Portfolio management is all about maximizing gains from your winning hands and minimizing losses from your bad trades.
To do that, a rule of thumb is to be aggressive when market is showing signs of strength but turn defensive when market weakens.
For example, when the Hang Seng Index is marching toward 28,000 points, chasing the market is the right thing to do. But when the index sinks below 27,000, investors should move out and patiently wait to see if the market can hold its ground before deciding on the next move.
Following the recent setback on US-North Korea tensions, I have turned more defensive and trimmed my positions. I believe the correction has alarmed investors and more of them are now looking for selling chances, thus limiting the upside.
When will I get aggressive again? Well, that will be when the market shows renewed strength, say, if the benchmark index bounces back to 27,500.
I would rather wait for signs of renewed strength and pay more for my stocks rather than buy on decline because there is a real risk that a breach of key support levels like 26,800 could herald the beginning of a long, hard crash.
This approach, however, may not be suitable for retail investors, because constantly adjusting the position size requires much effort and demands fast response. Also, if unlucky, one may have to reenter the market at higher levels than the exit point, posing immense challenges even to pros.
This article appeared in the Hong Kong Economic Journal on Aug 15
Translation by Julie Zhu
[Chinese version 中文版]
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