At what point do you cut your losses?
November 29, 2007 2:47 PM Subscribe
Stock question: I have two ETFs (BDJ and DCS) that have been declining all year but have really gone into the toilet lately. I've lost about 30% combined on both. Would it be best to just cut my losses and sell them now or actually buy more?
Is there any chance "the markets" will rebound in the next two or three years? To make any profit on them now, I'd have to get a pretty big swing in the other direction. What would you do? Hold, buy, or sell?
Is there any chance "the markets" will rebound in the next two or three years? To make any profit on them now, I'd have to get a pretty big swing in the other direction. What would you do? Hold, buy, or sell?
Response by poster: I would say it's a mid term investment. More than two years but less than ten. I don't want to grab a falling knife, but I'd like to stop the bleeding already in progress.
posted by mattbucher at 2:52 PM on November 29, 2007
posted by mattbucher at 2:52 PM on November 29, 2007
Best answer: If you're not holding them inside a tax-advantaged account, selling them now would allow you to accumulate a tax-loss that you could use to offset payment of capital gains somewhere else.
I think your question is too hard to answer. The rest of this answer is pure speculation on my part. Do your own research, don't take my word for it.
I think that, depending on how these funds are doing their business, they may have bought into some value traps.
Let me explain what I mean. For instance, right now the historical dividend yields on stocks like Citigroup, BofA and Pfizer (to take three examples off the top of my head) are very high. The funds you mentioned buy these large-cap "dividend achievers," and a high dividend yield means that their historical dividend payouts are pretty high compared to their current stock price.
Unfortunately, there's no guarantee that some of these companies won't have to cut or even suspend their dividends as they write down their SIV and CDO exposure (Citi, BofA) or as patent expirations eat into their bottom line (Pfizer).
It's for this reason that when I think about buying a "dividend achiever," I try to pick a stock or two with good forward prospects, not let some fund do that for me. People often complain that this results in a lack of diversification but you can get around this problem by looking at a business conglomerate that has diverse holdings, like GE or 3M.
posted by ikkyu2 at 2:57 PM on November 29, 2007
I think your question is too hard to answer. The rest of this answer is pure speculation on my part. Do your own research, don't take my word for it.
I think that, depending on how these funds are doing their business, they may have bought into some value traps.
Let me explain what I mean. For instance, right now the historical dividend yields on stocks like Citigroup, BofA and Pfizer (to take three examples off the top of my head) are very high. The funds you mentioned buy these large-cap "dividend achievers," and a high dividend yield means that their historical dividend payouts are pretty high compared to their current stock price.
Unfortunately, there's no guarantee that some of these companies won't have to cut or even suspend their dividends as they write down their SIV and CDO exposure (Citi, BofA) or as patent expirations eat into their bottom line (Pfizer).
It's for this reason that when I think about buying a "dividend achiever," I try to pick a stock or two with good forward prospects, not let some fund do that for me. People often complain that this results in a lack of diversification but you can get around this problem by looking at a business conglomerate that has diverse holdings, like GE or 3M.
posted by ikkyu2 at 2:57 PM on November 29, 2007
Response by poster: a high dividend yield means that their historical dividend payouts are pretty high compared to their current stock price.
That's absolutely correct and one of the reasons why I'm thinking that funds like these are more for retirees or people relying on them to pay high regular dividends rather than younger people (like me) looking to build growth over time. I have found it hard to get straightforward advice like this, even from my financial adviser.
posted by mattbucher at 3:02 PM on November 29, 2007
That's absolutely correct and one of the reasons why I'm thinking that funds like these are more for retirees or people relying on them to pay high regular dividends rather than younger people (like me) looking to build growth over time. I have found it hard to get straightforward advice like this, even from my financial adviser.
posted by mattbucher at 3:02 PM on November 29, 2007
Best answer: When I read this question I was worried that you might have funds heavily weighted toward smaller capitalization specialty finance companies, specifically mortgage REITs. It looks like that's mostly NOT the case--especially with the BlackRock fund. It's allocation to Financials (38.6% as of July) is made up of large cap banks mostly. I'm not saying it's "safe", but it's avoiding some of the specific companies I was worried about.
However, DCS does contain a few of these companies (as of July, at least) within its 29.6% allocation in Financials. Specifically it holds JER Investors Trust and Newcastle Investments--both mortgage REITs that are externally managed and designed to take advantage of Commercial MBS financing arbitrages that are not very attractive at the moment (disclosure: I own shares in Newcastle and I'm not selling them). KKR Financial and Apollo Investment Corp are similar vehicles formed by two of the most prestigious private equity firms to take advantage of arbitrage opportunities in the corporate loan market (e.g., buying leveraged loans and financing them through CLOs). These companies are attractive to investors because they pay very high dividends (~8% in good times)--right now they are paying much higher yields. NCT/JRT trades right around ~20% yield and KFN/AINV right around 12-14% because their prices have become depressed but their last dividend payment was not cut. This may be another value trap similar to what ikkyu2 mentioned. I'm not going to speculate on whether or not these companies will survive and/or keep up their dividend payments. It would take someone with very deep expertise to make this judgment.
