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Time to protect your stock market winnings

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Latest MoneyWatch headlines 01:08

While the stock market continues its bull run, even crossing the 21,000 level on the Dow Jones industrials index, investors need to be working to protect the gains they’ve scored so far. That means it’s time to devise a “defensive” investing approach. The robust rally could well stay on course, but it’s also possible that prices could reverse faster than most investors might expect. Wall Street has yet to have a bull market that never ended.

That’s not to suggest it’s time to head for the exit, but it’s a reminder that protecting profits is one of the primary rules of investing. So defensive investing simply requires that you devise a plan to take off the table in an orderly fashion the profits you’ve already gained.

Dow tops 21,000 01:27

The U.S. economy’s basic fundamentals are showing continued positive signs, including rising corporate profits, but other issues are coming into play, including a political atmosphere that could damage the market’s recent optimism. Any headlines that indicate something going awry with implementing President Donald Trump’s campaign promises on tax cuts and easing regulations or getting Congress to go along with the massive spending could easily erode the market’s advance.

Already, the major stock indexes, including the Dow Jones industrials, S&P 500 and Nasdaq Composite, showed signs of slowing their speedy advance in the two days after the Dow crossed that 21,000 mark last Wednesday.      

One way to practice defensive investing is what’s commonly referred to as “dollar-cost averaging” out of the market, usually by taking out a modest percentage of the profits over several days. Or investors could sell stocks equivalent to a third or half of the worth of profits over a brief period of time until all of the gains have been taken. Sellers can park those gains in a cash account or insured money market fund until they’re ready to buy again, that is, to dollar-cost average back into stocks and mutual funds as steadily as they dollar-cost averaged out.

But profit-taking is best done when the market is flying high and not when stock prices are already on the decline. Selling when the market is pulling back is generally an unwise move. The adage of “buy low and sell high” applies most particularly when the market is in a powerfully bullish mode because that’s when investors can sell and get the best price for stocks they want to unload. Conversely, the best time to buy is when stock prices are on a massively declining path -- when opportunities abound to buy at bargain levels.

Trump rally 01:39

So profit-taking for investors is a must, even for long-term investors because it wouldn’t deprive them of the opportunity to continue gaining from the bull market. Clearly, it’s one positive way of refueling your financial resources and buying power to be adequately prepared for the next buying opportunity when a pull-back happens. Obviously, when taking profits, the stocks to sell depend on which ones in your portfolio have produced the biggest gains.

Some of the big winners in this bull market have been technology, health care and financial stocks. So they’re the groups where profit-taking is most opportune for many investors. And on the rare occasions that they get slammed, opportunistic investors usually rush to buy them at lower prices. Alphabet (GOOG), Amazon (AMZN), and Apple (AAPL) are among the stocks that have been leading the tech parade.  

So far, many bulls remain upbeat on the market’s outlook, believing it’s undergoing a healthy rotation into a more defensive portfolio posture. CFRA Research has “overweight” recommendations on the industrials and materials sectors, but suggests “underweighting” consumer staples, energy, real estate and utilities.

“We still believe the U.S.  economy is on an ascending trajectory and should further benefit from stimulative legislation expected to emanate from Washington, D.C., in the form of tax cuts, infrastructure spending and earnings repatriation opportunities,” said Sam Stovall, chief investment strategist at CFRA. And even though “a digestion of the double-digit gains racked up since the election could occur any time, we firmly believe that the bull market is alive and well and will celebrate its eighth birthday in fewer than two weeks,” he said in his most recent market appraisal. 

Still, that doesn’t eliminate the possibility that Wall Street could be swamped by bad news on either the political or economic fronts. So it would be wise for investors to protect their profits whenever they can.  

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