Should I Sell Today?
A Reader asks if now is a good time to sell equities (stocks)
© Kirk Lindstrom
Sep 15, 2006
I take profits when my asset allocation is at the top of its range. Likewise, I buy when my allocation is at the bottom of its range. This is not market timing.
September 15, 2006
I was asked in our Bob Brinker Discussion Forum by a reader if now was a good time to take profits. The following was my answer that I feel is worth sharing with everyone.
In response to Total Stock Market at All Time Highs posted by Moonlight:
You wrote: I got out of the market jan 11, 2000 and into GNMA and made 19% then Mar of 3000 S&P a little higher than 800 got back in with VTSMX. (Vanguard's Total Stock Market Index Fund) Oh yes I too bit on the QQQ's thing (Brinker's recommendation to buy QQQQ in Oct 2000 in the $80's).
Congratulations!
You should sell your timing services as well as choice of what to buy to Brinker because your choices were exceptional and you significantly out performed all of his portfolios! I'd be curious why you chose to buy GNMAs in 2000 when Brinker said to put the cash into money funds because he thought interest rates would continue to go up.
You wrote: Question, would now be a good time to take maybe half the profits, that's $41500 or sell half of my shares.
I don't recommend anyone try to time the markets. Taking profits never hurt anyone so selling some now to lock in gains is better than later, if the market goes down. The risk you take is the market keeps going up, you suddenly decide you have less allocated to stocks than you "really want" so you buy back in at higher levels. Once you start to do that you risk joining the large group of people who under perform the markets.
Make sure you read "Winning on the zigs, losing on the zags" explains how the average investor made 2.6%, roughly 1/5th the return of the S&P500 between 1984 and 2002.
You wrote: My tolerance for loosing isn't very good. Not at my age.
People with low risk tolerance should not have more than 50% in the market and they should be well diversified. I tend to like 120% in the market less your age as a maximum. The equities are there for inflation protection so any money in TIPS or Ibonds can further reduce this. Someone 70 yrs old could be 30% equities, 10% TIPS, 10% Ibonds and 50% Total Bond (or GNMA) and have a wonderful portfolio as far as I am concerned. If you want to put 6% into my newsletter Explore Portfolio to try and increase your return, then you could be 28% equities (in my core index funds), 9% TIPS, 9% I Bonds, 48% Total Bond and 6% in my explore portfolio (which has some overlap in all the categories which is why I took a bit out of each.)
You wrote: I've taken profits on Cacs and gotten back in to do it again,several times, thanks to you
Good job and congratulations on having what it takes to buy low and sell high.
It is amazing how well we've done on CACS trading the volatility to get even more gains this year than the 30% it is up YTD!
Boo yaaaa!
Free Charts and Other Stuff
Since beating the market is hard for most to do, I recommend a "Core and Explore" approach to investing. Core means place 80 to 99% of your money into a CORE, buy-and-hold, no load, mutual fund portfolio and then EXPLORE with the remainder. To build your core portfolio, I suggest a diversified basket of index funds.
I welcome more questions and suggestions for future articles at Kirk's Market Thoughts.
Kirk Lindstrom:
DISCLAIMER: Answers & my words are general in nature, are not meant as specific investment advice, and do not necessarily represent the opinion of anyone but Kirk. Individuals should consult with their own advisors for specific investment advice.
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Comments
Sep 22, 2006 9:36 AM
Moonlight
:
I did some asset allocation selling 9/19/06 I bot in March of 03, total stock market a large amount, then added twice smaller amounts. . I just reduced total stock market 66% . Taking back original purchase with profits of 20% per year. S and P up to 1330 something from 800 when I bot. Even if it goes up from here I feel good staching away some in my sock.
Sep 22, 2006 10:03 AM
allancoleman
:
it's never bad to take profits . as Warren Buffett says , " never lose money " in his Rule number one . and repeats in his Rule number two when he says , " don't forget Rule number one " . :)
Sep 22, 2006 6:56 PM
Moonlight
:
Kirk,
23 years with HP stock, guess that qualifies as long term.Is the tax rate 5% like I heard it was for stocks held 5 years?
Wow I think we have a similiar comfort zone, I didn't do European market, lost out there. What a world we live in, making money without sweating like we used to. I am so grateful to be in such uplifting helpful, generous with there time group of people and with courtesy and respect.23 years with HP stock, remarkable.
