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When to sell some profits?

Thanks in advance -- I continue to learn from everyone posting here and appreciate that.
My question is about when to harvest profits (in retirement accounts). Like many folks, my portfolio took a hit in 2008-09 and I patiently waited that out before making too many changes. Many of those investments (mutual funds and ETFs) are up 20-40% since then and I admit to feeling nervous as the markets bullishly march upward while simultaneously there is so much anxiety about the stalled economy, interest rates, Fed policies, etc. While I'm someone who believes the recovery is (slowly) happening I also feel like some kind of correction is inevitable.

I'm not entertaining selling everything and stashing it under the mattress. But has anyone sold profits off the top, the idea that you'll then re-invest if/when the market does correct?

I realize there's no crystal ball but I want to be smart about this. I'm in my early 50s, self-employed writer (which means I've funded all of my retirement over the years). Thanks for any thoughts/opinions.

Comments

  • edited June 2013
    If under 50, you shouldn't be worrying IMHO.

  • edited March 2013
    I agree with Hank says a good deal. I've tried to be much more long-term with a lot of my holdings, almost all of which pay significant dividends (so I'm getting paid in the meantime), but there was one stock yesterday I sold after it became absurdly (to quote "Spaceballs", it had reached "ludicrous speed") overbought (an RSI of near 90). But I here's the thing: it was also similarly way overbought about 8-9% ago. You can't rely on technicals alone, especially with a market like this.

    I'm not saying don't take profits if you have them, but attempting to time something in this market is a tad difficult. If you want to sell, sell - and while it may keep going, you'll likely get another pitch in a few months (or not, who knows really, with this market.)

    In the meantime, you can look at what hasn't done well - a number of the oil names have not fared that well in the last couple of years. People are starting to drop the low beta/high boring names that have done well so far this year (Procter and Gamble, General Mills, the latter just increased the dividend) - I still think it's not a bad idea for those who are in/closer to retirement age to have some exposure to these low-key, consistent names that offer many things everyone here likely uses.

    Hank said: " (I don't wish to share my thoughts as to where I think that neutral point might be today.) "

    Awww, why not? I'd be curious.
  • No one will have a better answer than you. In fact, you will get probably as many answers as there are investment plans, reasons for investing, ways to invest, funds or stocks to invest in etc.etc. etc.. The simple fact is that we all are at different stages in our investment journey, each following our own path to get to the top. What I think or do may be totally scary and utter nonsense to everyone else here.

    So, having said that, I agree with Hank that if your under 50 I might not be too concerned if you have a plan that you're currently comfortable with. Can the market turn on you? Of course, but it can also continue to propel ever higher. I react to the price. If the market starts to drop I'll get out. Realize though that I am saying this as a semi-retired investor mostly in blue chip dividend paying equities. The stuff I'd sell would be recently purchased flyers bought strictly for mo-mo with the added kicker of ridiculous dividends to boot. These were never intended as long term holds but rather as cash machines to fuel further investment in the blue chips when they go on sale again. Which they will. I don't know when but they will. Mr. Price will tell me.

    OK, so a lot of babble and probably very little help. If you're worried then know that nobody usually goes broke taking profits. If your afraid that your portfolio will take another hit similar to 2008-09 then maybe rearrange your portfolio to one that can withstand a similar market drop without as much backdraft. Stay alert and stay engaged. Best of luck to you.
  • edited March 2013
    Hello,

    Not saying this concept should be followed … but, here is what I have been doing since the S&P 500 Index reached 1425.

    Since my risk tolerance for equities ranges from 40% to 60% within my portfolio I start selling equities down when they are close to making new 52 week highs thus reducing and controlling my allocation to them. Conversely when they are towards 52 week lows I’ll start building my allocation to them while staying within my allocation range of 40% to 60% which was determined by a risk tolerance analysis. I am striving to move towards the low range when equities are at 52 week highs and to move towards the high range when equities are towards their 52 week low valuation. In short words, buy low ... sell high ... while being mindful of my allocation range to equities. In 2009 and 2010 I was more towards the 60% range and since then I have been in a control sell down mode along the way even though I have made some special buys from time to time when I felt good value could be had.

    Since the S&P 500 reached 1425 … I have been selling about a sum equal to one percent of my equities at each 25 point step mark of 1450, 1475, 1500, 1525 & most recently at 1550.

