The Verus Team

Locking in Profits vs. Missing Upside

Written by: Derek Majkowski. Any opinions are those of Derek Majkowski and not necessarily those of RJFS or Raymond James.

When posed with the question – Are you going to be more upset if you sell your equity assets while in a profit position and they keep going higher, or that you did not sell when things were up and they corrected or pulled back?

Assuming that you are fully and appropriately invested, how would you answer? Often times your answer will provide you with enough information on how you should manage your portfolio in its current state.

To be clear, there are a lot of reasons to liquidate a position, but typically only a few reasons to stay in an investment or hold on longer. The reasons for holding are usually because you anticipate that asset going up in value, rewarding you more favorably than an alternative (via dividends or income), or to defer a tax liability.

That all said, there may be appropriate times to ask yourself the above question in order to reassess your balance sheet and overall asset allocation. Also, this is not a zero-sum game, so sometimes the correct answer may be to do both – hold some and sell some.

When you are considering the next potential 10% move (up or down), think about your portfolio and what is more important to you. Will you feel like you missed out if you took assets out and the markets kept going higher, or will it pain you more to have not done anything when the valuations were higher, and asset prices sold off?

We are all very good at answering the question with the luxury of hindsight, but without the benefit of seeing into the future or going backwards to change a decision for a more favorable outcome, we are left looking at things in their present state. As such, I like to use the above question as a way to gauge someone’s general thought about market volatility and potential outcomes.

Regardless of your answer and ultimately your action based on that answer, weigh the obvious trade-offs should the outcome go in the opposite direction of your choice.

In other words, own your decision. You will always get an opportunity to reverse your choice by either getting out, or getting back in if it fits with your plan.

We often like to say that if we knew what was going to happen, we would not have to be doing what we do as advisors. Unfortunately, we have no idea what will occur next, so we have to ask the questions and make thoughtful decisions.

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