When I first started investing while I was in college, I started off fairly conservatively. While I was working a job through Auburn University’s Cooperative Education program, one of my co-workers introduced me to dividend reinvestment plans (DRIPs) where I could buy stocks largely commission free. (This was in the mid-90s when commissions were usually in the $20-50 range per trade.) Once I accumulated some positions in these dividend paying stocks, I did manage to open a brokerage account and branch out into some of the more growth-oriented stocks of the mid-90s. It was during this time that I decided to take a gamble here and there on some headline-making companies…with mixed results.
After I graduated in 1997, I would sell all of my do-it-yourself investments to pay down some debt and let my 401k hold all of my investing dollars. Despite the fact that getting out of the do-it-yourself investing game meant missing out on the dot-com euphoria, I don’t regret the decision; I missed the ensuing crash, largely, as well.
Unfortunately, I ended up being irresponsible with money through my late 20s and into my early 30s, so I had to stay away from individual investing much longer than I had intended.
Once my money habits got straightened out, I proceeded in much the same way I did when I first started out almost 20 years earlier…after some trial and error. While I tried investing in some smaller, growing companies, I found that starting off with the more well-known names were a better fit for building my foundation.
Once my foundation was built, I decided to open a more speculative account to satisfy my gambling spirit. Even though it’s a small account, I still wanted to have some sort of safeguard to make sure I didn’t stress myself out too much.
What’s My Risk?
To be clear, I am not talking about trading in this post. I am talking about speculation.
In trading, the downside risk needs to be very well-defined and small relative to how much money you’re actually putting into the venture. Most successful traders will calculate how much they’re willing to lose, which is some % of the amount of money they are investing; traders also have a pre-defined time limit for determining whether they are correct or not. For the type of speculation I do, I’m pretty much risking almost all of the money I pay and plan on holding the investment for an unknown time frame. These investments are long-term for me.
It is worth noting that I started my speculative account in mid-2020, after the stock market had dropped in February and March and began it’s run back up over the remainder of the year. So, I haven’t had to deal with the possibility that my assessment of my own risk tolerance is incorrect; you tend to not know these things until AFTER you’ve lost the money. We’ll see how I feel during the next stock market correction/bear market, when all of my speculative stocks are likely to drop in value at the same time.
So far, all I have experience with in my speculative account is taking profits out to get to…
If I invest $500 and say I am willing to lose most of it, it is implied that I wouldn’t be OK with losing $700 or $1000 on that single investment. So, to ease my mind, I use my love of math to set pre-determined price targets to reduce the amount I have invested in a single stock as the price rises. Again, this method differs from trading, where you want to stay in (or, possibly even add to) your investment to squeeze out every bit of profit that’s worth your while. Here, you will notice that I am actually taking a chance that I will miss out on a bit of a run higher if a stock increases in price. This is, however, in exchange for limiting my potential losses and gaining the ability to invest in another company if I choose to.
I want to get my money out of the speculation and still have a little bit of a position left over. So how do I get my money back and still have just a little bit of stock left in my accounts?
In a word: MATH! Specifically, algebra.
I came up with some formulas that get my money back by selling some of my shares at consistent intervals until I at least get back to even. As a small investor, I’m dealing with a limited number of shares, but I can divide them into multiples of 3, 4, or 5 shares. As I stated in my How I Invest My Money post, I also want to keep 20-40% of the original share count after I’ve finished selling out of an investment.
Here’s the minimum I need to happen to get my money back and keep the shares I want, starting with investments in multiples of 3-5 shares:
The above example shows how to get your money back on a $100/share investment. (I chose that price point because it’s easier to see the percentage gain needed to accomplish the goal.) As you can see, trying to keep 1 share for every 3 shares purchased or keeping 2 for every 5 bought are the 2 hardest ones to wait out; the returns needed are little higher for each interval at a 33 1/3 percent return. If I buy shares in multiples of 5 and only intend to keep 1 for each 5, that is going to be a shorter wait to start getting my money back. In the middle is buying a multiple of 4 with the intent of keeping just 1 share for each group of 4, or 25% of the original position left over.
Considering the Two Ts: Taxes and Time
My table above, showing how to get your money back out of an investment ignores both that it takes time for investments to rise in value and, unless the investment is in a Roth account, there are tax implications (immediate or delayed) to selling at a profit. I like to try to get a little bit of a return on my money to attempt to offset the passage of time and any taxes that I might be liable for. (Note that if I speculate in a taxable account, I can get credit for a loss on the investment; also, note that losing money is a bad investment strategy.)
As of now, I am dealing with LITERALLY 3-5 shares of each stock I invest in so, even though I am executing this strategy in a taxable account, the tax liability is somewhat small. If I get my account to a level where I’m investing with a higher number of shares, taxes become more of a concern. Additionally, I will turn 50 years old in a few years, which will give me an option to contribute an extra $1,000 in a Roth IRA account; I may use that $1,000 catch-up provision to speculate tax-free at that time. We’ll see how I feel about that when the time comes.
On top of any tax considerations, we also want to factor in the time it takes for the value of our investments to increase. (Note that my strategy for starting with 5 shares and ending with 2 shares requires a doubling of the original value, which usually doesn’t happen overnight.
So, to factor in the amount of time my money will be tied up in an investment, I’ve come up with the following tables to outline how to get a little more than my original money back.
This table above outlines a minimum and maximum for taking a few profits and still having some your investment left over. Using either the low strategy (left), high strategy (right), or some point in between achieves the goal. Hopefully, that will get my investments to a point where I compensate for time, taxes, and the pesky fact that I will occasionally invest in a dud that causes me to lose money. If I can take a little off the table here and there, I can lower my risk in each investment as I go.
A Little Room for Improvement
While my current illustrations might outline some rules of thumb for when to partially sell out of investments, I feel a little inspired to design something that might be used to customize how I execute specific investments (starting share count, # of sales to get my money, plus some extra, out). The generic strategy above has worked for me so far, but it would be nice to build something that might let me customize in certain instances.
Hopefully, this post will help you come up with a strategy of your own if you are considering setting aside a small portion of your investment dollars toward more speculative ventures, or to tweak the system you may already have.
If you’re not into speculation, I hope I didn’t tempt you. Speculation is an investment strategy that’s more likely to lose you money than make it if you’re not disciplined; I just enjoy taking a little more risk here and there and want to have a way to make it just a little bit safer…in my own mind, anyway.
Thanks for reading.