Stock "Options" - Knowing When to Sell

Q. My husband and I bought 225 shares of Preferred Stock with #### for $25.20 a share on November 17, 2003. We also bought 225 shares of preferred stock with #### at
$26.50 a share on the same day.

This is money we will use to buy a car next June or July 2006. Both of these companies are not doing well financially and we are worried about our money since we will need it in a year.

Our Financial Advisor told us the only way we would lose money on this would be if the companies went bankrupt, but I'm not so sure that is the case.

Should we leave it where it is or take it out and take a loss now since the price of the shares are down about $2.00 each? Thank you.

A. First, find a better financial advisor! It seems that many advisors are great about telling you what to buy but are terrible about letting you know when you should sell. I make both kinds of decisions for my clients.

Second, #### has had a lot of bad news recently and their debt has been downgraded. Much of the bad news is probably already in the price of the preferred you own. If #### were to come out with new models that people actually want then you might see the stock recover. If I remember correctly, the change that I am talking about won't happen until the 2007 model year. If #### is successful negotiating for lower health care costs with their union then you might see a bump there as well.

####. I really don't know enough about this one to give you an opinion.

Your timeframe is short enough that it limits your ability to recover. It also comes down to your comfort level. If the fear of losing any more money on these is greater than the desire to take a chance and see it they come back, then you should go ahead and sell them. If you have other assets that can offset further losses then you might want to hang on and see if they partially recover.

A third option is to sell off a portion of each now and hold a portion and see what happens. Set a downside limit for yourself that if the remainder drops to that point you will sell no matter what. That will give you the peace of mind that your downside risk is more limited.

Lastly, if you have other investments, you will be able to use any losses on these preferreds to offset future gains. I know that's not the greatest but it's better than nothing!

Your posted comments on this and other questions are welcome.
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