The stock market has leaped this year, the past week notwithstanding, with the S&P 500 climbing 14%.
Does that mean it’s time for investors to take profits? For some, yes, and for others, no.
If a position has climbed well beyond your allocation, this might be a good time to unload part of it, experts say.
“If something is historically 5% to 10% of your portfolio and it’s morphed into 10% to 20%, it makes sense to rebalance,” says Jack Ablin, chief investment officer of Cresset Capital, the Chicago wealth-management firm.
“We had a thematic strategy in 2021, when GameStop (GME) went from a 2.5% weighting in the strategy to 25% in eight weeks. We rebalanced, selling it back down to 2.5%. We didn’t want a GameStop portfolio.”
The videogame retailer's stock soared amid irrational meme-stock exuberance in early 2021, then quickly plunged back to Earth.
Taking Profits on Tech Stocks
So far this year technology stocks have jumped, and that's led independent financial adviser Mick Heyman to trim his clients' positions in Nvidia (NVDA) and Meta Platforms (META).
The idea is to push the clients’ positions back toward their normal weighting. You don’t have to hit the weighting percentage exactly, “but you don’t want to get too far away,” he said.
If it’s a company with strong fundamentals, there’s no need to sell all of it. “You don’t want to lose your position,” Heyman said.
If you do so, you might want to get back in later. But then the stock will likely be well above your original purchase price, making it psychologically difficult to purchase the stock again.
When you do take profits, Morningstar chief market strategist Dave Sekera recommends, do it piecemeal. “I like to layer in and out of positions because you can rarely pick a top or bottom,” he said.
Perhaps you’ll want to unload half the profit-taking shares initially and the rest in several later trades. If the stock starts to drop quickly, you can sell all the profit-taking shares left at that point.
Know When to Fold ‘Em - Selling Off a Position
There are times when you want to take profit on all the shares you own. That’s when a company’s fundamentals go into free fall.
Heyman cited Intel (INTC) from 2020 until now and General Electric (GE) from 2016 to 2020.
“At some point you have to draw a line in the sand,” as to what price will make you bail out completely, he said. With Intel, “I looked at the earnings and thought 'this is no longer a great company. It’s now a different company from what I bought 10-plus years ago.'”
If your premise for owning a stock disappears, that’s a good time to take profits, Ablin says.
One rule for investing is to sell only when you have a better investment idea for the proceeds of your sales. That equation has become vastly simplified as interest rates have surged over the past 15 months.
You can simply stick your money in short-term Treasury bonds for a yield of up to 5.35%. So you don’t have to search far and wide for a new stock.
“Now you can sell a stock and make a reasonable return with lower volatility,” Ablin says.
Experts agree that you should avoid trying to time the market with your profit-taking, as it’s virtually impossible to predict short-term moves in equities. “They’re pretty random,” Ablin says.
Get exclusive access to portfolio managers and their proven investing strategies with Real Money Pro. Get started now.
