Repositioning Your Portfolio After You've Lost Money?

The last month in the market has been no picnic. It often raises the question - Is it too late to sell and reposition after I have already lost money?

It seems contrary to sell out at a loss just to get the portfolio in a better position for the next time the market experiences a correction. Why not wait until the portfolio recovers, then sell and reposition? The question is not easily answered but there are a couple of lines of thought that one should consider.

First, never discount the possibility of further loss. Just because you might be down 10-15% from the last few months does not mean you cannot fall further. Big losses are what kill the values of our portfolios. The recession of 2000-2002 proved that well enough. If you think we are facing some more hard times ahead and you are not happy with your portfolio, you need to think hard whether you can withstand more losses. Remember, when you lose 50%, it takes 100% to get back to even. If you are in investments that are volatile, then you really have to evaluate when this repositioning should take place. If now, even after a 10-15% market correction, then so be it. You might save yourself further loss.

Second, evaluate if there is a chance that the economic circumstances or the management style might recover. If so, perhaps waiting to sell and reposition is the answer. It is pretty amazing how volatile the market can be on the smallest piece of news. For instance, the market may surge up and give us a one day wonder when things like the Fed lowering interest rates or oil dropping far off that $100 mark happen. You might gain 2-4% in a single day if you are watching. That could potentially provide just the opportunity to sell and reposition.

What would my answer be today? My thoughts are that the economy has slipped pretty dramatically to the downside in the last 3-4 weeks. Most people expect a rough six months in the market, so cashing now and repositioning would admit defeat (i.e. you would take your 10-15% loss) but the move might shelter you from further erosion. I hate to sell low as much as the next guy, though, and might see if I could evaluate my more volatile positions and move those around at opportune big market positive days.

There has been a lot of selling of late. Perhaps even with the downward pressure on stocks and selling there might be windows to recover some, sell, and reposition on a good market day. Splitting the difference and selling some positions now and waiting on others could work just fine.

The other advice I might have for those wanting to reposition is to put a portion of the proceeds immediately back to work in the newly restructured portfolio. This way, if the market does decide to head up (and we were too pessimistic in our outlook), you should get upside. Also, dollar cost average back a portion back into the market over time so that if the market falls further, you will continue to have some of your funds buying at these low prices. If you are aggressive, perhaps the dollar cost averaging should be just on more volatile holdings. If not, moving in money each week or so for the whole portfolio is probably the safer bet. You may miss some upside, but you will experience better buying if the market heads down further in the short run.

Every strategy is unique. It is always better to think about risk and understand how much you are taking before the market decides to go backwards, but better late than never!