If a stock appreciates, consider capturing some, but not all, of the gains, says Stephanie Douglas of Avenue Investment.Galit Rodan/The Globe and Mail
Canadian and U.S. stock markets have had a good run this year, with the S&P/TSX composite up about 13 per cent as of press time. South of the border, the Standard & Poor's 500 index was up about 8 per cent. Still, this being October, and with the U.S. election nearing, the usual aut-umn tumble not be far off.
Whether you have a couple of stocks or a whole basket of them in an index fund, what should you do now? Let them run or take some chips off the table?
Here are four steps to help you benefit from the market's largesse.
Rein in hopes, do some research
"People want to keep making more money," says Kurt Rosentreter, a veteran investment adviser at Manulife Securities Inc. in Toronto. "That's where the trouble happens." You may feel like a genius for picking a winner, but chances are you've just been lucky. Remember Nortel.
You may find a solid reason for your stock, or the market, to be rising. Even so, it may be prudent to take some profits and watch for an opportunity to buy your position back later at a lower price.
"Check to ensure the fundamentals of the company still remain positive," says Stephanie Douglas, a portfolio manager at Avenue Investment Management in Toronto.
"If a stock appreciates a lot, we'd likely cut back the position to the original weighting in the portfolio to capture some of those gains rather than selling the entire position," she says.
If the fundamentals have changed for the worse, though, "we would sell the entire position."
Review your investment policy statement
If you don't have one, this might be the time to sit down with your financial adviser and draw one up showing your goals and how you plan to achieve them. If your plan says you are comfortable with 60 per cent in stocks and now you have 70 per cent, it's time to reconsider: Are you really comfortable with that?
"Review your objectives and time frame to make sure you know what you're trying to achieve," says Tom Bradley, president and co-founder of Vancouver-based Steadyhand Investment Funds Inc. If there's been a long market run, "obviously there'll be some shifting back to bonds, cash or whatever else the investor has," he adds.
Investors' views of the market should be reflected in their portfolio mix, Mr. Bradley says.
"So if somebody really thinks the market has peaked and is going down for the next year or two, and they would typically have 60 per cent equities, they might take that down to 50 per cent or even 45 per cent," he says. Even so, you don't want to stray very far from your long-term target because "the odds of getting it right aren't very good."
Revise
If your circumstances have changed, revise your plan accordingly. Life changes that may alter your needs – hence asset allocation – could be marriage, divorce, a new baby, a teenager heading off to college, a job loss, a big raise and so on. Mr. Rosentreter calls this strategic rebalancing.
It takes into account the stage of a person's life, how close they are to retirement and other such things. Take, for example, a 58-year-old person who has just had a couple of really good years in the stock market. They plan to retire next year and start living off their investments.
"You might say, wait a minute, let's scale back risk to reflect the income I'm going to need, starting next year," Mr. Rosentreter says.
Ms. Douglas of Avenue Investment takes a more basic approach.
"The choice to sell or reduce the position should be the same no matter your preparedness for retirement," she says. "Think of investing from an asset allocation point of view. Your equity portfolio should not be used as a bank account. The equity portion of your portfolio should not be the funds that you are drawing on in the short term."
Rebalance
If nothing has changed, take steps to return to your original asset mix. Mr. Bradley, who manages the Steadyhand Founders Fund, a balanced fund, takes a suitably balanced approach. His fund targets a weighting of 60 per cent equities and 40 per cent fixed income.
Last January and February, when stock prices were low, Mr. Bradley said he did a significant amount of buying on behalf of the fund. "We were quite aggressive," he says.
"We had a great run," but by spring "things didn't look as cheap any more." The equity portion of the Founders Fund had climbed to 67 per cent. "So we brought it back to 60 per cent again. That's what a balanced fund should do."
Mr. Rosentreter points to another kind of rebalancing, which he calls tactical. It's essentially market timing.
"This is the hardest," he says. It's more psychological than it is portfolio theory. "If you've had a great year and you're truly worried about a seasonal correction or the U.S. election, there's nothing wrong with taking some profit and seeing how things unfold."