06-24-2020: Did it Work? Indeed it Did!

Updated: Jun 25, 2020

A near 3% sell-off in the market today culminated in booking some nice profits.

Over the last few week, each time I would add a new holding to one of my client portfolios, my first goal was to get the stop loss setting above its basis. At the end of the day, yesterday, most of our holdings had stops above their respective basis prices.

Today, the market took a breather and dropped a bit (over 3% intra-day). This triggered a number of stop outs in my client portfolios, locking in some very decent profits for them. As an example, here are the results from the stop loss action in our Aggressive Growth model: Starting the day, we were 100% invested. During the day, we stopped out of all but one position with an average profit per position of 2.6%. 2.6% may not seem like a lot, but when you go from 100% invested to 10% invested in a single day when the market is falling nearly 3%, AND book a profit of an average gain of 2.6%, AND take 90% of downside risk off the table... it is a good day. Getting a 2.6% return on 90% of capital was a very good day for my Aggressive Growth clients.

Think about it... the market took it on the chin today. Most investors either panic sold or held on, hoping for a recovery. While they garnered some significant unrealized losses, my strategy took risk off the table and booked some serious profits. Each position that we stopped out of might continue to move lower (most did, today) and in the next few days, (potentially) a lot lower. Some, of course, will rebound when the market rebounds, but just assuming a rebound will happen, is risky from two perspectives: 1) The market might not rebound as the COVID-19 cases continue to skyrocket higher; and, 2) The individual equities that stopped out today might continue to fall despite a market that recovers.

There are many axioms in the world of stock market investing and one that I like is this:

It is never wrong to take a profit.

Profit-taking is what we did today.

Now... You might be thinking... "Wait a minute, Mike... Didn't you say in your recent blogs that you were going to buy into sell-offs?"

Yep... But when you're 100% invested, there is no capital available to buy equities. Now, after the stop outs, we have capital on hand again and I am salivating over some great stocks that got a lot cheaper today. In fact, I bought a few at the close today.

If the market does continue higher and all the positions that stopped out today, reverse course and move a lot higher, then there is the argument that I should not have taken profits today. BUT... that is a BIG "IF" and big if's have a lot of risk of loss built into them. I don't like taking on a lot of risk based on the 'hope' that the market will continue higher.

Despite the assumption that this market will continue higher, that assumption could be wrong. Today 'could' be the beginning of the next major move into a bear-market trend. Granted, I don't think today was the beginning of the much anticipated falling off a cliff. That is why I only bought at the close today... But, I only bought a few equities at the and am holding on to most of the profits we banked today. I am willing to take on 'some' risk; especially in my Aggressive Growth strategy.

In a falling market, it is better the take profits and lower risk; but that does not mean you sell everything the moment that the market wiggles a little to the downside. I let my stops handle the selling today. I did not sell a single position other than as triggered by a stop loss.

When a stop is triggered, I do not second-guess the action. It is far too easy to turn an unrealized gain into a realized loss if you are guessing when to take a profit. You have seen that happen more than once in your investment life, I am sure, and it is gut-wrenching. There is almost nothing worse than turning a profit into a loss, when it comes to investing in the stock market.

I am delighted with how our stop loss strategy worked today. Any time you can lower risk and put profits in the bank, it is a good thing.

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