Last month this newsletter discussed whether the concept of buying and holding through market volatility was good advice. Most investors lack a really good sell discipline which results in missed opportunities to take profits when investments are at high prices. It can also result in holding onto investments as they decline in price. Let’s explore that a bit more…

The catchy title to this article is intended to convey that selling should be more of a process as opposed to a binary event. That is, being all-in or all-out of a market is a tough call. It is a black or white approach that seldom reflects how the market actually works. For some people, being out of the stock market when it goes up is just as disconcerting as being in the stock market when it goes down. One way to potentially avoid making a binary call on the market is to have a process to realize gains when the market is high. Here are a few examples:

Over time, my Canadian Equity Strategy has quite substantially out-performed the Canadian stock market. This has been accomplished by only buying shares in companies when they show me the ideal combination of characteristics. They need to be fundamentally cheap and they need to be going up faster than most other stocks in the stock market. When the market has sold-off, I can normally find lots of companies that I want to buy. But after the market has rallied, it becomes harder and harder to find those ideal characteristics. As stocks are sold from my strategy, I’ll begin to hold cash instead of buying stocks. My Canadian Equity Strategy has been building cash equivalents over the past few months and is currently holding about 45% cash equivalents.

The US stock market dropped quite considerably in 2008 and into early 2009. In the subsequent years, we moved a lot of our clients’ investments into the US stock markets and have enjoyed a nice rally higher. On top of that, the US currency jumped significantly in January 2015. This left us facing a tough call on the markets. Could they keep pushing higher? The answer was "possibly". However, it seemed very prudent to withdraw some funds in order to lock in some of the gains that had occurred in both the stock market and the currency. We made that decision in early February and reduced our US Equity Strategy holdings by about 15%. If the US market continues to rally, we will use it as an opportunity to trim some more gains so that we eventually have the cash on hand to buy stocks at lower prices.

Having a sell discipline is, in my opinion, even more important than having a buy discipline. Knowing when and how to realize some gains, or when to prevent further losses, is a key element missing from most investors’ trading mandates. If your portfolio would benefit from having a process-driven approach to wealth creation, please feel free to call us.


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