One pertinent question investors commonly ask themselves is: ‘when should I take profits?’. This is no doubt a tough question to answer since we as investors are always seeking higher returns from our investments. In today’s article, we will break down our thoughts on this topic for our platform’s investors.
To begin with, there is nothing wrong with chasing more returns despite having your investments in the green. However, we think that it is a good practice to review your portfolio at the end of the year or even the start of the year, even if you have a time horizon of ten years or more, given that sometimes a certain investment may become a huge part in your portfolio, especially if it has rallied aggressively.
Take for example you have invested in the technology sector during the Covid-19 market drawdown last march. You probably would have made a substantial amount given that the health crisis has given the impetus for us to move our day-today-day activities online which resulted in a heightened demand for technology services and items. In such a scenario, you may find the weight of your holdings towards the technology sector increase substantially from the strong run-up witnessed, forming an overweight in your portfolio allocation.
In times like that, we believe that it is wise for investors to consider a few factors before deciding if they should continue holding their investments or take profits off the table; 1) valuations and earnings growth potential, 2) the longer term outlook of the sector and 3) the overall macroenvironment.
Yet often enough when we speak about taking profits, the first thing that comes to mind will be pulling all of your monies out from the security. However, this is a common misconception as taking does not have to be an all-out type of exercise.
Amidst the scenario mentioned above, you could perhaps reduce your exposure to the technology sector by selling some of your holdings and allocate them to other sectors since the longer term outlook for tech remains sanguine – growth themes like e-commerce, internet of things (IOT) and cloud computing remains intact over the longer term. By doing so, you are essentially reducing the risk of your portfolio suffering a huge loss in value should the sector experience a correction.
Should you decide to take profits, what are some funds you can allocate your monies to?
Heading into 2022, we think that value-oriented investors can look to the China A shares market for opportunities as global equity markets, with the exception of Asia, Latin America and China, are trading at extremely stretched valuations.
Emphasizing that the slew of tough regulatory crackdowns news in China has triggered investors to dump Chinese equities – Chinese equities has registered a loss of 31% from peak to trough, we argue that there are still positives in an investment into the China onshore market; 1) Companies listed on the China onshore market are poised to benefit from the reforms, 2) China A shares is the easiest way investors can gain exposure to the 2nd largest economy in the world and 3) the low correlation of China A shares serves as a good portfolio diversifier for investors. The fund we recommend investors to consider adding into their portfolio is the $Allianz China A Shares AT Acc USD(LU1997245177.USD)$.
On the fixed income front, we think that Chinese Government bonds (“CGB”) and Asian High Yield bonds (“AHY”) are worth considering if you are seeking stable income. CGB is an attractive option for risk averse yield hunters because of its 1) ability to provide higher real yields at lower risk, 2) low correlation to other fixed income market and 3) a growing structural demand is expected to drive price appreciation over the longer term. On the flip side, aggressive investors can add AHY into their portfolio due to its 1) cheap valuations, 2) better yields and 3) short duration.
To gain exposure to the aforementioned fixed income categories and classes, the two bond funds we recommend are the $Fidelity China RMB Bond A-ACC-USD(LU0740036214.USD)$ and $Eastspring Investments - Asian High Yield Bond ASDM SGD-H(LU0756522594.SGD)$.
For a more in-depth analysis, check out the article If I have $1,000, which funds should I buy?‘
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