Should I be taking profits on long term stocks and stock ETFs?

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veagudoc
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Should I be taking profits on long term stocks and stock ETFs?

Post by veagudoc » Tue Jun 11, 2019 8:29 pm

I am 58 y/o and am looking to retire or go part time in 2024. I am maxed out on Tax Deferred 401-Ks and IRAs but continue to add to a taxable account w/ several Index ETFs, Factor ETFs as well as a few Stocks. I automatically reinvest dividends on most of the above.
Q: at what point does it make sense to start taking some profits (realized capital gains) and then maybe reinvest in a Dollar Cost Average fashion , to try to invest some of it at/after the next market correction (or recession)? After a 20% long term appreciation.
My fear it to miss out on any realized gains ? I know I will have to pay taxes on the gain at a max of 20%?
Thanks for your thoughts

venkman
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Re: Should I be taking profits on long term stocks and stock ETFs?

Post by venkman » Tue Jun 11, 2019 9:07 pm

What you're describing is market timing, and it's generally frowned upon in these forums. You should have an asset allocation that allows you to remain comfortably invested through all market conditions, without being tempted to buy or sell assets based on current valuations.

If you're worried about an upcoming correction, your AA may be too heavy in stocks. You can lower your stock allocation by directing all future contributions into bonds until your overall AA gets to a place you feel comfortable with.

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grabiner
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Re: Should I be taking profits on long term stocks and stock ETFs?

Post by grabiner » Tue Jun 11, 2019 9:12 pm

Welcome to the forum!

While you shouldn't be selling in order to reinvest after the next market correction, you may have a very good reason for selling because of the possibility of a market decline. You are only five years from retirement, which means that a market decline will significantly reduce your retirement funds, and a portfolio of about 60% stock is likely in order if you have a typical risk tolerance.

If you have stocks in your IRA or 401(k), it's better to sell those for risk reduction, as there will be no capital-gains tax due; you will lock in your previous gains just as well as if you sell in your taxable account. You can keep tax-deferred growth in your taxable account until you need to spend the money, or the account has too much stock for your risk tolerance.
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livesoft
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Re: Should I be taking profits on long term stocks and stock ETFs?

Post by livesoft » Tue Jun 11, 2019 9:16 pm

Answer: Never. It never makes sense.
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delamer
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Re: Should I be taking profits on long term stocks and stock ETFs?

Post by delamer » Tue Jun 11, 2019 9:24 pm

You need to determine a target asset allocation for your portfolio, and buy/sell assets only in order to maintain that allocation.

So if your target for stocks is 60% of your portfolio and stock prices have risen so that they now make up 70% of your portfolio, you’d sell enough stocks to reduce them to the 60% target. When you do so, it forces you to “buy low, sell high.”

This is called rebalancing, and is not the same as market timing which is what you are describing above. Market timing causes bad outcomes.

Here’s more information: https://www.bogleheads.org/wiki/Rebalancing

If you stop reinvesting dividends, particularly in the taxable account, you can use that money to help rebalance without tax consequence.

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