When to take profits

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antiqueman
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When to take profits

Post by antiqueman »

Assume the following. You invested 1 million dollars in equities less than 90 days ago. Your paper profits are 100k. (10 percent) All the assets are in tax deferred accounts. Should a person take the profits and go back to the allocation (1 million dollars) he had less than 90 days ago which was his asset allocation he set up or let the profits continue because the rebalance bands on upside havent been triggered. The 10 percent profit is spread over TSM;Int. Emerging; Gold and Commodites. Some have done better than others but overall portfolio is up 100k. Disregard bands of rebalancing.

Should the person take the 100k profit or wait till bands are triggered.

No, I didnt invest the million but have made substantial profit , as I am sure many of you have. I suppose this is market timing but if you just go back to your original asset allocation and take the profits, what is downside if no taxes. Selling expenses will not be much through Vanguard.

Thanks.
livesoft
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Post by livesoft »

I would let everything go for one year. I would not take profits until they were at least long term. If tax-deferred, I would ignore the profits for years.

But ...

If this was a trading account, then I would have sold on a big up day or I would wait for a big up day before selling. Then I would buy again after few days. A big up day would be a 2% increase in total stock market in a single day.

Furthermore, if you get out, you had better have an unemotional trigger to get back in. No wishy-washy decisions. Something like this: I will get back in when the DJIA is at 9600 or if more than a month away at 10000 or above, no matter what.
topos
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Post by topos »

I would take 50% of the profit (50K) and let the other 50% run.
EdTheYellowJacket
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Post by EdTheYellowJacket »

If the bands are set in your investment plan, stick to them. It is more about sticking to the plan than the actual numbers of the plan that makes it work.

I would ask why you want to sell now? Any time you are up 10%, are you going to sell? If so, change your plan. If not, you are trying to time the market. Stick to the plan.
bulbul
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Post by bulbul »

livesoft wrote:If tax-deferred, I would ignore the profits for years.
livesoft, what is the benefit of holding profits for years in a tax-deferred account? To me, if the profit is big enough to stray away from planned AA, I would just take profits since there are no capital gain tax. You do not want to hold profits until you lose it, right?
livesoft
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Post by livesoft »

I'm sorry, I was quite flippant. I would only rebalance with that account and not very often. That would generally mean holding for years. Some folks have recommended not rebalancing more than every 2 to 4 years. That might require very large rebalancing ranges or bands. But its only an opinion, so make of it what you wish.

One point I wish to make, is that one should've already decided what they were going to do before the they made the profit. If one is doing short-term trading, then that should be written up in their IPS along with the rest of their investment policies.
bulbul
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Post by bulbul »

livesoft wrote:I'm sorry, I was quite flippant. I would only rebalance with that account and not very often. That would generally mean holding for years. Some folks have recommended not rebalancing more than every 2 to 4 years. That might require very large rebalancing ranges or bands. But its only an opinion, so make of it what you wish.

One point I wish to make, is that one should've already decided what they were going to do before the they made the profit. If one is doing short-term trading, then that should be written up in their IPS along with the rest of their investment policies.
I do not have my IPS yet. I really think I should take advantage of tax-deferred account. More often rebalancing with market speculation :oops: might generate some bonuses.
YDNAL
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Re: When to take profits

Post by YDNAL »

antiqueman wrote:Assume the following. You invested 1 million dollars in equities less than 90 days ago. Your paper profits are 100k. (10 percent) All the assets are in tax deferred accounts. Should a person take the profits and go back to the allocation (1 million dollars) he had less than 90 days ago which was his asset allocation he set up or let the profits continue because the rebalance bands on upside havent been triggered.
antique,

If rebalancing bands remain untriggered, it sounds like you either:
a) have a crystal ball (top of the line) that's telling you something.
b) your AA is wrong for YOU.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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spam
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Post by spam »

Hi Antique,

There is more than one way to rebalance. I hold some speculative investments, and I "rebalance" those to a fixed dollar amount. When I notice that they are 10% or more above target, I sell. When they go 10% or more below the target, I buy. I do this without relationship to any other asset and I sell to cash.

