Can’t tell you how often I’ve done this. My most recent boo boo? India.
The Trend is Your Friend
I bought an India ETF last month as it reversed higher. We were making money and then things got volatile in global markets – so I swapped out the shares for cheap call options on the same index (to avoid large downside loss) and it worked beautifully. We got a nice move up from there. With that backdrop, what did I do? When I saw overall market weakness and desired to reduce “risk,” I sold off the converted shares for an 8-9% gain. Most people would take 8-9% in a month but we need to understand one thing – it’s like Newton’s Law where an object in motion tends to stay in motion. You can often think of a continuing trend as a safer idea than betting on a turn-around.
India was trending up but despite that, I sold it to reduce portfolio “risk.” My alternative was to sell another holding – one that looked “safer” (but might have been trending negative). I mistakenly thought of India as “risky” (because it’s an “emerging market”) and disregarded the changing politics and the strengthening Indian currency which is helping push up a country’s stock market along (the super cheap P/E ratios help too!).
In summary, I sold India too soon and missed an additional 5% upside so far. Even though my assessment that the market looked weak seems to be confirmed at this point (action in US indices look choppy and perhaps there;’s some churning going on), India is holding up ok. If the global market continues weak, it’s unlikely that India will stay positive – so perhaps my instinct was correct. However in hindsight, it might have been better to wait for a confirmed end of the uptrend before selling, because who can pick a top? And assets can rise farther than any of us might realize! Therefore, think twice before selling an asset that’s moving up steadily (not wildly).
Important Note: it’s not being greedy to hold on – it’s being smart because you need your big winners to offset your weak performers in any portfolio or trading record.