    A little math, each step ranges about 1.7% to 1.6% between them so this allows for some equity asset growth along the way. In short words equities have grown by about 8.8% form the 1425 step to the 1550 step … and, I have taken a sum equal to about 5% of this to my pocket while letting the other 3.8% ride. So equities have still grown while I have been in my sell down process and they currently account for about 46% of the portfolio (by Xray analysis).

    I’d much rather book some of my profit in a market uptrend rather than trying to make it all in a market pullback when there is a lot of selling activity occurring by others. If I decide to sell in a market down draft it would be more for capital preservation move while being mindful to where my equities are bubbling within my allocation range just as I am doing during this bull market upward run.

    If I have not right sized my portfolio's equity allocation by the time a good market down draft presents itself I'd be doing so pretty quickly in getting towards the low range of my equity allocation. At my age of 65 capital presevation is important as well as the prospects of growing the portfolio over time.

    Not saying this is perfect … But, it is what I am currently doing and it draws from the lessons I have learned through the years from not only from my late father but Mr. Market as well.

    So with this ... I wish all good investing and good fortune untill we meet again. I am going to go silent for a while and just sit back and just watch the board. My golf league will soon start play; and, I need to spend some time in getting my golf game in shape.

    One of my late childhood friends was a PGA pro golf tour caddy ... Harry Caudell. Now it is time to see if I can put to use some of the things that Harry brought to my game as well as the late Clayton Heafner who gave me my first golf lesson at the age of six and one of my city's favorite sons who represented the USA many years ago with his winning Ryder Cup play. For those that would like to expand their history knowledge in golf I have linked some information about Clayton below.

    http://en.wikipedia.org/wiki/Clayton_Heafner

    So, with me, it is now off to the pratice tee that I go ... And we shall see ... "How good it can be to be on the tee with Harry C!"

    Good Investing ...

    Skeeter
  • Your question pertains to retirement accounts. You can "transfer in kind" to other retirement funds if these items are in an IRA, or you can roll-over a 401k or 403b into an IRA. Otherwise I dunno how you can "harvest" profits without paying a 10% IRS penalty for early withdrawal. I suppose if you're holding a Money Market Acct, you could simply park money there, inside a Retirement frame.

    I've never used a MM fund. I have indeed spread my money out into several more funds, so that the portfolio is not so concentrated. Even so, I have big barbells at each end, and (much) smaller positions between the two of them. Along the way, I've chosen both equity and bond funds (I'm 58) which offer either monthly or quarterly dividends, and still own some that pay the old-fashioned way just once, at the end of the year. As you surely already know, the only way to take advantage of compounding is to reinvest all profits. Feel free to rearrange the profits into Fund A or B or C, but don't cash in. That 10% early withdrawal penalty to the IRS for cashing-in anything before age 59 and a half just sucks, then you'd have to pay tax on the income, anyhow. If you've pre-paid taxes with Roths, you'll still owe the early withdrawal penalty if you take the money into your hands, rather than shuffling and readjusting your profits. You can do THAT all the live-long day. But remember to KISS it. 'Keep it simple, stupid."

    I opened a small position in late August last year in TRAMX. It looks to be on pace to grow maybe 20% by the time a full year goes by. I'm thinking I'd "harvest" profits by transferring that profit into a different fund within TRP, thus adding to the monthly div. I'd receive from that other fund, which is PREMX. Bond funds are facing headwinds. Don't expect miracles. ..."Break a leg."
  • edited March 2013
    If you were willing to sit through 2008, don't understand why you can't sit through the good times too. It's like why let your losses run in the bad times while cutting your profits short in the good times. Not a very good wealth creation technique.
  • Just googled "age based investing" and narrowed it to the below articles for basic and somewhat pertinent info. Anyways,some good ideas posted by everyone here.Being retired myself and always being a small-cap fund investor and believer,I have trimmed some positions on these recent highs but continue to look for new funds or as Scott reminds everyone to look @ asset plays, dividend stocks,BDC's, REIT's and companies growing dividends,with the caveat that no asset class is without risk.Remember in the worst of trhe recent crash,YOUpaid the US Treasury to hold your cash!
    Start a Google Finance watch list of possible ETF's or dividend stocks and buy on weakness from the cash you may harvest from trimming your positions.Seeking Alpha web site has plenty of ideas on income and dividend investing.
    In the fund sector most posters reccomendations for approaching retirement are the asset allocation funds.My personal faves (and I own) are BRUFX,FPACX,MFLDX,and a small allocation in WBMRX ,which can be slowly built over time @TD(see below).But all the posters here have posted plenty of options they feel comfy with in their own circumstances,research, and wisdom.
    I have retirement accts at the big 3 discount brokers and there are some funds with low minimums and subsequent minimum investments,if you do some poking around.One of the best is a $500.00 minimum in DWGOX with no minimum subsequent @TD (not automatic).It's $35.00 thursdays in DWGOX for me.Sometime in you retirement, if not before, gold probably will approach $2500.00.I want that insurance.(one big problem with TD is their 180 day hold period in RPHYX,everybody's fave cash position).Beware.
    I was going to post this observation in another thread concerning investing in Walmart stock or bonds.But here it is. I had an aquaintence ,who,starting in the late '60s,would on every payday(every two weeks),went to a coin shop and purchased a roll of silver dollars.(I think 20?) Any way, the right investment on a regular basis with enough diversity can insure a somewhat secure retirement. Unfortunately I never found that coin shop! Anyways,good luck as you financially prepare for retirement and to all a great week-end.Go Badgers and LADY BLUE HENS!
    http://personaldividends.com/age-based-investing-for-retirement/

