It’s time to lighten some positions, take profits and build up portfolio cash. Read on.
I learned some valuable lessons about retail share investing while editing Fairfax’s old Shares magazine in the late 1990s and early 2000s.
The first was how many investors crave information on the ‘next big thing’. A cover story on ’10 Hot Stocks Under $1’would race off the newsstands – an investment magazine’s equivalent of the Princess Diana cover, when sales needed a boost.
A cover story on blue-chips or top dividend-paying stocks sold far less. Stories on asset allocation, long-term investing or portfolio construction …. crickets!
Few readers seemingly wanted information on when to shift between assets, even though asset allocation is vital for long-term investing.
Nobody wanted to know about portfolio cash levels, even though knowing when to increase or decrease cash separates great investors from the rest. Ever notice how the truly great investors cash up before the rest of us?
The other main lesson was investors wanting ‘buy’ ideas rather than sells. In my field, you’d think reader complaints were about buy ideas that flopped. Instead, many were about stories that dared to suggest something should be sold.
My point is that stories that were most informative for readers – that helped them build long-term wealth – often rated poorly. Conversely, stories that were bad for readers – ’10 hot stocks’ and the like – usually rated strongly.
Yes, there’s a place for direct stock-picking or small-cap companies and speculation, ideally within the confines of a well-designed portfolio. A few small-cap ideas, for example, as portfolio ‘satellites’ to complement the core.
Problems occur when entire portfolios are built on speculation. For example, a portfolio comprising dozens of stocks that seemed good ideas at the time but have no to relationship to asset allocation or portfolio construction.
Knowing when to change asset allocations – and knowing when to sell – are vital pieces of the investment puzzle at all times, and especially now.
Selling into rallies
As outlined in several columns this year, I expect investment markets to be persistently more volatile this decade due to heightened macroeconomic and geopolitical risk. The market will have more twists and turns than usual.
In turn, retail investors will need to be more active to capitalise on short-term volatility on their own, with the help of an adviser, or through a fund.
Many retail investors will need to sharpen their skill at selling into rallies to take profits, using those profits to build portfolio cash holdings, and using that higher cash allocation to pounce on bargains during volatility.
Now is such a time. As I write this column, the S&P/ASX 200 Index has made a fresh record high. That’s despite Australia’s sluggish economy, two consecutive years of negative corporate earnings growth (and the prospect of a third) and myriad challenges for the global economy.
In the US, the S&P 500 Index this week hit a new all-time closing high, despite the uncertainty of President Trump’s tariff agenda. Some trade progress has been made, but risks are high as the 90-day trade pause is due to end early next month.
Retail investors should consider lightening exposure to global and local equities in their portfolio and increasing their cash holding as markets reach new highs and look increasingly expensive. They will get cheaper before year’s end.
Note my emphasis on the word ‘lightening’. I don’t suggest equity markets are about to fall sharply or that investors should cash up and bunker down. Rather, to take some profits as markets rally.
In portfolio terms, this suggests a small reduction in the equities allocation (global and local) and a small increase in the cash allocation. Having more firepower on the sidelines to put to work in the next market pullback is critical.
Nobody knows when that will come. What I do know is that too many retail investors are usually fully invested during market pullbacks, meaning they don’t have sufficient cash on hand to pounce on bargains. The main way to free-up cash to buy quality undervalued stocks is to sell in a falling market. Ouch.
As an aside, portfolio investors should use periodic rebalancing anyway, to ensure target allocations are maintained.
What to sell
That said, it’s not enough to suggest investors lighten their equities allocation and increase portfolio cash. They need to know what to sell.
Every investor is different. It’s far easier to suggest buy ideas because they have fewer tax complications and only involve one decision. Selling requires knowing what to sell and also knowing what to do with the proceeds.
Investors should also consider their tax position before selling on their own or with the help of a licensed financial adviser or accountant. Also, whether selling is aligned with their long-term investment goals and needs.
Caveats aside, here are three candidates to take some profits on in the new financial year, with a view to building up cash holdings and buying back in during the next market pullback, when valuations are more attractive.
1. Australian banks
For long-term investors, few stocks are surely harder to sell than the Commonwealth Bank, a remarkable performer for its shareholders.
But every stock has its price. Granted, analysts have argued CBA has been badly overvalued for at least two years, only to watch it climb ever higher, crushing the returns of fund managers who don’t hold it (relative to the benchmark).
At its current valuation, CBA is partly driven by weight of money and investor sentiment rather than by company fundamentals. After soaring gains, CBA trades on a higher forward Price Earnings (PE) ratio than Alphabet (owner of Google) and is up there with the world’s most expensive banks.
Again, I don’t suggest retail investors fully exit CBA or other Australian banks. Capital gains tax is a big issue for long-term CBA shareholders who sell.
Instead, CBA shareholders could consider taking a few profits and lightening their exposure by selling into this Australian equities rally, to free up cash.
2. US equities
On several occasions this year, I have argued that investors should gradually reduce their exposure to US equities and rotate into cheaper equity markets, such as Europe or China, or use profits from US shares to boost cash holdings.
My immediate concern is the looming end to Trump’s 90-day tariff truce. There’s been some progress – a UK trade deal of sorts and this week Canada backing down on its planned digital services tax.
But negotiations are a long, long way from being concluded and much can, and often does, go wrong with trade talks.
Then there’s the staggering growth in US debt and growing concerns about it from so-called bond-market vigilantes; war in the Middle East and Ukraine; and general uncertainty from Trump’s erratic policymaking.
Although US equity markets continue to climb ‘this wall of worry’, they look like an obvious place to take some profits and lift portfolio cash holdings.
3. Gold bullion
As the chart below shows, gold bullion’s rally has been extraordinary. The US-dollar gold price has almost doubled in the past three years.
A powerful confluence of trends has put a rocket under gold. They include surging inflation after the COVID-19 pandemic; heightened geopolitical tensions; sharply higher central bank buying of gold; economic uncertainty; US-dollar weakness and demand for gold jewellery in emerging countries.
I can’t see gold retreating in a big way any time soon, given my expectation of heightened market volatility this decade. With so much economic, political and military uncertainty, I understand why more people are buying gold.
That said, I also know that when an asset delivers soaring gains over several years, it’s usually a good time to take some profits and lighten exposure.
I’ve long argued that most portfolios should have a small allocation to gold as a form of insurance. But I don’t like holding too much of an asset that a) doesn’t generate income and b) whose returns require someone else to pay more for it in the future. That’s too speculative for me. Plus, gold equities look better value.
Again, for investors who have profited from gold’s extraordinary rally, I’d look to trim positions at these levels and use those profits to boost cash holdings – with a view to buying quality, undervalued assets at lower prices later this year.
Tony Featherstone is a former managing editor ofBRW, SharesandPersonal Investormagazines. The information in this article should not be considered personal advice. It has been prepared without consideringyour objectives, financial situation or needs.Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 1 July 2025.