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Frequently Asked Questions (FAQs)

Q: When you give a sell signal for a stock or mutual fund, what should I do with the proceeds from the sale if you don't immediately have a new buy signal? Should I reinvest immediately into something else or wait until the next buy signal for that particular portfolio?

A: There is no absolute right or wrong answer. However, we believe it is best to stay fully invested at all times. To achieve this, an investor has several options.

Option 1: leave the proceeds in cash and wait for the next buy signal. We subscribe to the theory that it's best to remain fully invested, so this is our least favorite of the options. However, it is the simplest of all the options and keeps transactions to a minimum, which is important for taxable accounts and for accounts at brokerages with substantial commission rates.

Option 2: buy an exchange-traded fund (ETF) that follows one of the major indices, such as the S&P 500. Standard and Poor's Depositary Receipts, also known as SPDRS, do just that. They trade under the ticker symbol of SPY and are sometimes referred to as "spiders". Keep in mind that because all ETF's deduct some funds to cover expenses, you are guaranteed to not beat the market. However, you will closely trail the market and should never be soundly beaten by the index the ETF is emulating.

Option 3: invest the proceeds into one or more of the stocks in our collection of Stock Screens for Short-Term Investing (available separately). Then when a new buy signal is issued for the portfolio you are following, sell the short-term stock and buy the new recommendation.

No matter which option you choose, remember that the ideal situation is to keep the amount invested into each of the stocks or mutual funds in a given portfolio equal. For example, let's assume you originally invested $500 into 20 stocks. Later on, we give a sell signal for one of the stocks and you happily sell it for a 50% profit. You decide to stay fully invested, so you then reinvest the $3,000 into "spiders" (see option 2 above). Later we give a new buy signal for XYZ stock and you choose to buy it with the money invested into the spiders. Instead of investing $3,000 into XYZ, it's best if you invested only $2,000. This way each stock was given approximately equal weighting. Leave the remaining $1,000 invested in the spiders.

 

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