Are you afraid to take profits in your portfolio?

It seems like a ridiculous question, but when was the last time you sold something in your portfolio? For the typical investor, “investing for the long-term” is the plea defense for portfolio inactivity. I’m not speaking of trading just to trade, or working with an advisor who churns just for commissions. No, every asset, in every portfolio should have an exit strategy to pockets specific gains or avoids further losses.

Sell Strategy Needed. You bought your first house, planning to downsize in retirement. You bought a new car planning to sell it at 100,000 miles. You bought a sexy new outfit, knowing you’d need a new one if you gained 5 more pounds. So, you bought a mutual fund or a stock and plan to sell it . . . WHEN?  NEVER?  Investing without a sell strategy subjects a portfolio to returns which rise and fall, and fall and rise, with the markets. Buy and hold investors of the Lost Decade, Feb. 2000 through Dec. 2009, suffered 120 months of ups and downs, only to end up 4.68% lower in their portfolio.  Along the way, however, there were opportunities for long-term investors to take profits off the table. So why don’t investors more easily execute a sell strategy? Investors fear missing bigger gains, or admitting defeat.

Markets are Never Average. While the long-term view of stock market investing suggests a buy and hold investor might expect an average annual 8-10% return, since 1963 the Dow Jones Average produced only 2 years of returns in that range. 24 years had returns above 10%, with 22 years below 8%; the best and the worst being a positive 34.1% in ’95 and a negative 38.5% in 2008.

Investing isn’t an Amusement Park Ride. All investors need to understand how specific investments move, and must formulate their own personal realistic expectations for a portfolio’s performance. If an individual expects an 8% annual return, and suddenly finds an investment with a short-term 16% gain, wouldn’t common sense suggest locking in two years worth of gains?  And if not, the investor needs to be able to articulate why. Don’t be concerned with being labeled a market timer when selling for gains.  There is a huge difference between market timing and profit taking.

A Sell Strategy is Intellect Over Emotion. Grab a copy of your current portfolio and dedicate the next 30 minutes to reviewing it.  Next to each investment write down why you bought it: Was it a hot sector buy or maybe an undervalued stock? (Or did you accept an uninformed recommendation?) Now write down when you plan to sell it. Do you have a specific income or gain in mind, or did you buy it for unquantifiable immense profits? If you won’t take the time to document when you’ll sell an asset, your decision will be based on the emotion of the moment which is often driven by flashy headlines or investment losses which have grown too painful to stand.  Or as Yogi Berra was credited with saying, “If you don’t know where you’re going, you’ll end up somewhere else.”  No investor should have their portfolio end up somewhere else.