DOLLAR$ & SEN$E

BY CHRIS HANLY

INVESTMENT CONSULTANT, GARY GOLDBERG FINANCIAL SERVICES

2016 has been a volatile year for Wall Street, but all things considered, investors should be feeling pretty good. Major indexes have turned positive for the year, and many are hovering near record levels. If you followed the investing rule of “buy low, sell high” and increased your exposure when the market corrected, you’re probably looking at some nice profits right now.

Believe it or not, gains like that can pose a conundrum. Last month we took a look at what should be done with investments that have seen pronounced declines. The question of what to do with winners may not be as fraught with urgency, but it is just as tricky. Under what circumstances should you take profits, exit a security completely, or bet on the possibility of further gains?

As with the question of what you should do with losses, this depends on the specifics of the company. If it has benefitted from a trend you expect to continue – whether something broad like an improving economy or something company-specific like a new product – that’s a reason to stay put or add to your holdings. This path also holds if the stock offers a compelling investment thesis, consistently growing revenue or increasing its dividend. As a huge part of an investor’s total returns come from reinvesting dividends, you’re generally wise to not touch your holdings unless the fundamental story changes for the worse. Taking profits may give you some cash in the short-term, but over the long term you’ll want as many shares generating dividends as possible.

The question of when you should trim or exit your position is a little harder. If the trend that lifted the stock seems temporary, you might be wise to take profits while you still have them. Similarly, if the recent rally was steep or the company’s valuation seems stretched, the stock could be vulnerable to a swing in the opposite direction. Look at how much cash the company has on hand and compare its price-to-earnings ratio to that of its peers. If it doesn’t have a lot of cash, the dividend may not be sustainable, and if the P/E ratio is elevated, that could indicate the stock has little room to continue growing, at least in the near term.

Long-term investors will have both gains and losses, so the important thing is to be sure about the fundamentals of your investments. If you are, you can feel confident weathering a decline. If you’re not, you may fall prey to the “greater fool” theory of investing, the idea that prices will continue to rise so long as there’s someone behind you willing to pay more. As always, your financial advisor can walk you through your options and help you determine the best course of action for your needs, ensuring that the greater fool won’t be you.

Chris Hanly is an investment consultant with Gary Goldberg Financial Services in Suffern and can be reached at 845-368-2907 or chris.hanly@garygoldberg.com.