You have been invested in several stocks for a year or more and have seen nice gains. When is it time to take profits? This question comes to mind as we watch the Chinese stock market lose the spectacular gains it accumulated over just one year. The rise in Chinese stocks happened despite weakening fundamentals. But investor confidence was strong. Now The Wall Street Journal reports that investors doubt that government measures will sustain market gains.
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Stocks in China fell a second consecutive day as a government-engineered recovery proved fleeting and surprisingly strong growth data dimmed hopes for more economic stimulus.
The fleeting recovery of the China market, which had trillions wiped out of it in recent weeks, suggests investor confidence is far from returning in full. The continued slide reflects deepening doubts that Beijing can turn things around, despite heavy intervention in recent days.
A common opinion is that it would take a genuine miracle for Chinese stock prices to stay where they are. Many have rightly decided that it is time to take profits. However, the time to take profits was at the height of the market over a month ago. How can an investor get the timing right in such cases?
Buy and hold investors can time the market as well. The point of assessing the intrinsic value of a stock is to decide if it worth buying or selling. Market Watch tells how one buy and hold investor times the market.
Mechanical market timing, which I use for part of my own portfolio, is very different from the emotional in-and-out trading I just described.
Mechanical timing relies on rigid rules or “systems” designed to identify times when the market is more likely to go up than down, and times when it is more likely to go down than up.
This sounds like a form of prediction, but it isn’t. The systems I recommend are known as trend-following. That means they issue buy and sell signals that are based on actual market trends, both up and down.
When you design such a system, you want it to be able to ignore short, minor price trends that will turn out to be mere “noise” and yet react to price trends that, based on lots of history, have a relatively high probability of producing a profit or of avoiding major losses.
The old saying is that you do not have a profit until you have taken a profit. Although the Chinese stock market is down about thirty percent since its high there are many small stocks that have been virtually wiped out. If you are going to invest in a market whose rise is solely based on investor confidence there is always the risk of failure. Setting an amount that you want to gain out of a stock is a good idea. When, for example, the stock has gone up 30%, it could be time to take profits. And if it goes up another 30% what do you do? It depends on why the stock went up! In the case of the Chinese market where stocks rose as the economy was cooling off taking profits routinely would have been a good idea and when the market started to trend downward taking everything off the table would have been a better idea.