    http://personaldividends.com/age-based-investment-strategy-can-hurt-you/

    http://personaldividends.com/investing-basics-asset-allocation-10-5-3-rule/
  • edited March 2013
    Advice all good here. I like Hank's qualifier about age and proximity to retirement...and how that retirement is structured. If you have a pension, for example, likely you can hold volatility longer in seeking growth or high dividend. In any case, congratulations on having wisdom and ability to hang-in there through 2008 and come out ahead...outstanding. Now that you are over 50, I would not want to risk a substantial draw-down again, so allocate accordingly. If that means taking profit on some amazing holdings, do it. Even the best equities and equity funds can quickly lose 50%...and more...in terribly short order. Just ask traders around the world who experienced October 19, 1987. And during the 2008 crisis, some excellent "blue chip" companies and high profile funds drew down 80%! Personally, I believe this reluctant bull has more room to run, but I try to allocate recognizing the market can go seriously up or down rapidly. Bottom-line: allocate assuming you lose big tomorrow on the more volatile portions of your portfolio. If the market goes up, great. But if it goes down... You need to be able to sleep soundly, either way. If you can do that, you've allocated appropriately.
  • edited March 2013
    Hi Charles,

    Thanks for your continued comments and commentary on the board. Again, good comments here again by you. And, so that you know, I went through both events as an investor ... the 1987 event along with the big 2008 crisis. By keeping my head I surived both chalking them up to learning experiences. Some say let your winners run and perhaps for them this is ok ... but, for me through the years I have seen too much of my unrealized gains get vaporized in sudden and swift market pull backs. Now, I have a plan to harvest some of my gains in steps along the way.

    Have a great day ... and, thanks again for your continued input.

    Good Investing,
    Skeeter
  • edited June 2013
    Appreciate the input by Charles & others.
  • Our philosophy is that ANY time is a good time to capture profits. That doesn't mean you should grab every thousand in capital gains. But rather we would look at a holding and evaluate 1) what was the total amount invested, 2) what is the gain, 3) how quickly has the gain occurred, and 4) consider any tax consequences. The final decision is "Where do I put the dollars from the sale?" Consider either undervalued sectors or whether your target allocations are out of line.

    It's more than just waiting until your allocations are out of line, since individual holdings in the same class can vary wildly in their performances. Our process is not to sell out of anything, just capture the gain back to the amount invested.
  • Rats. I had a postie get throttled.

    I believe folks should take profits based upon their ability to sleep. Rebalancing and reallocation all play a role, but as Bob just said, when you hit a a double or triple, bleeding down some of the gains is prudent. For example, with a double, you've doubled your money in that you're up over 100%. Why not take your original investment out and continue to let the profits ride. It's like playing with hour money. Good stuff.

    peace,

    rono
  • Hi VirtueRunsDeep,

    Congratulations for being long the current equity market.

    I assume that you trust your existing portfolio; that you are reasonably satisfied that you made both a prudent asset allocation and wise choices within each category.

    It is important to remember that you should have a definitive, well-grounded reason to sell. The evidence is overwhelming that individual investors make poor timing and product selection decisions. We underperform the funds we buy because of poorly timed entry/exit decisions, and we frequently sell holdings that subsequently outperform our replacement positions. Be very, very careful when planning a sell.

    The sell decision is likely the most difficult that confronts and confuses just about every investor, even when only contemplating a partial portfolio downsizing. Anxiety escalates. Of course, that’s not the case with market speculators (frequent traders, gamblers). This disparity highlights the need to know what type of investor each of us really is.

