Taking Gains?

[Cycle Tom]

As I am new to this site I am not sure this is the correct forum. So forgive me. [It's fixed, thread moved - admin LadyGeek]

Today we updated our portfolio as of 1/31 and we are please with the gains for January. I was wondering if anyone would consider taking the gain, or a part of it, and just putting into their cash reserves? Was ondering if this is a wise practice.

My thoughts are to "grab" some of the profits should things change. If I did the portfolio would be no different than it was on 1/1/2013.
Thanks!

[livesoft]

No. One should not take gains for the sake of taking gains.

One should follow their rebalancing plan. What is your rebalancing plan? When did you write it down? Does it still make sense today?

[Atilla]

I am taking some gains by front-loading my charitable giving for the year. Whenever it makes sense I launder donations through a taxable brokerage account.

Figure I can give money I had to earn and write it off - or give money I didn't earn - still write it off and raise my cost basis (bonus). Right now I'm good through May if I would have given semi monthly out of cash.

Still get the same write off for taxable year 2013 - and lowered my cap gains taxes for some point in the far future.

[Toons]

Doesn't sound like you are straying from your financial plan,taking some profits,
sure go for it. I wouldn't make a habit of it though

[dbr]

As I am new to this site I am not sure this is the correct forum. So forgive me. [It's fixed, thread moved - admin LadyGeek]

Today we updated our portfolio as of 1/31 and we are please with the gains for January. I was wondering if anyone would consider taking the gain, or a part of it, and just putting into their cash reserves? Was ondering if this is a wise practice.

My thoughts are to "grab" some of the profits should things change. If I did the portfolio would be no different than it was on 1/1/2013.
Thanks!

No, yes, maybe. The effect of what you are doing is to watch your risky assets gain a little, which means that you now have proportionately more invested in those assets and less in safe assets. Moving some back returns your portfolio to the original plan. This is called rebalancing and is recommended (see Wiki).

However, this has nothing to do with "grabbing" gain. If your stocks had fallen, rebalancing would say to take cash and buy stocks back to the correct proportion.

If you follow a practice of constantly converting gain to cash beyond just enough to rebalance, the result would be a shift to less stock and more and more cash. If your intention all along is to become more conservative as you go, then that works, but a better way to do it is to plan an asset allocation target as time goes by and move to that by some rebalancing scheme or another.

[Sidney]

I am still not anywhere near a re-balancing trigger. No action required.

[Geologist]

I would suggest that if you are tempted to make changes based on one month's fluctuations, then you are paying too much attention. There might be some theoretical advantage from rebalancing over short intervals, but most investors watch too much and then are tempted (or do) something at the wrong time. If you are investing, especially in stocks, for the long-term, such as retirement, one month changes don't mean anything.

I do record transactions and investment prices monthly. My reaction when things have gone up over the past month is "How nice." Then I go on with the rest of my life.

[sscritic]

Agree with Geologist. Some months are up and some are down. I am investing for the long term (I am retired, long term means for my grandchildren). I watch intently, every day, but I never do anything. If you don't have the self control to look without acting, stop looking.

[dbr]

I would suggest that if you are tempted to make changes based on one month's fluctuations, then you are paying too much attention. There might be some theoretical advantage from rebalancing over short intervals, but most investors watch too much and then are tempted (or do) something at the wrong time. If you are investing, especially in stocks, for the long-term, such as retirement, one month changes don't mean anything.

I do record transactions and investment prices monthly. My reaction when things have gone up over the past month is "How nice." Then I go on with the rest of my life.

Just to set my comments straight, I also would advise not rebalancing too frequently. I think the 25/5 rule works pretty well and in practice probably results in changes less than yearly. If contributions are used to adjust to target along the way, actually selling something is a fairly infrequent event.

[JW Nearly Retired]

Today we updated our portfolio as of 1/31 and we are please with the gains for January. I was wondering if anyone would consider taking the gain, or a part of it, and just putting into their cash reserves? Was wondering if this is a wise practice.

My thoughts are to "grab" some of the profits should things change. If I did the portfolio would be no different than it was on 1/1/2013.
Thanks!

Not usually a wise practice. What is your AA? Did January put you outside your rebalance bands?

Sounds more like you just have a hunch the January market gains are to good to be true so you are selling stock funds. I don't think many Bogleheads think that is a wise practice. We have found, either through personal experience or via studies, that jumping in and out of the market based on investor thoughts about which way it might be going usually works out poorly.