This gives me a minimum of a 20% difference between buying and selling.
retiredjg
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Post by retiredjg »

So, if you "take the profits", where are you going to put them? If you put them in cash, you will have diluted your target AA toward bonds. Maybe I'm just not getting what you mean.
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spam
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Post by spam »

retiredjg wrote:So, if you "take the profits", where are you going to put them? If you put them in cash, you will have diluted your target AA toward bonds. Maybe I'm just not getting what you mean.
Not sure who you directed the question to but consider this. When a market recovery (like this one) begins, stocks naturally outpace bonds so the need IS for more cash or bonds.
retiredjg
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Post by retiredjg »

spam wrote:
retiredjg wrote:So, if you "take the profits", where are you going to put them? If you put them in cash, you will have diluted your target AA toward bonds. Maybe I'm just not getting what you mean.
Not sure who you directed the question to but consider this. When a market recovery (like this one) begins, stocks naturally outpace bonds so the need IS for more cash or bonds.
The question was actually directed to the OP, but any answer will do. If the question means "should I rebalance now?", then I understand. But the question said "should I take the profits?". I was wondering where the profits were going to be taken to.
InvestingMom
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Post by InvestingMom »

Stick to your plan. Wait until your bands are triggered. The idea is to build up your nest egg and so I don't understand why you would consider taking some out? Was your original plan a long term plan?

To the others who have suggested taking some of the profits now....are you on the right forum?
Tramper Al
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Post by Tramper Al »

InvestingMom wrote:Stick to your plan. Wait until your bands are triggered. The idea is to build up your nest egg and so I don't understand why you would consider taking some out? Was your original plan a long term plan?
Part of my long term plan is that I reduce my stock allocation a bit as my assets in total increase. This is a kind of varying need to take risk step. So if the stock market goes up 30% or whatever, I can afford to reduce my %stocks in AA slightly, I reason. Note that this is not something I wrote up in my formal rules from the beginning (though I was 100% stocks then anyway), but I since have done so. This approach had me increasing %stocks in late 2008, for example, though I confess I did not always comply to the letter. And it just shifts my targets and their ranges, so does not necessarily trigger any action in the short term.
Last edited by Tramper Al on Fri Sep 25, 2009 11:27 am, edited 1 time in total.
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Imperabo
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Post by Imperabo »

OP, you're just looking for an excuse to alleviate your guilt about market timing. There's almost never a good reason to pay taxes unnecessarily, especially short term cap gains.
InvestingMom
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Post by InvestingMom »

Tramper Al wrote:
InvestingMom wrote:Stick to your plan. Wait until your bands are triggered. The idea is to build up your nest egg and so I don't understand why you would consider taking some out? Was your original plan a long term plan?
Part of my long term plan is that I reduce my stock allocation a bit as my assets in total increase. This is a kind of varying need to take risk step. So if the stock market goes up 30% or whatever, I can afford to reduce my %stocks in AA slightly, I reason. Note that this is not something I wrote up in my formal rules from the beginning (though I was 100% stocks then anyway), but I since have done so. This approach had me increasing %stocks in late 2008, for example, though I confess I did not always comply to the letter. And it just shifts my targets and their ranges, so does not necessarily trigger any action in the short term.
Not sure if I agree with your philosophy (in part because it implies that if your portfolio decreases then you might be taking on to much risk.) But in any case you say "a bit" and so if that works for you, then that is the most important thing. The OP didn't really describe his/her plan though? The original question really does beg the question as to what the OP was going to do with the money?

Investing mom
retiredjg
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Post by retiredjg »

antiguqman wrote:Should the person take the 100k profit or wait till bands are triggered.
I went back and reread your post a couple of times. I believe what you are really asking (since this is all in a tax-advantaged account) is "should I rebalance or wait till the rebalance bands are triggered?" I think several of us (myself included) got derailed by your "taking the profits" wording.

If your rebalance bands are too tight, you will find yourself rebalancing into bonds and rebalancing back into stocks fairly frequently. I don't think this is recommended by anyone. Bands should be loose enough to allow some drift back and forth.

