Wednesday, May 06, 2009

Staying Invested but Taking some Gains Off the Table

"Don't fight the tape" ~ Wall Street adage

The stock market rally since the March 6, 2009 bottom has been very generous, advancing about 35% through today. In late 2008, any news was bad news leading to precipitous daily declines in the market indices. Nowadays, every piece of news is viewed as "not as bad as it could be," resulting in a sustained market advance. For example, the leaked stress test results of Bank of America needing as much as $34 Billion of capital was considered relatively good news by investors today. The stock rises $1.85 or 17.07% on the news. I would have never guessed such a response by investors.

While I believe the market will correct soon, I don't want to miss out on a sustained advance, if I should be completely wrong. Therefore, I am maintaining the same amount that was invested in stocks at the beginning of this year. However, when the funds gain 5-10%, I am selling an equivalent amount and taking out the cash. That way, I continue to participate in the market advance, while protecting against an expected decline.

Of course, this strategy will reduce our returns if the stock market continues it's strong rally. However, if the market does correct, I will feel better that some of the gains were taken off the table.

Disclosure: At time of publication, I do not have any position in Bank of America.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

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