I wonder how many of you grew up wanting to become investors.
, you can put your hands down. Scott and Paul are two of our
Start Investing Community
regulars who took to investing like ducks to water. They certainly seem to love it.
For many of us, though, it has been something of a strain. I certainly never wanted to become an investor, much less a business reporter. I wanted to be more like Lois Lane -- to write about what seemed to be more interesting stuff to me. Maybe become a Moscow correspondent, like my
editor, Dan Fisher. Alas, when I applied to
The Kansas City Star
, no Moscow jobs were available. Only the business desk.
It worked out OK, but I had a pretty steep learning curve at the beginning. When the business editor started talking to me about "equities," I didn't know that what he really meant was stocks. So I did a good deal of reading -- just like
, another of our newsgroup regulars who learned just about everything there is to know about investing in 12 months flat.
One thing I'll never forget is being terrified of looking stupid when I was new on the job. All day, I would scribble down things that I didn't understand, then look them up at night when I was alone in my apartment or at the library.
Learn It on the Web
Today's novices have a big advantage over me there. They can ask any question they like, at any time of the day or night, in any number of online newsgroups. What I love about the Web is the way it combines anonymity with customized answers. You can ask whatever you like without looking the business editor of
The Kansas City Star
in the eye and wondering if he thinks you're stupid.
and I answer as many questions as we can in the Start Investing Community -- though fewer than I'd like lately, because of problems I'm having with my equipment.
In addition, I've decided to pick one question each week and answer it here in my column. It won't always make up an entire column. But there'll always be a question of the week.
First Question of the Week
To kick it off, I'd like to look at a recent question from
a newcomer to the community. He pointed to a recent column I wrote about lessons I'd learned from the crash. He congratulated me on selling off some stocks before the crunch, but noted that it was largely due to my intuition, rather than any systematic discipline. True.
"Systematic profit-taking is the biggest hole in my investment strategy," Beartrap wrote, adding that, as a buy-and-hold investor, he saw profit-taking as market timing in disguise. I love this question, because I felt exactly that way myself. As a journalist, I've always urged investors to buy and hold for the long term. So what was I doing selling off my winners? And with only my intuition to go on?
Fortunately for me, some of our community participants had answers to Beartrap's question.
suggested selling a set amount of holdings at the end of the year, which is a rebalancing technique that financial planners swear by.
Alb thinks that the worst performers should be sold first. I'd agree that in a taxable account, it makes sense to harvest losses. But that doesn't address Beartrap's question about systematic profit-taking.
How Much in Cash?
offered a strategy that I think has real merit -- one that he uses himself. He suggests maintaining a certain percentage of your portfolio in cash, something that I agree with wholeheartedly. Indeed, for me that is now nearly half.
Gofer suggests that a conservative investor might aim for 45% to 55% in cash; an aggressive investor, perhaps 25% to 35%. (I think those might be a little high.) He uses the cash percentage as an indicator of when to buy and sell. It's really a way to dollar-cost average into and out of the market.
So suppose you've set your cash target at 20%, and you've invested the rest aggressively in the New Economy. What you would have seen last February and March is that cash, as a percentage of your portfolio, would have shrunk as the value of those stocks soared. That would have been the signal to sell -- the systematic approach Beartrap is looking for.
How to sell? One way is to trim back the positions that have gained the most. I sold at least half of everything I had in the technology sector after that sharp run-up in February and March. I sold all of
because chip makers, with their high multiples and limited number of customers and suppliers, are very volatile. But I held on to some investments that I thought were hedges, like
Fidelity Select Energy Service Fund, as well as these value funds that have become a millstone around my neck --
Dodge & Cox Stock and
Longleaf Partners. I also bought back into TranSwitch later, after the price came down.
Putting the Cash Back to Work
Now Gofer has helped me out on something else. I've been sitting here with my barbell strategy and a lot of cash, waiting for things to settle down and wondering about a re-entry strategy. If I adopt Gofer's discipline -- what shall we call it, "cash rebalancing?" -- I'll set a cash target as a percentage of my portfolio and then start averaging back into the market.
I consider myself an aggressive investor, and will aim for 15% to 20% cash. I need a shopping list, too, so I'll get to work and report on that next week -- a list of sectors and stocks that look good to me now.
Meanwhile, I learn something every time I go into the
Start Investing Community
. So keep those questions coming. Answers, too.
Mary Rowland is the Start Investing columnist for MSN MoneyCentral. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She welcomes your feedback at
email@example.com. At the time of publication, Mary Rowland owned or controlled shares in the following funds and equities mentioned in this column: Enron, TranSwitch, Fidelity Select Energy Service fund, Dodge & Cox Stock Fund and Longleaf Partners Fund.
Rowland's Start Investing Portfolio