Now, the 4 companies I mentioned make up about $22 million of DCS' $1 billion portfolio. But it's something to think about. Notwithstanding the point about tax losses that ikkyu2 makes, I think your decision needs to focus on the make-up of each funds' portfolio and determining if find anything troubling. If so, sell it. If you're not sure or just can't trust your own judgment...well, I probably wouldn't sell it but I don't know if that's the right call for you.
Feel free to email me if you have questions about what I've written here. None of this is investment advice, just my reaction and observations.
posted by mullacc at 3:29 PM on November 29, 2007
However, DCS does contain a few of these companies (as of July, at least) within its 29.6% allocation in Financials. Specifically it holds JER Investors Trust and Newcastle Investments--both mortgage REITs that are externally managed and designed to take advantage of Commercial MBS financing arbitrages that are not very attractive at the moment (disclosure: I own shares in Newcastle and I'm not selling them). KKR Financial and Apollo Investment Corp are similar vehicles formed by two of the most prestigious private equity firms to take advantage of arbitrage opportunities in the corporate loan market (e.g., buying leveraged loans and financing them through CLOs). These companies are attractive to investors because they pay very high dividends (~8% in good times)--right now they are paying much higher yields. NCT/JRT trades right around ~20% yield and KFN/AINV right around 12-14% because their prices have become depressed but their last dividend payment was not cut. This may be another value trap similar to what ikkyu2 mentioned. I'm not going to speculate on whether or not these companies will survive and/or keep up their dividend payments. It would take someone with very deep expertise to make this judgment.
Now, the 4 companies I mentioned make up about $22 million of DCS' $1 billion portfolio. But it's something to think about. Notwithstanding the point about tax losses that ikkyu2 makes, I think your decision needs to focus on the make-up of each funds' portfolio and determining if find anything troubling. If so, sell it. If you're not sure or just can't trust your own judgment...well, I probably wouldn't sell it but I don't know if that's the right call for you.
Feel free to email me if you have questions about what I've written here. None of this is investment advice, just my reaction and observations.
posted by mullacc at 3:29 PM on November 29, 2007
No offense, but your question is a good example of a buy high, sell low mentality. You didn't describe how you selected those ETFs in the first place, but it usually goes like this:
Flashback to Jan 07:
"Hey, this DCS ETF had a return of 25% last year! The S&P was only up 12% on the year, so this ETF will help me beat the market!"
Fast Forward to November 07:
"Oh no, this DCS ETF is down over 30% on the year, even though the S&P is still up a percent or two. I need to drop this thing and pick something better."
You should be thinking the exact opposite. A large run in a stock is an opportunity to sell, not an opportunity to buy. On the other side of the spectrum, a big drop in a stock is an opportunity to buy, not an opportunity to sell. That doesn't mean that you should always buy stocks that are dropping and always sell stocks that are rising, but if you don't buy low and sell high consistently you should start to rethink your decision to try to beat the market with trades.
Personally, I don't really try to time the market very much. I mostly stayed out of financials this year because I saw the housing crash coming, but other than that its business as usually. I just have a set of long term assets, and I maintain a relatively constant balance of all of them. That means if one asset gains and another falls, I'll move money from the gainer to the faller. It takes most of the agonizing decisions out of the game.
posted by burnmp3s at 4:54 PM on November 29, 2007
Flashback to Jan 07:
"Hey, this DCS ETF had a return of 25% last year! The S&P was only up 12% on the year, so this ETF will help me beat the market!"
Fast Forward to November 07:
"Oh no, this DCS ETF is down over 30% on the year, even though the S&P is still up a percent or two. I need to drop this thing and pick something better."
You should be thinking the exact opposite. A large run in a stock is an opportunity to sell, not an opportunity to buy. On the other side of the spectrum, a big drop in a stock is an opportunity to buy, not an opportunity to sell. That doesn't mean that you should always buy stocks that are dropping and always sell stocks that are rising, but if you don't buy low and sell high consistently you should start to rethink your decision to try to beat the market with trades.
Personally, I don't really try to time the market very much. I mostly stayed out of financials this year because I saw the housing crash coming, but other than that its business as usually. I just have a set of long term assets, and I maintain a relatively constant balance of all of them. That means if one asset gains and another falls, I'll move money from the gainer to the faller. It takes most of the agonizing decisions out of the game.
posted by burnmp3s at 4:54 PM on November 29, 2007
Why did you choose these funds in the first place? They seem awfully esoteric as core holdings. While it's true that you don't want to buy high and sell low, that doesn't mean you shouldn't revise your fundamental strategy.