Sep 22, 2006 8:43 PM
allancoleman
:
I believe you are talking about the " Qualified 5 - Year Gain Rate " , Moonlight . Beginning in 2001 , taxpayers who would normally have had to pay a 10% capital gains rate were allowed to pay a lower 8% rate for a capital asset HELD FOR FIVE YEARS . Similarily , taxpayers who would normally pay a 20% capital gains rate were allowed to pay an 18% rate on capital assets HELD FOR FIVE YEARS , BUT with the limitation that the asset HAD to be purchased in 2001 OR LATER . The new lower capital gains rates override this rule .
I believe there may also be a special formula to calculate your capital gains using this FIVE year rule even for stocks purchased BEFORE 2001 , BUT , PLEASE see your own tax advisor for further details .
There is a 5% capital gains rate for those in the 15% Tax Bracket or Below . And for the 2008 Tax year ONLY , this capital gains rate is ZERO ( NO typo ) for those in the 15% Tax Bracket or Below . That's why i intend to sell my ESOP stock i converted to common stock and sell it in 2008 and keep myself UNDER that 15% Tax Bracket for that calendar tax year . This ensures maximum profit on the sale of my company stock .
This is the essence of long term tax planning . And why it's so darn critical for each individual investor and taxpayer to learn . Not many planners have as much personal interest in your own personal circumstances as you do and know for yourself . After all , it's your money . :)
Sep 23, 2006 7:54 AM
Moonlight
:
Allan,
You sent such important info on taxes. I try to keep up because some times a day, just one calander day can make such a diffenence in the tax rate you pay. I'll keep 2008 clearly in my mind, unless of coarse taking profits is more important. while there are profits. I learn so much here, It is a joy. Thank you so much
Sep 23, 2006 8:16 AM
allancoleman
:
No problem , Moonlight . And , of course , you're right about profits in a particular stock being more important than the tax considerations . However , it is also important to know that in a perticular tax year that there is going to be a ' loop hole ' for that tax year ONLY that may benefit one's own circumstances . I'll be watching as we get closer to 2008 to see if the government is going to close this tax loop hole for that year . ? ?
In my own case , with my own company stock , waiting another year isn't likely to change my particular companies' fortune so this tax loop hole will definite benefit me . The other complication is that there are alot of different capital gains rates now depending on your particular tax bracket , wehether you held for a certain period of time . Wehther it's a dividend and if that means certain guidelines . Taxfrees have their own guidelines . The capital gains rate paid on " depreciation recapture " was 25% for a certain period of time .
And you're right , sometimes one day matters . Roth conversions versus Roth contributions is like that : Roth contributions are dated for April 15th of the following tax year and Roth conversions are dated by calendar year's end . So , for example , folks who want a Roth conversion for 2006 have to get them done by December 31st of this year and folks who want to start or contribute to a Roth have until April 15th of next year to get that task done . Generally when it comes to IRS regulations i don't like to run my day counts too close to their limits . RMD are like that . If one takes advantage of the IRS April 15th of the year AFTER one is 70 and 1/2 , you may be subject to TWO distributions in the same calendar tax year . And if you're not happy with one RMD , you're certainly not going to be happy if you have to take TWO in the same calendar tax year because you waited too long . I've also heard / read stories of custodians giving taxpayers the WRONG RMD and the penality for that error is 50% . :(
Sep 23, 2006 12:06 PM
axolotl
:
.........and urge more complexity and twists in the income tax. More complexity is more headaches and lost productivity and requires more IRS employees. A whole army of CPAs and tax attorneys is good too. Never urge replacing this monstrosity with a flat tax or VAT tax. :-)
Sep 23, 2006 12:27 PM
hickfish
:
Ax, I nominate your post for the best of forum.
Classic! Of course, be careful with VAT or we'll get that along with present income taxes. I see it all over the world.
Sep 23, 2006 12:28 PM
allancoleman
:
Boy , I sure agree with your post , axolot1 .
Unfortunately there are too many special interest groups and politicians who want to give special tax deductions to the disadvantaged for numerous different reasons that I don't think it'll ever be likely . for myself , i figure i can do as well with any tax system because i'm willing to spend the time necessary to fully understand the tax code , no matter what it is , to take the best advantage of it for my own personal circumstances . Most aren't willing to do that , much less keep themselves educated on the changes .
Sep 23, 2006 12:33 PM
allancoleman
:
I agree with your feelings about VAT too , hickfish . Some countries in Europe really struggle with the VAT tax structure . And it's probably one of the many reasons that European countries don't seem to be able to match US growth .
