Insights & Advice

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Taking profits is a Personal Choice

We’ve seen some profit-taking this week and as the year winds down, we may see more. That doesn’t mean the markets can’t go higher. It just means that for some investors, who got in early in March or before, it’s time to cash in some of those winnings.

“Should I sell?” asked one client from New York, who has made quite a bit of money since early March.

“That depends on how much you want to risk?” I asked, “Remember, no one will fault you for taking a profit.”

Naturally, investors will want to consider the tax consequences of taking profits, especially short-term profits, which are taxed at your income tax rate. Of course, if you are talking about an IRA or 401(K) or any other tax deferred account then taxes are not a consideration.

There is an old saying on Wall Street—“Bulls, Bears and Pigs”—with the last epitaph attached to those who allow their greed to overcome their common sense. Let’s take an example. You purchased an emerging market stock or fund back in March and now you are up anywhere from 75 to over 100% in just nine months. You made back all your losses last year and then some, but you are still holding on to your investment. Ask yourself why.

I have often mentioned that fear and greed are two emotions that the astute investor must battle each and every day.

“It’s going higher. I’m gonna hold on for $90 a share,” I recall one client with a weekend place in Lenox said to me back in November of 2007.

Sadly, that particular stock never did reach $90 but it sure did see $18 before the end of 2008. And it still hasn’t hit $90. He sold his shares at about $45 and walked away with a slight loss. He was fortunate.
One tried and true method of taking profits, I have practiced with some success, especially when you are up big, is to sell enough of the investment to get back your original principal and let the rest ride. Now, you may want to take more profits then that.

Sure, the markets or the security may continue to go higher but that’s fine. I’ve maintained an attitude that I’m just leaving room for the next guy to make a profit. Put another way: I will never sell on the top tick nor do I ever look back. Wouda, shoulda, coulda, exercises are for amateurs. Live, learn and go on to the next trade.

Taking profits is also a wise move when you know you are going to need the money. Don’t wait until the down payment on your new house or your kid’s college tuition is a week away. The last thing you need or want is for your profits to evaporate just before you need the money. That happened to me a few years back when I was planning to buy a condo in Montreal. I had a big profit in a biotech stock that was a ‘sure thing’ to break $20/share on the upside. So I waited. Over one weekend the Phase III results were announced—a big disappointment—and the stock opened up that Monday down $14 a share. That was the end of my condo.

“But what if I haven’t made back my losses yet from 2008, what do I do?” you might ask.

I suspect that many investors who jumped back into the markets in March are ruminating on this very subject. In some ways, consider this a luxury problem. After all, you could still be in cash or worse. So as the year end approaches consider your options and if you have any questions don’t hesitate to call or e-mail me.

Posted in A Few Dollars More, At the Market