"Locking in Gains" and How to Do So

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Random Poster
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"Locking in Gains" and How to Do So

Post by Random Poster » Thu Aug 08, 2019 12:20 pm

People often write that they have "locked in gains" from various run-ups in the market (whether recent or otherwise).

I'm not entirely clear on what they mean by this phrase, however, or how they accomplished it.

I suppose that the most direct way of "locking in gains" is by selling those holdings that have increased in value, but is it possible to "lock in gains" by simply increasing one's allocation to the underperforming parts of your portfolio?

And, if so, if you are continually directing new contributions to the lower-performing or underweighted portions of your portfolio in an effort to maintain your targeted asset allocation, are you "locking in gains" every time you make a contribution to the underweighted holdings?

Or do you have to change one's asset allocation in a particular direction in order to "lock in gains"?

Or are there other ways to "lock in gains"?

KlangFool
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Re: "Locking in Gains" and How to Do So

Post by KlangFool » Thu Aug 08, 2019 12:25 pm

OP,

It is very simple. It is part of the "Buy, Hold, Rebalance".

If you have an AA of 60/40 and you are doing 5/25 band based rebalancing when the stock goes up high enough, it will trigger your rebalancing. You will sell stock and buy fixed income.

You do not have to do anything special. You just need to have an AA that is not 100/0 or 0/100.

No, you do not have to adjust your AA. You just need to maintain your existing AA.

KlangFool

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Dialectical Investor
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Re: "Locking in Gains" and How to Do So

Post by Dialectical Investor » Thu Aug 08, 2019 12:29 pm

If you invest according to a pre-determined asset allocation, the phrase has no meaning. Don't worry about it.

DecumulatorDoc
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Re: "Locking in Gains" and How to Do So

Post by DecumulatorDoc » Thu Aug 08, 2019 12:43 pm

Dialectical Investor wrote:
Thu Aug 08, 2019 12:29 pm
If you invest according to a pre-determined asset allocation, the phrase has no meaning. Don't worry about it.
Agree, I don't think Bogleheads use that term in that fashion. There will be a time when harvesting/capturing long term capital gains is useful, such as years when you are in a low enough tax bracket to take advantage of 0% cap gains tax rate or perhaps to offset large harvested losses.

H-Town
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Re: "Locking in Gains" and How to Do So

Post by H-Town » Thu Aug 08, 2019 12:46 pm

I can only think of one situation where it applies: when you win the game and adjust your allocation towards your new risk profile. Other than that, locking the gains has very little meaning.

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goingup
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Re: "Locking in Gains" and How to Do So

Post by goingup » Thu Aug 08, 2019 2:58 pm

The phrase "locking in gains" is not in my investing mindset. Nor is "taking money off the table". If you've got an asset allocation that you're sticking to, you don't think like that.

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Sandtrap
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Re: "Locking in Gains" and How to Do So

Post by Sandtrap » Thu Aug 08, 2019 3:56 pm

It sounds good. Like one is investing wisely.
Financial advisor lingo.
Especially to those that are not "bogleheads".
"locking in gains"
"deploying assets"
"etc".

Of course, the layman's favorite is "write offs".
Seinfeld Episode "The Write Off".
https://www.youtube.com/watch?v=XEL65gywwHQ

. . . a little "boglehead humor". . . .
j
Wiki Bogleheads Wiki: Everything You Need to Know

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Hector
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Re: "Locking in Gains" and How to Do So

Post by Hector » Thu Aug 08, 2019 4:10 pm

When I think of locking in gains, I think of selling winners.

Many years ago, I used to locking in gains. I was investing in few companies by doing "research". As soon as any company showed my pre-determined gain, I would sell that position to locking in gains.

Locking in gains is a loosing strategy.
Imagine an index which start with holding all companies at equal cost (or something else). Every X months, that index would sell Y percentage of highest performing companies and put the proceed in remaining companies.

livesoft
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Re: "Locking in Gains" and How to Do So

Post by livesoft » Thu Aug 08, 2019 4:17 pm

I don't think I have used "lock in gains", but I can say that if a special purchase on/after an RBD gains money, then I will sell before 2 to 30 days are up and put the money back where it came from which is usually a bond fund. Now the bond fund shares will have changed value (up or down) while I temporarily moved the money to equities, too. But I will realize the gains and go back to my nominal asset allocation that I had before the initial RBD transaction.

