
Best regards, and let me know how you do,
Tom |
