Should you sell BHP Billiton Limited and Rio Tinto Limited shares in 2016?

Shares of BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) proved to be bad investments in 2015.

Source: Google Finance

Source: Google Finance

Unfortunately, the two big global mining companies are stalwarts in many Australian investors’ portfolios, so many readers are likely feeling the pinch from their falls last year.

Although the warning signs were obvious, many investors continue to fall foul attempting to ‘pick the bottom’ in the current commodity price rout.

For example, as you can see in the graph above, investors who bought Rio or BHP shares in late September last year thought they were geniuses… for about two weeks, until Rio and BHP shares fell another 20%.

Trying to time the market is a mug’s game. Successful investing is about time in the market, not timing the market.

And entering just our third day of trading for 2016, already both Rio and BHP shares are down 3.14% and 2.06%, respectively.

The problem for resources investors last year, and again this year, is that no one knows when the plunge in commodity prices will find a ‘floor’. Prices of iron ore, aluminium, coal, copper, uranium and oil – the most important commodities for BHP and Rio – are crippling under supply and demand pressure.

Unfortunately, if China’s weak manufacturing data (and subsequent 7% sharemarket crash on Monday) continues the oversupply situation could get worse.

Of course, we know BHP and Rio won’t go bust (because they are among the low-cost producers across most commodities), but their profits will be hit – hard.

For example, BHP and Rio are believed to have breakeven prices at their West Australian iron ore mine of less than $US20 per tonne. With iron ore recently trading around $US40 per tonne (down from over $US180 in 2010), the price of the steel-making ingredient need only drop $US10 to cut profit margins in half!

It’s important to note neither BHP nor Rio have reported a full-year of profits with iron ore prices below $US50 per tonne. Only six months ago, the commodity was selling for 35% more than it does today.

Foolish takeaway

Trying to pick a bottom, or time the market in general, is a fool’s errand. However, Foolish (note the capital ‘F’) long-term investors should know when to cut their losses. In my opinion, the Rio and BHP share prices could rebound throughout 2015, but that chance is not worth the risk.

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Motley Fool writer/analyst Owen Raszkiewicz has no position in any stocks mentioned.

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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