Since these moves or transactions are for the short term, I can also calculate what would have happened if I did not make these transactions.
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FrankLUSMC
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Re: "Locking in Gains" and How to Do So

Post by FrankLUSMC » Thu Aug 08, 2019 4:35 pm

If you are in a low enough tax bracket such that your capital gains in a Taxable account are long term and will have 0 tax, then that's what I call locking in gains. You then re-buy the stock and hope to do the same next year..or you may be able to also harvest losses.

If you don't do this, then you run the risk of having monster gains in your taxable account after 5, 10 or more years.

:sharebeer

7eight9
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Re: "Locking in Gains" and How to Do So

Post by 7eight9 » Thu Aug 08, 2019 5:09 pm

In a casino you lock in your gains when you pick up your chips and walk away from the table. And don't return. Until then you bankroll is in action. You might have taken money from the house. But if you come back then you didn't lock in your gains. You just took a short-term loan from the casino. You only lock in your gains when you quit playing the game. No different in the investing world. You might have gotten some tax advantage. But don't confuse that with walking away.
I guess it all could be much worse. | They could be warming up my hearse.

UpperNwGuy
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Re: "Locking in Gains" and How to Do So

Post by UpperNwGuy » Thu Aug 08, 2019 5:43 pm

I don't try to "lock in gains." Sounds to me like it would involve a lot of tinkering and market timing.

mhalley
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Re: "Locking in Gains" and How to Do So

Post by mhalley » Thu Aug 08, 2019 10:09 pm

I did this many years ago when I became a boglehead. I had several stocks, and wanted to get rid of them to buy index funds. I sold the losers, then sold my winners basis plus some percent, can’t remember now how much, let’s say it was 25%. I was left with a few positions as “gravy”. Probably wasn’t smart, I never checked to see whether these few stocks outperformed or underperformed the market, I should have just sold them all. wouldn’t do it again.

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celia
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Re: "Locking in Gains" and How to Do So

Post by celia » Fri Aug 09, 2019 12:28 am

Most of the replies so far are avoiding the question which, I believe, is what is the definition.

The only way to "lock in gains (or losses)" is to sell and leave you with a gain (profit) or a loss. Until a sale occurs, the "gains" or "losses" are just (unrealized) "paper gains" or "paper losses" that will continue to grow or shrink until an actual sale takes place.

dbr
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Re: "Locking in Gains" and How to Do So

Post by dbr » Fri Aug 09, 2019 9:15 am

celia wrote:
Fri Aug 09, 2019 12:28 am
Most of the replies so far are avoiding the question which, I believe, is what is the definition.

The only way to "lock in gains (or losses)" is to sell and leave you with a gain (profit) or a loss. Until a sale occurs, the "gains" or "losses" are just (unrealized) "paper gains" or "paper losses" that will continue to grow or shrink until an actual sale takes place.
I agree. I think the term means nothing more than to sell a position and realize an unrealized gain (or loss). The significance of having done so depends on what the investor does with the proceeds of the sale.

To expand on the thought, this process might be considered by the investor to be "winning in the stock market" based on a thought that gains and losses aren't real until the stock is sold. That could make sense in the real world. I might invest in the market, get a large gain, sell, retain the original money invested, and buy a yacht with the gain. Who would not be happy? That, of course, would depend on wanting to end up with the original money plus a yacht. On the other hand, if the investment is to build wealth for retirement and the gain gets me one quarter of the way there, selling leaves me short of the goal and out of the market I need to be in to reach my goal. That would be suicidal relative to the objective. So now I have to reinvest the money where it was and move on. "Locking in the gain" means nothing in that case.

ByThePond
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Re: "Locking in Gains" and How to Do So

Post by ByThePond » Fri Aug 09, 2019 4:16 pm

H-Town wrote:
Thu Aug 08, 2019 12:46 pm
I can only think of one situation where it applies: when you win the game and adjust your allocation towards your new risk profile. Other than that, locking the gains has very little meaning.
This.

sharukh
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Re: "Locking in Gains" and How to Do So

Post by sharukh » Fri Aug 09, 2019 4:37 pm

You can buy a put option to lock in gains for selected duration . But it might cost a bit

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Re: "Locking in Gains" and How to Do So

Post by JediMisty » Fri Aug 09, 2019 4:51 pm

ByThePond wrote:
Fri Aug 09, 2019 4:16 pm
H-Town wrote:
Thu Aug 08, 2019 12:46 pm
I can only think of one situation where it applies: when you win the game and adjust your allocation towards your new risk profile. Other than that, locking the gains has very little meaning.
This.
Agree. When the stock had a good run this year, I exchanged some us index stock funds with index bond funds to rebalance back into the bands of my target AA. I consider this "locking in gains" for those amounts.

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