If your rebalance bands are too loose, you may get too far away from your desired risk level (stock to bond ratio). Nobody recommends that either.

Perhaps it would help if you told us what your desired AA is and what the percentages have come to lately. Or you could tell us what your band rule is. Then folks might be able to say if your bands are reasonable.

Remember that the most important ratio is stocks to bonds. If you wish to be at 80/20 and you have drifted to 95/5, that is a significant change and probably should be rebalanced.
Should a person take the profits and go back to the allocation (1 million dollars) he had less than 90 days ago
This wording makes me wonder if you really do intend to "take the profits" out of the accounts. But you can't really do that with tax-deferred accounts. Except maybe Roth IRA. Is that what you are considering? Heck no! Don't even consider it!
InvestingMom
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Post by InvestingMom »

retiredjg wrote:
antiguqman wrote:Should the person take the 100k profit or wait till bands are triggered.
I went back and reread your post a couple of times. I believe what you are really asking (since this is all in a tax-advantaged account) is "should I rebalance or wait till the rebalance bands are triggered?" I think several of us (myself included) got derailed by your "taking the profits" wording.
Yep, I got derailed by the OPs wording. I think you are right retiredjg. If so, I agree with your advice.
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antiqueman
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Taking Profit

Post by antiqueman »

What I meant by "taking profits" was not to take the profits out of the tax deferred accounts. I meant should I sell because to me an increase of about 75k in a short period of time is alot of money. Before the market crash last year, I was up over 100k. My advisor told me not to do anything when the market started its descent so in essence I rode the hit down and lost most of what I considered "Profit". Now it is back up.

Is the consensus on the board , that you just let profits continue to accumulate even if the bands have not been triggered? Maybe I am not asking the question correctly and maybe I dont understand the issue fully.

I am not selling below what my asset allocation was initially. I am just reducing back to where I start and "locking" in the increase in a tax deffered account. The money would sit in the account in either cash or bonds.

My bands are 20%. So maybe that to high for me..
retiredjg
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Post by retiredjg »

antigueman, that helps a little. I think there are some differences in how words are used here.

Allocation/asset allocation - it appears you are using these words to refer to an amount. Asset allocation generally means stock to bond ratio. It does not mean how much money you started with.

Example, I think you are saying you are not selling below the original $1 million you used in your example. That is not what "allocation" is when we use that word here. I understand this is a word that can have different meanings. Just go with this meaning for this discussion please.

So, you started with $1 million, you now have $1.1 million and you are wondering if you should skim that extra $100k off the top and hold it in cash or bonds? Is that correct?

We don't really know enough to give an opinion on that. It would not be the way we usually do things here. But if your AA (asset allocation meaning stock to bond ratio) is out of whack, you might need to sell stocks and buy bonds to get your AA back to what you want. That would essentially be the same as "skimming the profit off the top and holding it in cash or bonds". But the purpose would be entirely different.

You say your bands are 20%. Can you say exactly what that means to you? And did you decide that or was it suggested by your advisor?

I believe you have a different approach to investing that what we generally discuss here. Keeping that in mind, the above answers may or may not make sense to you. But if we keep talking, maybe we can help you come to an answer to your question.
YDNAL
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Re: Taking Profit

Post by YDNAL »

antiqueman wrote:Assume the following. You invested 1 million dollars in equities less than 90 days ago. Your paper profits are 100k. (10 percent) All the assets are in tax deferred accounts.
antiqueman wrote:What I meant by "taking profits" was not to take the profits out of the tax deferred accounts. I meant should I sell because to me an increase of about 75k in a short period of time is alot of money.
Given a 10% gain in the original post and $75k number today:
a) It implies a $1.5 million portfolio pre-gain (750/750), assuming a 50/50 Asset Allocation.
b) It implies a $1.250 million portfolio pre-gain (750/500), assuming a 60/40 AA.
c) etcetera.

I re-emphasize my previous observation that your AA is not right for YOU. It seems that $750k in Stocks does not match your risk tolerance (up/down) and needs adjustment.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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