Time to Take Profits?

Stocks have been on a tear since March. Some investors have seen their holdings gain 40% or more in less than six months, leading them to wonder if markets are overbought and due for a correction. This, in turn, leads them to wonder if they should take profits and buy back during the dip — or otherwise do some opportunistic rebalancing away from stocks toward cash and bonds.

I would think longer term. There will invariably be a reversal at some point. But we have just been through a substantial recession and the central banks are now goosing the money supply big time. Historically, this kind of scenario spawns an extended multi-year appreciation in stocks, characterized by higher highs and higher lows. Your best bet will likely be to sit tight and ride the longer swing.

Excessive trading of peaks/valleys or rebalancing of holdings raises costs that eat into returns over the long run. There is also the issue of market timing. It’s very hard to sell near the peak and buy back in at the bottom of short-term fluctuations – the end result will likely be a lower return than simply holding.

Rebalancing, of course, has its place. Many investors do it annually and this would make sense for those concerned about maintaining a risk level they are comfortable with. However, those with high risk tolerance might not worry about annual rebalancing for two or three years in the current environment.

They could in time become concerned about the bull market ending. In that case, they may consider techniques such as “risk budgeting,” as Mark Yamada of PŮR Investing Inc. epsouses. Or simply begin a regular annual rebalancing.

Index-fund pioneer John Bogle has said he doesn’t think rebalancing is necessary at all. If one is a true believer in the thesis that stocks return 7% to 9% annually over 15- to 30-year periods, then all that volatility along the way does not need to be hedged away with rebalancing.

Comments

[Donald Ingram:]

I would very wary of the markets at this juncture in time. Personally I'm standing out, waiting for the trap door to open, delivering some high value, cheaply priced stocks deals.
Don't be late to the party, or stand the chance of coming through the trap door along with those heading to the poor house!
Keep your trailing shorts tight, because the coming ride will be rough.

Aug 14 12:38 PM

[whidbey:]

I agree with Donald above.

You should take any profits and wait for a new low.

We have one more move up then I think Wave C down will be on us like fog on London. Anyway, follow your instincts since the market's behavior is at present neurotic at very best. Maybe just obsessive compulsive.

Aug 14 12:59 PM

[Roger Knights:]

"the central banks are now goosing the money supply big time. Historically, this kind of scenario spawns an extended multi-year appreciation in stocks, ..."

Hoo boy.

Aug 14 01:13 PM

[Roger Knights:]

PS: We"re in a new normal. Or maybe a new abnormal. Too many other negative factors are at work. Relying on the standard playbook will be disastrous.

Aug 14 01:15 PM

[TheFounder:]

The recent 40% rally could very well be a counter reaction to the tremendous decline that preceded it. We could even go higher, to 1150-1200 which is the famous 61.8% fibonacci correction from the March lows, and still be in primary bear market, or we can test again the 700's level in a double bottom. ALl this is wild speculation obviously, but both cases are more likely in my view than continung in a cecular bull market.

Aug 14 01:32 PM

[semperpax:]

If you're wrong, people who take your advice lose a whole lot of money. Can you live with that?

Aug 14 01:38 PM

[Larry House:]

Your advice may be sound for a routine recession and subsequent routine market action. This time is neither. There is no way that government spending is going to spawn a "multi-year appreciation in stocks" give the problems that got us here and remain unresolved. It is a pipe dream to think we are going to bounce right back to market action as usual. You are glossing over once-in-a-lifetime changes in our economy and consumers. A much more cautionary tone would better serve investors.

Aug 14 02:04 PM

[The Economi...:]

FACT: Fundamentals stink. We are in debt up to our ears and a govt spending any chance we have of getting out of debt. Bull market or not, our country is screwed in the long run.

FACT: People are scared as hell and not wanting to lose their butts again. The only people in the market right now are hard core traders and HFT machines. Even that will stop at some point.

The drop is coming. To say we could keep going up deserves a backhand.

