Why I'm Clearing the Dead Wood and Raising Cash
Here is my trading strategy as I focus on keeping accounts at highs and compounding returns.
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Market action is slightly negative on Thursday morning, with all the indexes negative and the Magnificent Seven lagging with a loss of 1% after outperforming recently. Breadth is four-to-five negative, and the list of stocks moving up more than 10% is relatively short. After the big run that the bulls have enjoyed recently, a pullback isn’t a big concern at this point, but if dip buyers are hesitant and it gains some traction, there isn’t much nearby support.
I have been selective in reducing some positions and clearing out some deadwood. My cash level is now up to about 37%. I’m generally happy with the technical and fundamental health of the positions I hold, but I want to have greater flexibility to add on pullbacks and to find new opportunities.
As I’ve discussed in some of my educational columns, the single most important thing you can do to boost returns is to focus on keeping accounts as close to high as possible. This avoids the very inefficient task of having to recover losses and also allows the power of compounding to come into play.
Most investors think of compounding only in terms of individual stocks, but it is actually far more important on a portfolio level. Compound gains in one or two stocks can make up for a lot of poor-performing stocks, but it is when you compound at the portfolio level that your wealth increases.
Compounding at the portfolio level requires keeping accounts close to highs, and that requires a high level of flexibility. I use selling as risk management and will often sell stocks I like because I think short-term risk is high, and I can reenter at a later time with better odds. I don’t care if I have to buy back at a higher cost. I’m just concerned about avoiding shorter-term pain.
Now that I have raised cash, I will watch the remaining positions carefully and may sell some more, but I’m already looking for ways to deploy that cash into some new situations that I feel are offering lower levels of risk.
I don’t know where the market is headed next, but I’m prepared for whatever happens.
At the time of publication, DePorre had no position in any security mentioned.
