Risky Stocks: How to Dump Them

weissWeiss Research is a great resource for practical advice on stuff you need to know right now. Check out this advice on how to dump your risky stocks (and the Top Seven Arguments Your Broker Will Have).

If you haven’t done so already in response to our many earlier warnings, you’d better sell — or hedge against — your risky stocks now. If you don’t, be prepared to suffer far deeper losses.

One way is to ignore what everyone thinks or says, call your broker and issue one, four-letter instruction: “SELL.”

Sound too simple? Perhaps. But compared to sitting back passively and letting your retirement be destroyed by a long or deep bear market, it’s actually the lesser of the evils.

Worried that you may be selling at exactly the wrong time? Then, as with your 401k, sell half at the market, reducing your exposure to risk immediately. Next, wait for an intermediate rally to sell the balance.

But beware: No matter how much you seek to sell or when, most brokers will try to talk you out of it. They have a hidden agenda. They want to keep you as a customer; and they know that, once customers sell their stocks, they often close their brokerage accounts.

With this in mind, many brokers have been trained with up to seven sales pitches designed to keep you in the market come hell or high water.

Broker Pitch #1: “Buy more.”
Their argument goes something like this: “Your stock is now selling at bargain prices. So if you didn’t already own 100 shares, you’d probably be thinking about buying — not selling. Instead, why not double down and take advantage of dollar-cost averaging?”

The more likely result in a bear market: Every time your stock falls by another $1 per share, instead of losing just $100, you’ll be losing $200.

Broker Pitch #2: “Hold for a recovery!”
They argue that the “market will inevitably recover,” that the “recovery is always bigger and better than any near-term decline,” and that you should therefore “always invest for the long term.”

The reality: Bear markets can last for many years. It could take still longer for the averages to recover to current levels. During all those years, your money is dead in the water. And don’t forget: If the company goes out of business, your stock will be worthless and will never recover.

Broker Pitch #3: “You can’t afford to take a loss.”
If you insist on selling, brokers often come back with this approach: “Your losses are just on paper right now. So if you sell, all you’ll be doing is locking them in. You can’t afford to do that.”

What they don’t tell you is that there is no fundamental difference between a paper loss and a realized loss. Nor do they reveal that the Securities & Exchange Commission (SEC) requires brokers themselves to value the securities they hold in their own portfolio at the current market price — to recognize the losses as real whether they’ve sold the securities or not.

Broker Pitch #4: “You can’t afford to take a profit and pay the taxes.”
If you’ve got a profit in a stock, they say: “All you’ll be doing is writing a fat check to Uncle Sam. You can’t afford to do that.”

The reality: Although it’s not shown on your brokerage statement, the true value of your portfolio is net of taxes. So whether you or your heirs pay those taxes now or in the future is mostly a difference of timing. And if Obama approves legislation to raise capital gains taxes next year, it could actually cost you more. Besides, which would you prefer — paying some taxes on profits or paying no taxes on losses?

Broker Pitch #5: The “don’t be a fool” argument.
“Stocks look very cheap now and we’re very close to rock bottom,” goes the script. “We may even be right at the bottom. If you sell now, three months from now, you’ll be kicking yourself. Don’t be a fool.”

The truth: Brokers don’t have the faintest idea where the bottom is. Nor does anyone at their firm. And they know darn well that stocks do not hit bottom just because they look cheap. Worse, for their own accounts, brokers and their affiliates have been — and are likely to continue — liquidating shares, often targeting precisely the same shares they pitch to their customers.

Broker Pitch #6: “The market is turning.”
If the market enjoys an intermediate bounce, which it certainly will at some point soon, this pitch is invoked. “Look at this big rally!” they say. “Your shares are finally starting to come back. After waiting all this time, are you sure you want to run away now — just when things are starting to turn around in your favor?”

The truth: In a bear market, intermediate rallies actually give you the best opportunity to sell. Often, they’re stimulated by government efforts to bail out companies or stimulate the economy. If so, those can be even better selling opportunities.

Broker Pitch #7: The Patriot Gambit.
The last ace-in-the hole in the broker’s arsenal of pitches is the patriotic approach. “Do you realize,” they’ll say, “what could happen if everyone does what you’re talking about doing? That’s when the market would really nosedive. But if you and millions of other investors would just have a bit more faith in our economy — in our country — then the market will recover and everyone will come out ahead.”

The truth: Locking up precious capital in sinking enterprises is not exactly good for our country. Better to safeguard the funds and reinvest them in better opportunities at a better time.

Not all stocks are created equal.

In a prolonged bear market,
some fall more than the stock averages,
some fall less, and …
– a very small number of stocks can actually buck the trend, moving higher as the rest of the market falls.

If you have stocks that your money manager or broker insist are in the latter two categories, and he makes a strong case for holding them, then it may make sense to do so.

But even with these special situations, you still could be vulnerable to significant losses for four reasons: 
1) Investors need cash and sell even the best stocks to raise funds … 
2)
Investors suffer large losses in the rest of their portfolio and take profits in their best stocks to help offset the loss … 
3)
Fear overcomes logic and investors throw out the baby with the bathwater, and/or … 
4) Deflation drives down the price of all assets, including the best stocks.

Each or all of these situations can drive down the value of your stocks, no matter how good the companies may be. Therefore, if you’ve decided to hold them, you will need a hedge — an investment that’s designed to go up when stocks go down.

There are four vehicles available for hedging your stock portfolio. Here they are, listed from least risky to most risky:
Buying inverse ETFs. This is recommended for most investors who decide to continue holding stocks in their portfolio despite a bear market.
Spending small amounts of money on put options. This is recommended for investors with some risk capital available.
Selling short individual stocks. Not recommended.
– Selling short stock futures. Not recommended.

For detailed instructions on inverse ETFs and how to use them, our free report, How to Protect Your Stock Portfolio From the Spreading Credit Crunch, is currently available for your immediate download.

You should check out Weiss Research’s free daily update email. It’s actually pretty good.

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3 Responses

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