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A Time to Sell?

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.

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{ 4 comments… add one }
  • Think Dividends April 1, 2010, 5:33 pm

    I enjoyed reading your Manulife rant on FWF. Maybe its "time to sell" MFC given that they seem to be poor allocators of capital these days. I sold MFC in the summer and management hasn't done much to change my outlook of the company.

    Cheers

  • Nurseb911 April 1, 2010, 9:18 pm

    I think it's definitely an issue of not being able to effectively allocate capital; especially when you consider the expenses to the shareholder it caused for what management deemed "required" over the past 24 months.

    It still has a place in my portfolio; but it's no longer the darling it once was. When I look at my most basic/core quantitative numbers amongst insurers I'd hold GWO in 1st followed by SLF with MFC as a distant third.

  • Anonymous April 3, 2010, 8:28 am

    I have decided to take some profit out of my funds. having contributed to my IRA for 25 yrs, I'm not happy with my balance. Even the lower MER funds will still eat up too much of my capital over the long haul. I'm considering a higher percentage allocated to index funds instead of managed funds.
    John

  • insurance quotes May 27, 2010, 6:54 pm

    I'm up in the air about whether or not to sell MFC. I'm sort of inclined to get out of the market entirely these days though because I can't sleep at night with the roller coaster ride that the market seems to have taken lately. I really don't have the time to look after my investments properly and I think I may give it a rest for a while.

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