Can One LOCK IN GAINS?

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Can One LOCK IN GAINS?

Postby CaliJim » Sat Jan 07, 2012 6:09 pm

Assuming one is a constant risk (buy/hold/rebalance) type of investor, is it possible to "LOCK IN GAINS" without changing your AA, or withdrawing funds for consumption, or changing your risk profile is some way?

In another thread the question was "The price is up - should I sell Intermediate Tax Exempt (VWITX)?" My first thought was - NO, because there are no similar alternative to that type of fund that you could switch to that isn't also 'up'.

Even if one takes gains off the table and buys a 'safe investment' - say - TIPS - there is still sovereign risk - so LOCK isn't the right word.

You can change your basis, you can change your risk profile, but can you LOCK IN gains?
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Re: Can One LOCK IN GAINS?

Postby mas » Sat Jan 07, 2012 6:15 pm

CaliJim wrote:You can change your basis, you can change your risk profile, but can you LOCK IN gains?

I think these are the choices in play, and your post is correct.

I didn't see the other thread mentioning VWITX, but there is one reasonable alternative. FDIC insured CDs. You could conceivably retain the duration of the fund, and eliminate interest rate sensitivity (mostly - for a penalty). This is a minor change in risk profile/AA, but small enough of a change that most people would consider it equivalent.
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Re: Can One LOCK IN GAINS?

Postby nisiprius » Sat Jan 07, 2012 7:23 pm

I think your analysis is correct.

I think "locking in gains" does mean changing ones' asset allocation. In effect it is always a market timing move, because you believe that asset A, which you hold, having gone up, may now go down, and you believe you can exchange it for some asset B, which will not go down. EIther you still want to hold asset A and you intend eventually, at some propitious time, to exchange back into asset A, in which case this is obviously market timing. Or, conceivably, you may want to "quit while you're ahead," and never own asset A again in your life.

"Lock in gains" is emotionally charged, because it draws selective attention to the fact that the act of locking your present gains in means that you are locking future gains out.

I'm honestly not sure how to think of once-in-a-lifetime moves. In principle, one could imagine someone who had a well-defined value for "the number," reaching that number during a bull market and then exiting the stock market for good. I'm not sure how this stacks up as a strategy. In real life, people are very loathe to "quit while they're ahead" because it means "quit while they're still winning."
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Re: Can One LOCK IN GAINS?

Postby riverguy » Sat Jan 07, 2012 7:25 pm

Sure. Buy deep ITM puts or sell deep ITM calls. That's one on many areas where ETFs shine over mutual funds. Of course you could get options on a similar ETF if you are holding mutual funds.
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Re: Can One LOCK IN GAINS?

Postby jsl11 » Sat Jan 07, 2012 7:32 pm

In a sense, rebalancing after a gain is a "locking in" process. Of course, it only applies to the amount sold to rebalance.

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Re: Can One LOCK IN GAINS?

Postby CaliJim » Sat Jan 07, 2012 7:56 pm

Don't deep ITM options have risks too? You 'lock in' a future cash position - at which time your AA changes, and you have inflation risk with the cash.

I suspect nothing is ever LOCKED IN.
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Re: Can One LOCK IN GAINS?

Postby CaliJim » Sat Jan 07, 2012 8:38 pm

jsl11 wrote:In a sense, rebalancing is a "locking in" process.


Perhaps rebalancing is the ONLY way to "lock in gains".

Everything else seems to be some form of shifting between market, size, value, credit, inflation, sovereign, currency, default, and other risks.
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Re: Can One LOCK IN GAINS?

Postby NERD777 » Sat Jan 07, 2012 8:49 pm

Many directions to take this question, I'll bite with the most theoretical, lest practical of them.

Short Answer: Kinda. Rebalancing from 'riskier' investments into 'safer' investments. i.e rebalancing equity gains into your bond allocation (Remember when that used to happen frequently?) Bonds obviously are not risk free, the shorter the duration the less theoretical risk.

Long Answer: No. Bonds are not this risk-free investment that every seems to think. (Not risk free in the sense of duration and interest rates, everyone here seems to get that. I'm talking default, or complete monetization of treasuries). Not saying it will happen in my lifetime or ever, but it is not 100% impossible. In such a scenario no paper asset would be worth anything. So even if you think you cash would be king it would not be, not if treasuries are defaulted upon. In which case hard assets are they key. Gold & silver & land. Except in such a scenario where treasuries are worthless these could and probably would be confiscated. In such a scenario your only shot as they say is guns, ammo, and food, hardly what I would call locking in gains. Remember a Federal Reserve Note is not worth the amount printed on all four corners, rather it is worth what another party is willing to accept it for. So no you can never truly 100% lock in gains it is simply impossible.

Best Answer: Yes. One can lock in gains by living a great life. Having friends, possibly a significant other, maybe kids, family etc. Sharing memories with these individuals or maybe just making memories by yourself. Go to the top of the Empire State Building, go see the lights of Paris, go climb Machu Picchu, drink some beers and kiss The Blarney Stone. Volunteer every so often, feed someone who doesn't have food, lend an ear to an elder in need of companionship and teach an underprivileged kid to read. That is how you lock in gains that no government, no economic cycle, inflation, deflation or standing army can take from you. Lock in gains by trading Federal Reserve Notes for things you will remember on your death bed, the moment your life flashes before your eyes, or just when you are lying in bed at night.
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Re: Can One LOCK IN GAINS?

Postby Aptenodytes » Sat Jan 07, 2012 11:05 pm

No, there's no way to do this. The logic of accepting a level of risk in exchange for a level of expected return (which in your scenario are held constant) is that you have to let the gains remain in play.

If every time you had a gain you withdrew it from the portfolio, then your portfolio would have nowhere to go but down. The market will swing up and down. Every time it swings up you withdraw the gains. Every time it swings down you lower your baseline.

The logical end point of this approach is a portfolio of zero.

The responses you are getting that are more positive are not accepting your premise of keeping risk and expected return constant. Of course you can adjust your AA whenever you want.
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Re: Can One LOCK IN GAINS?

Postby exeunt » Sun Jan 08, 2012 12:47 pm

Locking in gains is a bad move because you're working against price momentum. In fact, one of the reasons why momentum exists is because a lot of investors like to lock in gains and sit out losses until they break even. Don't do it. If anything, you should be aggressively selling losers to tax-loss harvest and riding winners.
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