You may not want to do a whole lot of selling for several reasons including taxes (depending on the account type), transaction costs and the possibility of being wrong. Here, my preference has always been a little bit of selling combined with some exposure to several types of diversifiers (strategies or asset classes that tend to have a low correlation to equities).
It’s always a good time to consider rebalancing trades. Consider the following chart;
Chart from Google Finance
The blue line tracks a stock I follow (the name doesn’t matter for this post) compared to the S&P 500 Index. If you are a long term investor and you use individual stocks you have at least a couple of stocks that have dramatically outperformed the index one way or another over some long period of time.
Obviously this stock has tracked the index with some periods of decent outperformance here and there before blowing up (in a good way) over the last 15 months. The stock you own that has done something similar was bought with some sort of target weight in mind and every once in a while it grows away from that target. Again if you own individual stocks and hold long term you have some of these and now might be a good time to reduce those positions. This would also be an easy way to add a defensive tweak without turning the portfolio inside out. Also, this sort of pruning is not a guess about market direction. If you bought this stock with a 4% target weight, it is clearly not 4% anymore. I am unlikely to want to prune a position that has grown to 3.5% from a 3% target but a move as huge as the one on the chart probably is worth pruning.
Yes, this is an elemental concept but how often do investors stray from the basics? Yeah, pretty often.
This article was written by AdvisorShares ETF Strategist Roger Nusbaum.