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Profits are for growing not for protection!

Let profits grow

Profits are for growing not for protection! You invest to profit. Don’t kill your performance by selling winners and buying losers. Use this as part of your core portfolio growing strategy to get rich.

Investors must manage their portfolios to grow their wealth and achieve financial security and independence. Actions taken to protect gains can kill the possibility of dramatic portfolio growth. Don’t move to protect a gain too soon. Let profits run.

Rebalancing to win, lose or hide

The prices of stocks in your portfolio rise, fall or move sideways over time. In classic portfolio management, rebalancing means buying or selling to adjust the holdings in an account.

This simple idea can be very badly used.

Some advisors sell the winners or a portion of them. They do this for no other reason than the stock has risen in price. This selling of your winners locks in any gains. The rationalization that “you never go broke taking profits”can limit your growth.

The rebalancing approach means that funds raised by selling winners are used by buy more of the positions that declined in price. Buying more of these losers brings them into “balance”.

Selling your winners to buy losers is not smart

Can you imagine a company becoming a winner by firing great performing employees to hire inferior workers? Would you be a fan of the professional sports club that sat out their best players to routinely play the worst?

Investing focuses on making money work. We do this to grow value or why bother? Our portfolio management job is to make our money work for us. Any portfolio move that hinders that performance must be considered wrong. Our job must be to drive performance. Do not stop a producing stock from making money.

When you can, always buy the winners and leaders. Sell losers and the also rans in any sector or industry. Winners keep winning. Own them. In fact doing the opposite as the action taken in the traditional rebalancing approach can double your results.

For example, a properly and technically balanced account can open with 5% of the funds evenly invested in each of 20 stocks. Through time stock prices change. Some rise, some fall and others stay close to the original purchase price.

Following the price changes the account may be considered unbalanced. This suggests buying and selling to get it back into balance.

To explore this further, we will look at two scenarios. They are very much simplified to make the big point. Do not use them as an absolute guide to investing. There is still much more to learn.

Rebalancing by selling winners to buy losers hurts your wealth!

Rebalancing by selling winners to buy losers hurts your wealth!

Scenario One

In scenario one we regularly rebalance to evenly distribute our funds among the 20 holdings. In both scenarios we give ourselves a market that rises 10% annually.

In our imaginary world we use a simple limited example. We say that each year, 5 stocks rise 30%, 5 stocks rise by 20%, 5 stocks stayed at the same price and the value of the final 5 falls by 10%.

Crunching the numbers shows an overall portfolio performance of 10% growth. We have 10 winners, the 5 that rose by 30% and the 5 that rose by 20%. Another 5 did nothing and the final 5 lost 10% of the original value.

A disciple of rebalancing will sell off part or all of the winners and buy more losers to align the account. Then in our simple example we move forward year by year and go through the same process. The rebalanced portfolio shows an annual growth rate of 10%, same as the market.

Scenario Two

Scenario two does the opposite. We sell the losers and buy more winners. Now consider what happens. The losing positions go to zero as we do not want to own any losers. The resulting funds are redeployed to buy more shares in the winners.

Crunch the numbers and the annual rate of return rockets to 20.45%! That puts these powerful profit producers in a position to rapidly drive your wealth up. Do it for a third year and results compound in your favor. Before the fourth year is out you have doubled your account!

Compounding returns makes a huge difference!

Compounding returns makes a huge difference!

The solid 10% annual return can compound to double in 7 years. The 20+% growth rate gets you there in under 4 years!

This actually works. Keeping this approach going can turn a modest 5 figures into 7 in a few years. I know, that is what I did.

Naturally there is more to it then doing this one simple thing. The point here is to get you to seek winners and ride them rather than reining in winners to lock in and protect profits. Don’t limit profits; grow them.

Profits are for growing not for protection! Make that core to your investment thinking. It will put you far ahead of the market and help make you rich.

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Have a prosperous day!
White Top Investor
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