    We investors typically overreact. That’s partly why the marketplace in never quite in equilibrium, why we merely approach total efficiency, and why shrewd Operators (Warren Buffett, Ed Thorp, some Hedge Fund managers) gain excess returns. A few Guys just have more resources and better instincts in how to play the money game. For most of us, it’s a constant struggle.

    A couple of days ago, MFO’s researcher Ted posted a Link that summarized the investment wisdom of several prominent market wizards. The distinguished Sir John Templeton was among that group. Several of his rules are especially relevant to your question.

    Sir John said: “1. Invest for maximum total real return”. That maxim essentially translates into a maximize Geometric (compound) return rule after adjustments for inflation and return volatility (standard deviation).

    A very close approximate equation that translates average annual return into Geometric annual return is simply the average yearly return minus one-half times the square of its standard deviation. Geometric return is always less than its average value.

    As Einstein observed, compounding is a most powerful magical ingredient. So in many circumstances, permitting a winning investment to ride, to compound, is a competitive strategy if maximum returns are a goal. Yes, that increases portfolio volatility, but it maximizes end wealth. It requires a strong risk tolerance constitution, a commitment to the plan, and adequate reserves to survive the guaranteed bumpy ride. Diversification helps smooth that ride. That’s why Templeton noted: “7. Diversify. In stocks and bonds, as in much else, there is safety in numbers” and “15. There’s no free lunch”.

    Sir John’s last admonition is most pertinent to your quandary. He said: “16. Do not be fearful or negative too often”. We all do tend to worry far too much. There is indeed a delicate balance between being too conservative and too aggressive.

    Admittedly, in gambler’s parlance, both under-betting and over-betting can be hazardous to end wealth and happiness. Since future market rewards are an unknowable uncertainty, your tactic of making incremental portfolio adjustments is prudent. I too have adopted that risk management policy.

    Nobody presciently forecasts future market rewards with any persistence. A recent Forbes article addressed that issue convincingly as follows:

    http://www.forbes.com/sites/rickferri/2013/01/10/ts-official-gurus-cant-accurately-predict-markets/

    Thousands of experts have attempted to predict market tops; thousands have failed. The marketplace has far too many interactive parts; its topography is far too complex for precise projections. But some metrics might be useful to serve as guides. The metrics likely should include contributions from macroeconomics, microeconomics, momentum effects, government policies, and investor sentiments. It would be an imposing array of numbers that would require sophisticated analyses, likely on computers.

    That task is too burdensome for the private investor, but not so for institutional agencies. Models using scores and scores of input parameters are fed into institutional computer programs on a daily basis. It is not clear that all this expertise and modeling have significantly improved our composite forecasting accuracy. We still can not reliably predict market reversals or economic recessions. But some signals can be useful to provide some generic, not fully accurate, guidance. False signals seem to be a persistent residual in all analytical methods.

    Unless you want to be a slave to the marketplace, I suggest you limit your monitoring of these signals to a small number that you can easily access.

    For those purposes, to gauge market momentum I use a variant of the standard Simple Moving Average (SMA) statistic. I examine the relative positioning of the 65-day and the 200-day S&P 500 SMAs that the WSJ report every Monday.

    To gauge overall market valuation, I simply review the S&P 500 Index’s Price-to-Earnings ratio (P/E) also found in that same WSJ chart. I am very sanguine when its value is below 15; I am still in my comfort zone when it escalates into the twenty range. I become increasing troubled when the P/E ratio penetrates the 30 level. That’s an overheated marketplace.

    Profits are tightly correlated to GDP and GDP per person growth rate. For a developed economy like the US, a healthy value like 3 or above is great for stocks. In the US, GDP is mostly dependent upon two factors: one-third on population growth and two-thirds on productivity enhancements. Since population increases at about 1 % per year, a level of GDP per person growth rate of 2 % is needed. So monitor GDP data. We are presently slightly below that goal, but are moving in the correct direction. I am guardedly optimistic.

    Inflation is bad for both the bond market and, in the short-term, for the stock market. Today, it remains at an attractive level. The long range prospects are not encouraging since the government printing of money weakens the dollar without producing actual real goods to absorb the flood of money. Inflation is a long range threat.

    The behavioral economists have identified sentiment as a key market contributor. I use the AAII investor sentiment index as a rough inverse measurement of the overall populations investment feelings. A high relative number is bad news since it portends an over zealous investor cohort. It is readily available at the following website:

    http://www.aaii.com/sentimentsurvey

    It is currently slightly above its historic average and moving still higher. That’s a cautionary signal since it is useful as a contrarians indicator.

