Profit Taking: Without Timing the Market

The last twelve months have been very lucrative in the mutual fund and investment markets. Most Canadian balanced funds have performed at the 10-15% range; Canadian and US equities at the 15-30% range; and European and Japanese equities at the 40+% range.

Many investors are still cautious, however, because of losses sustained in the prior 39 months.

It is important for investors to maintain a philosophy of not trying to ‘time’ the market. Timing the market occurs when the individual investor tries to guess what the market will do next. In two out of three situations, the investor will get it wrong. A better philosophy is to establish a level of profitability, which, when reached, suggests that it is time to pull back from more aggressive growth, into less profitable but more stable investments.

At present good questions to ask if one holds an investment that has performed at over 30% growth are: “Is this investment likely to continue to perform?” “Is there a possibility, now that excellent returns have been achieved this year, that this investment might check back?” If so, you may wish to have a discussion with your financial advisor about profit taking – without trying to time the market.

Switching to a well managed balanced or asset allocation fund could preserve growth from technology or European funds. I like the asset allocation funds because the fund manager has the discretion to move from bonds to equities within the fund’s mandate. Another interesting fact to keep in mind is that the average bull (increasing) market since 1954 has averaged 57 months. The shortest bull market in the same time period has averaged 26 months. While this is no guarantee of future growth, the present bull market is only 14 months old. An asset allocation thrust to your portfolio at present could preserve profits while still allowing for participation in growth.