No. of Recommendations: 1
You sell XXX at an "overvalued" high.
Sit in cash for a short while.
Oh, look! YYY looks to be a good buy, and I have all that money sitting in cash doing nothing, so let's buy YYY.
... time passes...
Ah-ha, XXX just went down so time to buy it.
Um, using what to pay for it? All my money is tied up in other stocks and I don't really want to sell any of them.
And usually it's even worse than this. Because if it's a long term holding, a very large percentage of it is comprised of capital gains ... and taxes are due. For example, I sold some holdings of a stock in December that was nearly all capital gains. Come April, I will have to pay 23.8% of that sale (okay, maybe 23.3% because there was a small basis in it) in taxes. If I want to buy it back, even at a price that is 10% lower, I can only buy about 80% of what I sold. Obviously if I were planning on buying it back anytime soon, I wouldn't have sold, but with your scenario, the person does plan to buy it back someday soon. In my case, I sold because I have other plans for that money.
