Considering a reduction in stocks? Weigh 4 factors
November 06, 2013
The stock market got a nice pop after Congress and President Obama reached a budget deal, and that was on top of the nearly 18 percent the market had gained in the first nine months of the year. While others are eagerly buying stocks, this might be a good time for you to think about selling.
Here are four things to consider as you weigh the decision to sell stocks between now and the end of the year.
1. The macro side
Wise stock decisions require two levels of analysis: the big picture and company specifics. As enthusiastic as you might be about the individual stocks in your portfolio, those companies are going to have a hard time succeeding if the economy runs into a brick wall. Right now the biggest macro concern is what happens when the temporary budget deal reached by Congress and the president runs out early next year. If the stocks got a boost because the last set of deadlines was met, they might also start to falter as the next set of deadlines approaches. Scaling back on your stocks before then might prove timely.
2. Prices vs. earnings
It's easy to fall in love with rising stock prices, but it's equally important to follow how the companies you own are really doing, by keeping an eye on their earnings. This is a particular concern right now because prices have become somewhat unhinged from the underlying earnings.
Since the end of 2011, S&P 500 prices are up by 33.7 percent, while earnings are up just 12.6 percent. If earnings for any of the companies you own are lagging badly behind the stock's price movement, you might want to count yourself lucky and take the gain while you can.
3. The need to rebalance
Portfolios get out of whack when prices move unevenly, and rebalancing can be a way of trimming some of your higher-priced positions. This applies both to asset classes and to sectors within your stock holdings. Otherwise, over-weightings can develop, as when technology ballooned to 34.5 percent of the S&P 500 just prior to the dot-com collapse of 2000.
4. The alternatives
One challenge when selling is deciding where to put the proceeds. With savings and money market rates so low, they may seem an unappealing alternative. One option may be to look for longer-term CDs with low early withdrawal penalties. Normally you might not consider CDs liquid enough to be a holding tank for awaiting investment opportunities, but if you can find a longer-term CD with a relatively small penalty for early withdrawal (some are as low as two months in interest), you can take advantage of higher CD rates and after a relatively short period of time, still do better than you would have in a savings or money market account -- even after paying a penalty if you need to cash in to capture your next opportunity.
Of course, for some portfolios there are tax considerations to take into account when selling stocks, but that is an entire subject in itself. The above points are purely based on the investment side of the equation, and cover principles designed to keep you buying low and selling high.