The principle is sound. Sell the poor performers in your portfolio, and use the capital to increase your weighting in the better performers, or to acquire stocks with superior growth prospects.
Selling one stock to buy another in the same market may be fine in theory, but do the risks of getting it wrong and losing money, outweigh the potential advantage of improving return? Stocks often move in unison according to whether it is a “bull” or a “bear” market, and in this case the difference in performance could be marginal.
When working, the cash flow from personal exertion can be used to add additional positions without divesting existing stocks, but when retired as I am, this is not possible. Either I must forgo promising investment opportunities for want of capital, or fund the purchase by selling stock(s) from my portfolio.
The decision may be easy if there are stocks that are “dogs”, going nowhere, or are threatening to “fall off the cliff”, in the portfolio. Even if the new acquisition does not outperform, it may at least stem the leakage of capital to be rid of these under-performers.
More often than not, it is a hard decision, and the outcome uncertain. How do you chose between taking profit on a “blue chip” or other outperforming stock, and one that is now attracting media attention, but could falter when enthusiasm fades?
Rather than just rely on my own “gut feeling”, I try to research the pros and cons of the available options before making up my mind, and may seek advice from my stock-broker.
Having made my decision, I am intent on monitoring the outcome by comparing the charts and by taking screenshots of my WebIress Watchlist at the close of trade each day. The tabular percentage rise or fall of stocks allows me to more accurately compare the relative movement of the two stocks, on a cumulative basis.
If the price goes against me I would hope not to try and swim against the current but to admit my mistake and reverse my positions.
This post has been written after deciding to take profit and sell my shares in CBA at $83.60, hoping to be able to buy them again more cheaply later, and to use the capital to buy shares in take-over target Myer Limited (MYR) at $1.23.
So far this decision has not been vindicated, but I will report again after reviewing my choice in two months.
Categories: Trading opinion