Quoted from investingdad:
So when you get out of the market and into cash, how do you know when to get back in?
For that matter, how do you know when to get out in the first place?
When you sell a big gaining stock, do you immediately have another in mind to buy? How do you find the winners consistently?
This is my strategy for 'getting in, and out' of the market. Right now the Market is over-priced. Can it go higher? yes. Can it stay over priced for years to come? yes. Is it possible it will not ever have a big drop again? No. The one thing you can always count on, is that there WILL be a sudden and steep drop at some point in the future.
Until then, I am not 100% cash. I'm 75-50% cash. Some opportunities can always be found in any market. The stuff I'm holding is mostly big blue chip multi billion dollar companies. Most of them also pay big dividends (though, while most people will tell you a dividend increases your 'safety' it can also be a liability when cut... *looks at TEVA*) anyway... In the event these companies have a huge decrease in value, I will be comfortable just buying more. These companies are not going out of business anytime soon. but I need to have the CASH to buy more. That's the most important part.
If a Stock drops 50% after you buy it, it needs to increase 100% just to become par again. Look at any chart and its clear the movement up is almost always a very slow steady climb. But the drops are sudden and steep. It could be years before you just get your money back, much less start making money on the investment.
For simple math, I put $200 into the stock Market. The market crashes 50%. I need to get a 100% increase in value on my stocks to break an even $200 and recover those losses.
But let's say I have $100 in the market, $100 in Cash. Market Crashes 50%. I ADD the $100 to my position after the crash. I now only need the values to increase 35% to achieve my original (now $200) investment, and recover my losses. If the values return to their original pre-crash value, I'll have $300, instead of $200.
You don't want to get out of the market entirely. You could be missing out on years of overpriced growth. But stay 50% in, and you get 50% that growth, and are only exposing yourself to 35% of the risk. With re-investment, dividends, etc... this all gets very complicated... But boil it down to basic components, its just how much greed/risk ratio are you comfortable with?
To your other questions,
When I sell a Big gaining stock, I almost never sell all of it. I try to not have any 1 stock be more than 5% of my portfolio. If a stock does super well, I'll sell it off to a 2% position. I'm never in a hurry to re-invest that cash. The one thing you can always count on with the market is slow growth, and sudden losses. You want to be excited when you see a sudden drop in value, because you have a lot of cash to invest on that opportunity.
As for finding winners, that's really up to everyone's individual risk comfort level. Personally,
1) I don't invest in any company that doesn't make money (Tesla).
2) I try not to invest in any company with a market cap lower than a Billion.
3)I also try to find low P/E values, and solid Dividends.
4) The last and more tricky thing I look for is companies that took a nose dive because of 'news' and not fundamentals. (MNK recently as an example. Their sales are slowing, but they are making MORE money, but the value of the stock plummeted, because of the slow down on sales. So I picked some up. Made 6% today on the bounce.)
These rules become less tangible as the list goes on, and carry less weight in my decision making as the list goes on. make your own list of rules, write them down, and look at that list any time you want to buy or sell a stock. Write notes as to WHY you bought it, and what your goal was for it.
in my DIS purchase, I Bought it last month because it always makes money. It is a HUGE 159Billion company with a clear road map on how it wants to become bigger. It was at a very low 52 week average. Has a 1.5% dividend (meh). In the past 2 years it has reached value of up to at least $115 three times.
-I will begin selling DIS when it reaches $120. and I will sell more and more if it continues upward.
-If DIS has a sudden drop in value, some months later once the price stabilizes, I'll double my position.