Recently in the comments section of a post from July 2008, titled 30% today vs. 50% tomorrow, a reader John asks the following question,
“I noticed some of my mutual funds are showing a 70% return from one year ago (market low). Do you agree it’s a good time to sell some now and wait for a dip in the major indexes before getting back in? I’m of course talking about my funds invested in US equities.”
30% today vs. 50% tomorrow was a post I wrote discussing my long held belief that taking profits when available is never a bad investment strategy as long as you’re not intentionally attempting to time the market. Market timing is a bad habit in investing that far too many investors participate in by trying to anticipate moves in the markets for return/gain. No investor can successfully anticipate or predict movements or trends in the markets with 100% accuracy; so the question each investor needs to ask themselves is, “Why Try?”
Every investor needs to realize the golden rule of investing: You only make money when you sell.
If an investor has an opportunity to lock in a gain from their investment(s) than that is a prudent and often successful strategy. You might miss out on the potential for more upside but you’ve protected yourself from the downside risk by taking profits when available that are now available to redeploy in your portfolio(s).
The difference between locking in gains and timing the market is the discipline to sell at periodic periods when market forces are moving in various directions. Anticipating whether the market goes up or down over the short-term should not motivate an investor to sell; only whether locking in a portion of your gain from an investment is a timely decision.
John should consider selling a portion of his portfolio if he decides to lock in gains to re-invest into other investments (rebalance), but should not sell simply because he anticipates a decline or correction in the markets in the near future. Anticipating market declines can become a self-fulfilling prophecy where more and more investors sell not because of a decline in fundamentals but a perception that the market has gotten too far ahead of itself and profits need to be taken off the table.