Looking to take some profit ... then what do you do next?

by Wayne Ferbert on May 7th, 2013

I know many clients and investors who think we are nearing a top in the market. And many of them want to exit the market altogether and wait for a pullback. Timing the market is a difficult game – but no one ever went poor taking profits off of the table. So, if you really feel strongly about it, go ahead and look to take between 1/3rd and ½ off the table now.
Ok, you have that excess investment capital in your account. Now what do you do with it. In more conventional markets, you would strongly consider rotating those funds over in to fixed income while you wait for the equity markets to correct. But with interest rates at all time lows, that move is a coiled trap for your money that is waiting to spring.
You need to consider some alternative approaches. Here are two alternatives that we like if you decide to rotate out of the broader markets:
  1. Sell puts on the same positions you just closed – but at levels well below the market. In this case you are saying: “I am willing to own this equity/ETF again – but only at a discount to what I just sold it.” 
  2. Look at market neutral portfolio positions. With options, you can create your own but you would need to be an advanced options user for that strategy. We have written about it on this site before. Or, you can find a market neutral mutual fund or ETF. An ETF was launched in October by IQ Hedge that is a Market Neutral ETF. Its symbol is QMN and in a limited time window, it has performed the way you’d expect a market neutral portfolio to perform – with solid 3.5% performance over 8 months. This kind of position will not be highly correlated to the market.
On Thursday, we’ll write about ways to construct a market neutral portfolio on your own!

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