So, you sold more stocks than you probably should have ahead of the debt ceiling negotiations and now you're wondering how to get back in, because since then, the major averages advanced a few percentage points. Well, based on my experience, you are not alone. For most investors, it is actually harder to buy back into stocks than it is to invest in the first place.
Please don't beat yourself up over it. All of your investment activities should be viewed through the prism of your risk tolerance, goals and time horizon. If reducing risk by bailing on a portion of your stocks was in line with those three objectives, then good for you; you made a smart decision. Personally, I'd rather de-risk a little ahead of a major event that could crush my investment portfolio and miss out on some upside if stocks wind up ripping higher should the event come to pass without a hitch. It's been said that a little fear is a healthy thing and after all, no one is going to bail you out of a decimated portfolio, right?
But what if you acted hastily and you later realize that maintaining a certain portfolio allocation to stocks was part of a long term strategy; that you had a temporary lapse of discipline and now you regret it? Again, it is perfectly OK to act to protect yourself. The issue is most likely that you didn't have a strategy to get back in once the scary event passed.
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We pros also lighten up on risk ahead of potentially major market moving events, but the difference is that we are employing strategies that are looking beyond the event. Regardless of any particular upcoming event, we're always on the lookout to lock in a little profit and either hold onto the cash or reinvest the proceeds into something else. Portfolio management is a never ending cycle of expanding and shrinking our equity exposure over the long term to potentially earn the best risk adjusted returns for our clients for the least amount of risk.
If one has reduced their stock allocation below what they desire and they want to bring back that exposure, providing that is appropriate for one's objectives, here are a few simple things the pros use that you could use to:
1. Buy a little back now and use below the market buy-limit orders to add on dips. This way, you'll at least have a little more equity exposure if stocks keep going higher and you'll have a disciplined way to average down on dips.
2. Go for "relative value." This means that if there are two similar stocks within the same sector and one has a P/E ratio of 20 and the other a P/E of 17, pros would take profits on the higher P/E stock and reinvest in the lower P/E stock. Since you presumably raised cash, you could do the same thing. Best of all, you can use item #1 for this, too.
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3. You can invest a smaller dollar amount than you raised from the sales into exchange traded derivative products, thereby keeping the bulk of the cash on the sideline and using the leverage offered by these products to gain similar potential upside of the securities you sold.
4. You can also dollar cost average back into stocks by putting the same dollar amount in each month over; let's say, a year's time, until you invested the desired amount. This, I believe is especially helpful for 401(k) participants who do not have the ability to use limit orders or exchange traded products.
5. Here's an old standby: diversify. While this age-old advice is often overlooked, you could use the proceeds from your sales to fill in holes in your portfolio. While diversification doesn't guarantee a profit or protect against loss, it's a method used to help manage investment risk. Put simply, diversified portfolios have the potential to reduce volatility caused by rocky market conditions.
The investment climate has tested the metal of investors time and time again, and that doesn't look to abate anytime soon. It is both commonplace and understandable for investors to sell stocks ahead of events that may have a detrimental effect on their investment portfolios. But by taking advantage of the aforementioned tools of the trade, getting back in may be a little easier and a little less fearful.
—By Mitchell O. Goldberg, President of Dix Hills, N.Y.-based ClientFirst Strategy. Follow him on Twitter @Mitch_Goldberg.