How fast should you act in reaction to a portfolio addition or deletion alert?
A good general rule for following any portfolio, whether it is one of ours or one run by another organization (e.g., a newsletter service), is to buy when an addition alert is issued and sell when a deletion alert is issued. If you want to mimic the performance of the portfolio, it only makes sense to follow the changes. Acting quickly is prudent.
There is a difference between ‘quickly’ and ‘immediately,’ however. In the Model Shadow Stock Portfolio stock order guidance rules, we advise members to be patient. In the user’s guides for our Stock Superstars Report and AAII Dividend Investing portfolios, we suggest generally “acting on portfolio addition and deletion alerts within the week.” We follow up this statement by saying “don’t be afraid to wait longer if you feel the stock price is moving in your favor (falling if you are a buyer or rising if you are a seller).” In other words, don’t dawdle, but don’t feel rushed either.
The amount of patience you should use depends on the stock itself. A large-cap, widely held stock likely won’t be affected by a newsletter alert. We didn’t notice any unusual trading activity in Apple (AAPL) when we added it to our dividend investing portfolio this past April, for instance. Conversely, a smaller, less-followed stock may well be affected. Before the financial crisis, I once saw Movado (MOV) move upward by more than 10% in just a few days because Jim Cramer talked favorably about it on Mad Money. Lower volume will cause a stock to move in reaction to favorable or unfavorable comments or actions, especially if the portfolio or the commentator has a sizeable following.