Investors that have thrown everything at the ASX recovery trade and are sitting on a mountain of profit are now facing a big dilemma.
The agonising question they face is whether to take profit or brave the upcoming February reporting season.
To be sure, these investors are typically mum and dad investors as they have been aggressively buying the COVID-19 crash.
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Retail investors the biggest winners
It's the professional investors that that have been slower to act. That's why its retail investors that are reaping the lion's share of the close to 50% rebound in the S&P/ASX 200 Index (Index:^AXJO) since March.
Some of the best gains have come from the De Grey Mining Limited (ASX: DEG) share price, Brainchip Holdings Ltd (ASX: BRN) share price, Temple & Webster Group Ltd (ASX: TPW) share price and Afterpay Ltd (ASX: APT) share price.
You can give yourself a pat on the back if you have picked those horses amid the 2020 ASX market mayhem.
Is it time to take profit?
While I remain bullish on the ASX for 2021, now isn't a bad time to take some profit off the table for a few reasons.
This particularly applies to those who are fully invested in the market, as I had been. I only had 65 cents in my cash trading account up till a month ago and it's not usual for me to be 100% invested.
I typically like to hold around 5% in cash but I am aiming to collect a little more this time after the strong market run.
This is to ensure I can capitalise on any opportunities while still having significant exposure to risk assets.
What's priced in to this ASX bull market?
What prompted me to start locking away some profit is my belief that the market is overlooking just about all risks.
I am not talking about a black swan event which can't be priced or predicted. Even known risks are overlooked and I will outline three that particularly concern me.
3 risks to watch in 2021
The first is the rise in the 10-year US government bond yield, which jumped to the highest level since March 2020 at around 1.14%.
As I highlighted at the end of last year, investors should be looking closely at this global benchmark.
The second factor to watch is the Australian dollar. While the Aussie is backing away from its peak at just over US78 cents, currency experts believe it can climb higher still.
While some companies will benefit from this, a stronger Aussie is a net negative for ASX 200 stocks. I am expecting this issue to be more widely discussed during the upcoming reporting season.
Thirdly, return to COVID normal may take longer than what many are expecting. The current thinking is that mass vaccinations in developed countries will gather pace in the first half of the year. This will spell the beginning of the end of COVID in late 2021.
Foolish takeaway
While that's my base expectation, there are signs that progress will be slower than expected. I don't think the market is pricing in this or any of the other risks.
As the market saying goes, you can't go broke by taking profit. It's always good to have a bit in reserve, in my book, although this largely depends on your personal circumstances.
You should speak to your advisor before acting.