How will you decide if/when you might put money back into stocks?
JW

[Dandy]

There is a great temptation to take profits. This is because you "feel" the market is at a high and probably will not go much higher or actual decline. Those feelings are based on what? tidbits of info, fear?, greed? What you are getting into is market timing. If you listen to pundits they all have strategies and opinions about what the market will do short term. A lot of people took profits because of fear of the fiscal cliff issue. I'll bet many of them stayed out while the market rallied about 6% in january. Now they are even more frustrated and more convinced that the market is too high.

The basic philosophy of this forum is to select a diverisfed portfolio of equities and fixed income, mostly comprised of broad based, low cost index funds. To have a target allocation between those investments that fits your age , risk tolerance and need to take risk and to re balance on some objective basis (e.g. birth date, variance from target percentage etc). The whole point is to avoid trying to out guess the market. The rebalance idea acutally accomplishes the taking profits concept by selling investments that have appreciated and buying those that have declined -- but not based on trying to out guess the market or based on feelings or pundits comments. A slight difference between your profit taking and re balancing is that you may be keeping profits on the sideline and rebalancing puts them back into investments that have declined (or not appreciated as much). Over the long run that is usually better than just holding profits in cash awaiting a re entry point.

If you are investing for the long term you might consider the above approach.

[Hastibe]

Just to set my comments straight, I also would advise not rebalancing too frequently. I think the 25/5 rule works pretty well and in practice probably results in changes less than yearly. If contributions are used to adjust to target along the way, actually selling something is a fairly infrequent event.

What is the 25/5 rule? I'd be curious to know, if you (or someone else) would be willing to explain.

[plats]

I Googled and found this:

"Another common strategy is to rebalance only when an asset class drifts off target by a certain percentage. Financial author Larry Swedroe recommends the “5/25 rule,” which says you only need to rebalance when an asset class is off by an absolute 5%, or a relative 25%.

Following this rule, if your target bond allocation is 40%, you would rebalance anytime it was off by an absolute 5% — that is, above 45%, or below 35%. For asset classes with smaller targets, the “relative 25%” figure is more useful. If you’ve allocated 10% to emerging markets, you’d rebalance any time this fund dipped below 7.5% or rose above 12.5% (because 2.5% is 25% of 10%)."

[Hastibe]

I see--thanks so much for the explanation!

[Fotivator]

Don't do it! Unless you need the money or are rebalancing.

[Grasshopper]

For just because no, if you are retired and these are LTCG and you are in the 15% tax bracket, why not.

[momar]

If you take gains every time the market goes up a little bit, how is the "magic of compounding" supposed to work?

[Mitchell777]

Good question, one I thought about this weekend. My equity is in a range (I use a 5 percentage point range for equity) where I could take profits and would have in the past. My concern is taking the profits to place into fixed income at these interest rates. I have enough fixed income to live off of for many years so I may just not rebalance yet. I'm just not sure

[dbr]

If you take gains every time the market goes up a little bit, how is the "magic of compounding" supposed to work?

Compounding doesn't go away.

The key insight is that you look at your investments as a whole. The whole portfolio has an expected return* and a risk. The compromise you make between the chances for return and the chances that return will not materialize is set by the asset allocation, in the broadest sense between how much is in stocks and how much is in bonds. In the long run if you never rebalanced, you would expect more return, and as stocks outrun bonds over time, the uncertainty in return will becomes larger and larger. To put it in an example, do you want to start out 80% in stocks and 20% in bonds and when you retire end up pretty nearly 95% stocks with a chance of losing half of that in a given year? Would it be a better plan to continually sell from stocks and accumulate more in safer assets and enter retirement at perhaps 50/50 or 40/60 or something like that. In the meantime the portfolio will compound at the combined rate of stocks and bonds at a level of risk you can accept. On top of all of this, on the short term, bonds and mostly stocks will bounce up and down, so that it can make sense to adjust back to your planned targets when things get too far out of whack. The 25/5 rule tends to allow that without doing anything drastic too often.

*Expected return is the average of the distribution of possible outcomes. Risk is the width of that distribution about the average. Expected return is NOT a contract to realize a certain result.

[Default User BR]

"Another common strategy is to rebalance only when an asset class drifts off target by a certain percentage. Financial author Larry Swedroe recommends the “5/25 rule,” which says you only need to rebalance when an asset class is off by an absolute 5%, or a relative 25%.

After reading Larry's books, I incorporated the 5/25 rule into my tracking spreadsheet to automagically indicate when asset classes and subclasses have wandered outside the ranges.


Brian