    I do use a few other metrics to serve as a guide to my investment decision making, but if I am not yet boring you, I am boring myself.

    I do hope this gets you thinking to select a few statistical parameters to inform your decision making. All of these are imperfect inputs into an uncertain decision. I recognize that some signals will be positive while others will be negative. Mixed outcomes are the rule, not the exception; they hardly ever all point in the same direction. I have no formula to resolve this dilemma. Unfortunately, intuition, experience, and heuristics must now be deployed.

    That’s the way the marketplace resembles gambling. There are many similarities to both processes. With the application of a few rules and solid money management discipline, you can improve the odds of a fat retirement portfolio.

    Others at MFO have done so; so can you. I like many of the suggestions that earlier responders have contributed. It’s up to you to assemble a coherent plan from them. It’s doable.

    Good luck, especially since that’s an important factor in all investing.

    Best Regards.
  • edited June 2013
    Reply to @MJG: Overall good analysis & advice. I liked Sir John.
  • MJG
    edited March 2013
    Reply to @hank:

    Hi Hank,

    Thank you for your rapid, kind, and informative reply to my late contribution. I appreciated it, and surely all MFO forum participants will appreciate it. It added a deeper diversity of opinion to the discussion. We all benefit from that.

    The primary purpose of my submittals is to identify and possibly suggest investment tools that might contribute to a better market understanding and a more informed general portfolio assembly.

    I try very hard to be as neutral as possible with all my postings relative to everyone’s specific portfolio holdings and potential actions with that portfolio.

    I simply am not qualified to propose specific portfolio recommendations or changes to an asset allocation plan. I do not know enough about the very special circumstances of anyone’s financial position and life status to be comfortable providing such bold advice. So I typically punt on that issue.

    I like to characterize myself as a laidback, relaxed investor. I’m from Southern California so I fit the stereotype. For example, I do deploy the statistical metrics that I highlighted for VirtueRunsDeep, but I do so in a non-formulaic manner. I do not rigorously weight each factor that I scan; I softly assess the overall picture these metrics paint.

    Given that I believe that the MFO forum is populated with very well informed investors, if I were asked to assess the current portfolios of any member, I would judge their overarching holdings to be just perfect for them. I anticipate that each member’s portfolio is properly assembled to satisfy their very specific and personal needs.

    That philosophy is equivalent to the reply I would give to a question about the correct size of any community. In my opinion, the proper first-order response to that question is “its current size”. Some incremental changes might be warranted, but folks naturally reside where they are most happy or where circumstances demand. Likewise, investors naturally gravitate to a portfolio that is most satisfying to their many needs and objectives. A natural equilibrium is established; water seeks its own level.

    Again, thanks for your thoughtful commentary; it helped crystallize my positions on the subject matter.

    Best Wishes.
  • Reply to @MJG: Appreciate your kind & thoughtful response. Regards
  • beebee
    edited March 2013
    Bob C makes a really good point (in the form of a question)...have a plan as to, what will you do with the "profits". Profits are in quotes because they are only profits if you take them. I have lost my share of 'profits" along the way due to not having a plan for the profits. I have spent some time thinking through this little understood dynamic...not so little when you think about the reason you and I invest...to make some "profits"!

    I like the idea of paying down debt with profits...corporations do this everyday and we applaude them for their "concern for the company". Remember your household is like a company. You probably have a number of holes in your overall financial picture you'd like to make whole...maybe its a lack of good healthcare or life insurance or long term care insurance. Maybe you need to set up a wedding fund for your kid whose is shacking up with her boyfriend. Maybe your driving around in a 20 year old beater. We all have plenty of holes to fill. Profits should help us fill those holes.

    A few years back I refinanced my home that I held nearly debt free. I got a 4% loan that is now tax deductible and I invested the cash. I purchased a condo in Florida 2 miles form the beach for 1/5 the market price of 2008. The home I refinanced will soon be rented to cover the mortgage and provide a little retirremnt income. Restructuring debt for me was like taking profits because I had created a plan.The cash was king when I negotiated with the seller of the condo. Additional cash went to work in equities that were a lot lower than they are today. I am now in the process of taking profits and paying off a portion of my home debt with profits. Investing is a patient process and requires us to be able to identify value. But when value eventually presents itself as profit we need to have a plan for those profits.

    Like savings, profits should help you diversify, stablise, and pave over the pot holes in your financial road map.

    Good Luck!

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