rebalancing

Time to Get Off the Ride

We’ve all heard the basic maxim of investing: “Buy low, sell high.” And at 228Main.com, we have talked repeatedly about the perils of buying high or selling low. Just last week we asked, “Where are you on the ride?”

It is true that buying high or selling low can easily hurt you, and to avoid acting rashly, you do need to be able to recognize where you might be in a cycle.

The flip side may be true, too: you also need to be able to make timely moves when the time is ripe. Our philosophy focuses on value investing, and we are fortunate enough that you, our clients and readers, have internalized many of these notions. (So you know that we are not talking about “timing the market.”)

So the “buy low” part is relatively easy: hunting for bargains is fun and exciting! It is easy to look at a company trading at depressed prices and imagine the possibilities, even as you know that they may not necessarily come to pass.

The other part—”sell high”—is more difficult. A holding that has treated you well can be hard to get rid of. It is easy to get greedy and let it keep riding in the hopes of further returns.

But what goes up must come down. The more inflated prices get, the less sustainable they are. When prices enter an unsustainable bubble it is wise to protect your gains by selling while the selling is good.

This does not have to be an all-or-nothing process, though. You might still believe in a company’s long-term story even if prices look unrealistically high right now, in the short term. In this case it might make sense to hedge your bets by only selling part of your holdings. This lets you pocket some gains while keeping some exposure in case of future growth.

This becomes especially important when you have a high-flying investment. If certain holdings are outperforming the rest of your portfolio, they may swell up to become oversized relative to the rest of your holdings. Over time you may find yourself with too many of your eggs in one basket; periodically rebalancing away from a hot streak can help spread your risk around.

Of course, there are no guarantees. None of these strategies are magic. But letting your investments ride with a few big winners can leave them vulnerable to a big tanking at even a hint of bad news. Heck even totally decent news can spell a crash for a hot stock that’s being held up by unrealistic growth expectations.

How do we know when it’s time to get off the ride? Clients, when you have questions or concerns about your holdings, please call or email as always.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.