There might be no better feeling than locking in a huge profit as the market soars higher, but that’s not the only reason that Cramer recommends selling during a rally. These moves are just as much about preparing for declines as anything else.
That’s because pullbacks are just as likely as rallies. And there’s probably no better defense for those days than having a stock pile of cold, hard cash. Cramer on Wednesday called cash “probably the single most important part of your portfolio,” which is why you should shore up as much of it as possible when you have the chance. Like, say, during a rally.
Cramer recommended having at least 5% of your portfolio in cash most of the time, and up to 10% after a market decline. This gives you the flexibility you need to take advantage of those declines, buying your favorite names at a discount. Otherwise you’ll have to sell some of your present holdings or worse, use margin, meaning you borrow from your broker. But using margin is too risky, Cramer said, which is why he never endorses it on Mad Money.
Cramer said that not selling something during a rally to raise cash is “downright reckless” – no matter how much you love the stocks in your portfolio. And he thinks selling right after a rally – when a lot of other investors still want to jump in – might be best. You can always use that cash to buy back those stocks at a lower price sometime in the future.
If raising cash is essential, Cramer said, then spending during a rally is prohibited. Sure, after a big one-day rally you’ll be tempted to buy. But he warned against chasing stocks in these situations. You may think this is obvious, but it can be hard to keep your emotions in check when everyone else around you is flooding into the market.
So if you wanted to buy a stock, but the market’s just had a big run, take a pass, Cramer said. Admit you missed it and move on.
“It’s the smartest thing you can do,” he said. “And it will save you a lot of pain.”
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