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Time to Take Gains?

The Dow is up nearly 400 points this afternoon, and while investment pros say it’s a little early to celebrate, some recommend unloading or cutting back your exposure on some of your poorer performers and using those gains to buy higher-quality stocks on the next dive.

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Paul Nolte, managing director of Dearborn Partners: “Crack open a bottle of champagne and drink it, quick, before the markets go flat…Given this type of market it’s hard to make any broad judgments. Everybody hates to sell when the market’s down 300 points, so take this opportunity to switch out of some of your poorer names and upgrade the portfolio to some better names. You want to be buying the higher-quality multinational companies with good balance sheets and good income flows, that aren’t necessarily going to be impacted as much by the turmoil that’s going on in either the economy or the financial markets. Look at companies that have a lot of cash, good income streams, and a decent dividend that will help you weather the storm.”

Tom Samuels, managing partner of Palantir Capital: “It’s probably a little premature to get really bullish on these up days, but it’s a great opportunity to reposition a portfolio. Last year the best performing sector of the market was smaller companies that lost money, and not by a little bit. I think the theme of the next few years is going to be high-quality stocks outperforming low-quality stocks. We could see investors positioning away from companies that can’t sustain their own growth. More than a low P/E, I think it’s cash generation and low debt or no debt that are going to be important. If you haven’t cut back your high-yield bond exposure yet, you ought to be doing that aggressively. By definition, junk bonds are issued by companies that are on the low quality end of the spectrum, and in the relatively harder economic times that are coming, those companies will be disadvantaged.”

Steven Roge, portfolio manager at R.W. Roge: “I can’t imagine there’s too many gains to be taken off the table right now, with the past week. If you have a well-balanced portfolio, I would sell some bonds and buy some equities here. You can rotate your portfolio, what I call upgrading it, going from riskier small cap stocks to more grounded large cap stocks. Small caps are going on 12 years now of outperforming large caps…If you think to yourself, I’m going to pull out now and get back in when the market’s lower, a mental exercise we do with clients is to make them write down when they’ll get back in. It becomes tangible at that point, it becomes a real plan.”


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