The market is rallying. You are fully vested in a handful of stocks, but feel you could do better.
What do you do
An odd quirk of human nature spurs many investors to sell their best performing stocks — a strategy intended to lock in gains and protect capital.
What it actually does is leave you holding the weakest stocks from your initial portfolio.
The cure for this problem is to sell from the bottom up. Carefully weed through your portfolio. Sell the stocks that are producing the weakest returns.
Then take that money and pump it into your better performers, or promising new names, as they pass buy points in sound fashion.
The strategy is somewhat counter-intuitive because nearly all investors are programmed or taught to want to buy low and sell high. To many folks, cheap stocks look very attractive.
But as long as you are disciplined enough to buy at valid buy points, rotating cash out of a weaker stock and into a more expensive yet stronger growth company will help accelerate your portfolio's total gain.
Before you make the move, though, be sure to run through your checklist of precautions. Make sure the leader into which you are thinking about rotating funds is not in late stages. Make sure it is in buying range. Make sure it is not rebounding for the third or more time from the 10-week moving average.
Also, confirm the market's uptrend is intact. How many distribution days are stacked up against the major indexes? Is there any stalling action? Is the market going into a correction
It can sometimes be hard to let go of some weak stocks. You feel they are about to make their move. You have the feeling that you made a call about this stock, its products and its markets, and something in you tells you that you are right.
This can be particularly true when a stock posts a hefty gain, then pulls back into a steep correction. It's natural to tell yourself the stock is just base building, you may as well hold on for the upside.
But former leaders such as Hewlett-Packard (HPQ), Yahoo (YHOO), Cognizant Technology (CTSH) and VMware (VMW) are just a few examples of why this can be a serious mistake.
Get out. When the stock comes back by a , you can always buy back in.
If you want to be right, set yourself the goal of concentrating your funds in your top-performing stocks.
Maybe you start a rally with six or eight stocks. By the end of the rally, you'd ultimately like to have your capital focused in two or three stocks, preferably the top gainers from your initial portfolio. This reinforces the fact that you were right about those stocks to begin with. It also allows you to profit from your own smarts.