Part of the challenge of investing is raising capital to invest in new stock ideas. During your career, you can generally find ways to save and add to your investment accounts, giving you the spare cash to use to buy new stock recommendations. But often as careers wind down or other financial obligations mount, investors may no longer have new cash coming in to invest.
When you do not have outside cash to add to your portfolio, you instead have to come up with other smart ways to come up with cash proceeds to reinvest in your great new idea. Here are three smart places to look for portfolio cash.
The first and easiest way to find the cash to invest in new promising new stock recommendations is directly from your stock portfolio. If you own stocks that pay dividends, then you will find that your cash balances accumulate over time, even if you do not add a penny of new money to your account. Indeed, the prospects of raising money for future stock buys can be a compelling reason to take dividends in cash rather than using automatic reinvestment programs to buy new shares of the same stock, especially when its stock price is considered to be overpriced by the market.
The second source of funds for buying new stock recommendations is in companies in which you no longer have the same conviction for business success that you once had. As value investors, we believe in long-term investing, and it can take years for a business to reach its full potential, and for its stock to reflect its true value. Often though, if you discover that your rationale for buying the stock was flawed, or you may have underestimated the risks, it may be better to acknowledge the error, sell the stock and move on.
Another perfectly good reason to sell a stock is that you have identified a better deal elsewhere. There is nothing wrong to sell a less attractive stock (even at a loss) if you have found a better opportunity elsewhere. Businesses changes – sometimes significantly and not for the better. If you find that a company’s competitive position has been comprised due to unfavourable development, it may be time to deploy the funds into a better idea.
Finally, a big winning position can be a worthwhile place to look for investing capital. Indeed, trimming a winner could mean that you have to pay taxes on capital gains, which can be a deterrent to using this approach. Moreover, you have to have absolute conviction that your new stock recommendation will outperform the proven winner you already own.
However, future performance is really what should matter in deciding whether to hold on to a past winner or move money into a promising new stock. Cashing in on long-term gains to move money into an exciting prospect that could potentially double, triple or 10x your investment could be a smart money move after all.
Do not be afraid to make a move
Finding room for new stocks when you do not have new cash coming in regularly requires an adjustment in the way you think about your portfolio. But the added discipline it imposes can help you improve your investing results because it forces you to think whether a new stock recommendation is stronger than the companies whose shares you already own. Indeed, investors should not be weighed down by the past performance.
When you find a new stock idea that resonates with you, you should not be reluctant to take steps to find the cash to invest in it. Despite requiring a little more work, the payoff from embracing a great company in its prime high-growth phase is well worth the extra effort.
Best to avoid leverage
Lastly, using margin is perfectly legal and can greatly amplify your gains — but it can amplify your losses, too. Also, the equity in your account is the collateral that you are putting up for the loan. If the value of your investments made on margin starts falling significantly, you will get a “margin call” from your broker asking you to sell some assets to generate cash or to deposit more cash into your account. If you fail to do so, the brokerage may just sell some of your holdings for you. Meanwhile, brokerages charge you interest to use margin. You will need to earn quite a high return to make the borrowing worthwhile. Margin is best avoided, for most investors.