Aug 14 03:52 PM

[Obi-Wan:]

The bears have been harping that we're due for a monumentous correction since April..........
They've also missed out on much of the rally. So yeah, if it were me, I'd be a little bummed out too....LOL

Aug 14 04:20 PM

[untrusting ...:]

Exactly right. People who followed this guy's advice have already lost a lot of money over the last decade. Wonder if this author has the guts to post his actual stock investment returns over say the last 15 years? Would doubt it. It has been posted on numerous articles that both bonds and even treasuries have outperformed stocks over the past few decades, let alone the risk factor. Seems like the most objective commentators identify this stock market as a traders market as opposed to a buy and hold market. Even Warren Buffett attemts to time the market to a certain extent ... ie. buy when stocks are undervalued/cheap ... and it would be pretty hard to argue that stocks by any rational measure are remotely close to undervalued/cheap at the current levels. If one wants an objective factual presentation on stock market valuations, see Doug Short's great valuation statistics at his free site, dshort.com. His statistics clearly show that current US stock market valuations are nowhere near "cheap" levels in comparison to any past significant recessions in history. Thus to argue that current US stock valuations are LT buy opportunities is simply wrong, unless somehow it is different this time (which of course is what all talking heads say every recession and they are proved wrong every recession, and they will be wrong yet again this time). It is no different this time and stocks will almost certainly see significantly lower levels before this is over.


On Aug 14 01:38 PM semperpax wrote:

> If you're wrong, people who take your advice lose a whole lot of
> money. Can you live with that?

Aug 15 03:06 PM

[thechaser:]

to founder-

i agree with 1150 year-end; in fact i'm such a raging bull that i easily see 1120 about turkey time;

however, there are certain groups that have needs that only the big V will serve, as in push it up and then push it down;

obviously, we have just had a kneeslapping up and its only logical that we have a kneeslapping down

do you think the inside crowd has no awareness of colonial; come to think of it, i didn't see any of the friendly faces like where's meredith when we need her; i guess the hamptons are a welcoming place these days indeed; how about our ever popular AJC talking about Goldilocks kinda stuff;

we will gap down big time monday aug 17

i'll hazard some number throws (like guessing the weight) and say we finish the day at 981 after an intraday low pushing 973; continue to 968 on the 18th and then bounce either wed or thu back to just shy of 990, then wither and slither our way back down a little, bump up till we get past fri 23rd, then the following week watch for the clown cues from our "informed" announcers... then look out below, clear sailing all the way to 935-945 and for those with the inside nose, there will be a ten minute peek at 92x

and just then the network clamor will arise of retracement this and retest that what with one "support" level after another falling and guess what... back to the moon;

at bottom, dollar hits 84; oil touches 63.5, cu 2.6, al .77, au 910, vix breaks 30 clean and ag hardly moves; txn swing low sweet chariot swing high gives off Disney like fireworks north of 4.00

and then calm shall reign again and about the time the Lehman anniversary is on us what I just wrote will all fast either be history or becoming history with a rocket blast that makes the post Independence Day liftoff seem mild;

i've noted on several comments since Thur 8/13 the following dates;

3/30, 4/20, 5/11, 6/15, 6/23, 7/6

what do they have in common...

like the mamas and the papas song, "Monday, Monday..."

to put it mildly, the inside track is having a field day with this market like a 10 year old in 1958 with a brand new Duncan yo-yo

its

Aug 15 05:43 PM

[LKofEnglish:]

was looking for the "sell in may and go away" crowd to materialize so i could buy and it didn't happen. we'll see if given the tremendous run-up since that dog didn't bark represents a selling opportunity. nobody ever lost money by taking a profit. wal-mart has had a nice run and seems to me might be a good time to lighten the load a little. i've detailed my belief that morgan stanley's holding of the largest trucking company in the world may make an ipo of that asset a buy should ms decide to part with it.

Aug 15 07:17 PM

[Kimball Corson:]

I think Larry is basically correct. Do you really think you are going to be able to pick up 10,000 share of BAC at $4 again, or AIG at less than $1 as was the case a while back, or now CitiBank for around $4, or FNM or Freddie at less than $2 off in the future? You are kidding yourself. This kind of blood on the floor is a major buying opportunity. And Larry is also right about timing and trying to hop in and out, profitably, in these kinds of situations.

Aug 15 08:10 PM

[Joe Shareho...:]

Today in the WSJ was an article about how majority of economists believe we're out of the recession. Betcha the gov is going to come out and call an end to the recession within two months. Anyway, media will sing praises to Ben Bernanke and Obama and all will be well.....right?

What they should be doing is announcing a depression.

Aug 15 11:03 PM

[Erick Tippett:]

Mr. MacDonald,

Though elliott wave indicators show the possibilities for a second
wave up before a rather dramatic decline, even Bob Prechter is
cautioning investors not to expect more from the market "gods"
than they have already allotted us since march!

I'm inclined to agree.

E. Tippett
Chicago, Illinois

Aug 16 12:55 AM

[mlonz:]

Agreed, you can check out Prechter on weekend bloomberg. He makes great points about bullish/bearish sentiment indicators and Tops/bottoms. I think we're going down but I will only be able to hold my shorts for 10% at best.

Aug 16 01:49 AM