As market soars, is it now time to take profits?

Andrew Leckey

September 03, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Back up the truck.

Sometimes it's best to unload an investment, rather than hang on until the bitter end. In the current period of record market highs, more and more investors are wondering whether it's time to take profits and get out while they're ahead.

Here are primary considerations behind deciding whether to sell an investment:

* Your individual situation has changed. This could mean you need to convert your holdings into cash for an important purchase or that your overall financial condition now requires different goals. Inheriting money or losing a job are examples of new situations.

* The investment has successfully hit your target price. It's not a bad idea when buying an investment to figure a price at which you'd consider selling. If the investment's prospects improve during the time you own it, perhaps you should raise your expectations. But if matters begin to look worse, an even better case can be made for selling.

* The investment itself has changed. Ask yourself, "Would I buy this investment again today?" If you wouldn't, you have a potential sell situation.

For example, a mutual fund may change its portfolio manager or grow so quickly that it alters its investment style. A corporation may change top management or its product mix, making a big difference in its stock's prospects.

It's important to examine your investment mix on at least a quarterly basis, to make sure you've got your money where it will do you the most good.

"The investor must realize that all investment performance is cyclical, so, after an extended period of good performance relative to the competition, the competition will catch up and surpass the leader," said A. Michael Lipper, president of Lipper Analytical Services, which tracks the nation's mutual funds.

"Also bear in mind that you essentially 'rebuy' your investment positions every morning, so you must constantly evaluate your holdings."

An individual's tax situation, especially with recent tax changes coming out of Washington, is yet another consideration, added Ross Levin, president-elect of the International Association for Financial Planning.

"I also see cases in which someone buys an investment because friends bought it, or they've read in the newspaper that it has gone up dramatically in value," said Levin. "Since they don't know much about it themselves, they don't sell until after it inevitably suffers a correction."

It doesn't always make sense to sell a declining investment simply because its respective peer group is also doing poorly.

However, it often does make sense to sell if the investment is doing much worse than its peer group, said John Markese, president of the nonprofit American Association of Individual Investors.

"Frankly, the biggest mistake I've seen is that a stock declines because circumstances change, but people hold on with the goal of breaking even and then getting out," said Markese.

"Rather than trying to 'get even' in that situation, they should instead sell and use the proceeds to buy another stock with greater growth or income possibilities."

Investors often don't wish to sell because they've become emotionally involved with an investment. Human nature is generally optimistic, so they'll buy more of the investment even if it's not the best move for them, noted Peter Canelo, chief investment strategist with NatWest Securities.

"In bull markets, people forget there are periods of time where stocks don't necessarily go up, but go down," explained Canelo.

"While the current bull market is nearly 3 years old, most bull markets are 2-year affairs, and major rallies tend to be even shorter, about 1 1/2 years," he said.

The "buy and hold" philosophy of buying on price dips, so popular in the 1980s, may be changing in the 1990s, warned Greg Nie, vice president in technical research with Kemper Securities. Many investors definitely hold on too long, he believes.

Among stocks Nie would consider taking profits in because of significant price rises are Motorola Inc. and General Electric Co. At this point in the stock market, he recommends selling your more volatile holdings.

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