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.