You could start with Everything you need to know about investing in 129 words. The basic message is pay off your debts, max out your 401K, and put your long term savings in index funds. Anything fancier than that is great if you enjoy investing as a hobby. But if you just want to save it and forget it, keep it simple.
posted by alms at 9:10 PM on November 29, 2007
You could start with Everything you need to know about investing in 129 words. The basic message is pay off your debts, max out your 401K, and put your long term savings in index funds. Anything fancier than that is great if you enjoy investing as a hobby. But if you just want to save it and forget it, keep it simple.
posted by alms at 9:10 PM on November 29, 2007
alms: ETFs can be perfectly sane investments for the retail investor. You can buy an ETF that tracks a major index for less than the cost of buying into an index tracking mutual fund (and I believe the tracking error for ETFs is usually less than that for tracker funds, but don't quote me on that). Whether *these* specific ETFs are sane, I couldn't say.
posted by pharm at 3:35 AM on November 30, 2007
posted by pharm at 3:35 AM on November 30, 2007
pharm: I don't disagree that ETFs can be perfectly sane investments. That's especially true if the ETF is from a major player tracking a major index. But my perception is that many of the smaller or more obscure ETFs are much dodgier.
There's been an explosion of these things lately. I like to think of them as "hedge funds for the little guy." They use all kinds of proprietary (i.e. secret) formulas and instruments for meeting their goals. Because they are obscure, they are thinly traded and hence at risk for dropping in value dramatically when buyers decide they're not worth the hassle.
Sure, ETFs have been the flavor du jour for retail investing, but then we're all seeing what's happened in the last six months to the flavor du jour for large banks. The bottom's fallen out. Personally, I'll stick with an investment vehicle I can actually understand from end to end.
posted by alms at 4:22 AM on November 30, 2007
There's been an explosion of these things lately. I like to think of them as "hedge funds for the little guy." They use all kinds of proprietary (i.e. secret) formulas and instruments for meeting their goals. Because they are obscure, they are thinly traded and hence at risk for dropping in value dramatically when buyers decide they're not worth the hassle.
Sure, ETFs have been the flavor du jour for retail investing, but then we're all seeing what's happened in the last six months to the flavor du jour for large banks. The bottom's fallen out. Personally, I'll stick with an investment vehicle I can actually understand from end to end.
posted by alms at 4:22 AM on November 30, 2007
Why did you choose these funds in the first place? They seem awfully esoteric as core holdings. While it's true that you don't want to buy high and sell low, that doesn't mean you shouldn't revise your fundamental strategy.
1. The OP never said this was a core holding.
2. A BlackRock dividend fund is esoteric? BlackRock is as well-known manager as you can find (especially for fixed income and curren income focus) and this particular fund requires 80% of assets to be invested in stocks from the Mergent Dividend Achievers list. These things don't make it a good investment necessarily but it certainly shouldn't be smeared as esoteric.
posted by mullacc at 7:54 AM on November 30, 2007
1. The OP never said this was a core holding.
2. A BlackRock dividend fund is esoteric? BlackRock is as well-known manager as you can find (especially for fixed income and curren income focus) and this particular fund requires 80% of assets to be invested in stocks from the Mergent Dividend Achievers list. These things don't make it a good investment necessarily but it certainly shouldn't be smeared as esoteric.
posted by mullacc at 7:54 AM on November 30, 2007
one of the reasons why I'm thinking that funds like these are more for retirees or people relying on them to pay high regular dividends rather than younger people (like me) looking to build growth over time. I have found it hard to get straightforward advice like this, even from my financial adviser.
Well I certainly sympathize, a lot of hard words are directed at financial advisers but I think that a lot of the questions they are asked are really hard questions.
There are really very divergent opinions about these kinds of questions. Personally, over the few years I've been paying attention, the dividend paying stocks have done well, and there is historical data that suggests they do well in general because paying a steady, firm dividend tells you something about the overall "health" of the company. This is different from a stock whose price sinks precipitously, hence the trailing dividend yield looks large, but the prospects for a forward dividend yield look poor.
Two places where I've learned a lot by reading analysis and opinions on questions like these are the free sections of the Motley Fool and The Kirk Report. My own feeling is that anyone who possesses dollars in 2007 has to think about these issues at least enough to command a vocabulary they can use to communicate with their financial advisor, or else just hand the money over to the advisor and have blind faith.
posted by ikkyu2 at 1:51 PM on November 30, 2007
Well I certainly sympathize, a lot of hard words are directed at financial advisers but I think that a lot of the questions they are asked are really hard questions.
There are really very divergent opinions about these kinds of questions. Personally, over the few years I've been paying attention, the dividend paying stocks have done well, and there is historical data that suggests they do well in general because paying a steady, firm dividend tells you something about the overall "health" of the company. This is different from a stock whose price sinks precipitously, hence the trailing dividend yield looks large, but the prospects for a forward dividend yield look poor.
Two places where I've learned a lot by reading analysis and opinions on questions like these are the free sections of the Motley Fool and The Kirk Report. My own feeling is that anyone who possesses dollars in 2007 has to think about these issues at least enough to command a vocabulary they can use to communicate with their financial advisor, or else just hand the money over to the advisor and have blind faith.
posted by ikkyu2 at 1:51 PM on November 30, 2007
This thread is closed to new comments.
Is this a long term or short term investment for you?
posted by BobbyDigital at 2:50 PM on November 29, 2007