The 3 Ms Part 2 - Money (episode 2 of 2)

The previous episode 1 of 2 on Money Management is about minimizing losses.

This episode 2 is about protecting your profits.

Many retail investors have similar experiences on seeing their beautiful unrealised profits disappearing right before their very eyes during a pullback or market correction. 

If only unrealised losses can disappear as quickly!


Equities and cash

One of the easiest and simplest technique (does not mean easy though) to protecting profits is by taking some money off the table when we are ahead.

This technique has many names. Some call it scale in; scale out; some declare round 1, round 2, round 3; some advocate sell when high and buy later at lower price; some swear by cycle trading/investing; etc. 

If you visit forums like Valuebuddies.com, you may spot quite a few veterans doing it. (You may also notice the "newer" buddies are the ones who are more fervent buy-and-hold forever value "advocates" than the old bird veterans who have gone through a few market cycles)

It's basically similar to Trading Around A Core Position as explained by Jim Cramer.


Equities and bonds

Switching between equities and cash would  be the easiest and most popular.

Some like the Millionaire Teacher would switch between equities and bonds. (Warning! You may want to research the correlation between bonds and equities during the author's time and now. There was no QE distortion then. It's one example of not copying blindly. Jumping to bond funds now would be akin to jumping from the pot into the fire in my view...)


Portfolio Management

Another popular technique if you are into portfolio management would be to re-balance if your equities % share gets "too big" in relation to your other asset classes that are now underweight like precious metals, property, fixed income, cash, and so on. (OK, that's more for more mature retail investors in their 40s and above. Young investors starting out have less options due to smaller portfolio size. Another example of choosing a technique to fit your present context and perspective)


Hedging

Sometimes you don't want to or can't simply switch from equities to cash.

One example is when you are bearish on the market but to sell your cum dividend equity now would to forgo the juicy dividends... So you "hedge" by selling the Simsci futures or STI CFD. It's not a perfect hedge; but at least if the market corrects as you predicted, some of the unrealised profits that disappear ex-dividend in your equity holding can be offset by the "profit" in your short future or CFD hedge.

Another scenario could be you have painstakingly built up a sizable core position in a very illiquid counter. A good example is Vicom (not vested). Some may find it's more cost effective to hedge with CFD or Simsci than trading around a core position in this case.

Hedging does not always have to be with leveraged derivatives. You can do what I've learnt from my mistake:

I was so wrong on Hyflux preference shares 

You can also do hedging with other equities counters. For example, you are bullish on Oil and Gas plays. But what if Brent crude crashes to US$80 and below?

Some may want to add some equities that benefit from lower crude prices as a counter-balance. 

Remember!!! Hedging limits losses; it also limits profits (no free lunch) . 



It's all you - Mind

What I've shown above are merely some of the techniques we can employ if we want to "protect" our unrealised profits. They are merely a tip of the ice-berg. There are many more techniques out there. Have fun exploring! 

To improve, we need motivation.

If we are satisfied with our performance, then there's no motivation. 

There's nothing wrong with that. If it ain't broken; don't change it!

Ah! How I wish I can be in that comfort zone...

Stay tuned for the 3rd and concluding post on the 3 Ms - Mind.