Timing and the art of taking profits: do what fund managers do. Adjust your portfolio as conditions dictate

Money Digest, Sept, 2000 by David Karas

You have heard how important it is to not time the market. Instead, you are encouraged to leave your assets invested for a long period of time, as opposed to buying on lows and selling on highs (which are the actions that are more historically attached to stockbrokers and direct stock portfolios). Today, the majority of investing is now done through investment pools, such as mutual and segregated funds.

There is also another school of thought that says the whole concept of simply buying and holding has been promoted by the mutual fund industry as a way of getting clients to not redeem their holdings and go to another fund.

I can tell you from my personal experience, there is accuracy in both points of view. Holding assets for a long time, in either direct mutual funds or stock, will lower the amount of taxes you pay from capital gains.

Mutual funds create taxes for you by the sale and purchase of stocks in their funds even if you do not redeem the mutual fund itself. These are called distributions and can be a surprise if you are not looking for them. Typical distributions seem to average 3% to 7% a year. They usually appear in greater numbers as values of stocks get overpriced and managers sell off.

The taxes caused by distributions, flow through to you, the investor.

However, that in itself is not a bad thing.

A mutual fund professionally manages your assets and the manager themselves buy and sell stocks within the fund as conditions dictate.

So, even if the fund industry says that you should buy and hold, fund managers in reality do sell off losers and overpriced holdings as conditions dictate.

My advice?

Do both.

Sell off a portion of your winners, take some profit and redirect it to new opportunities. You cannot go wrong taking a profit.

Secondly, try to avoid responding to every media driven event in the market. Concentrate on the long view that you and your financial planner have mutually agreed upon.

Use the example of a decorative landscape hedge on your property. The longer the hedge is in place, the stronger and better it gets. To encourage proper growth you need to cut back on the spindly and excessive growth portions to build up stronger branches and roots.

That is your portfolio.

Occasionally it will grow excessively and unsustainably, into certain areas. Failure to trim back will lead to dead branches.

Proper trimming will encourage stronger support arms.

Be a good financial gardener. You will get better flowers.