How Do I Protect My Investments?
The stock market has been flying high and many of us have seen gains in our investments – some unrealized and some realized gains! For those that are unrealized, what can we do to protect those gains? There are a few ways to tackle this, what I and many others call a good problem to have 🙂 And the fact is at some point the market will drop, when and by how much nobody knows. So should we stay put, sell what we have, buy more, ah decisions decision decisions.
Sell It All and Run
Not advised by me. You’ll end up having all this liquid cash and then twiddle my thumbs; well now what do I invest in…or should I be irresponsible and take a vacation for no good reason. And guess what, even if we decide to buy an investment, chances are high it’ll be at a high price.
The other issue with this is depending on how long you have held the investment(s) you are selling off, come tax season time; you may have to pay a lot in Capital Gains. Depending on your income level and how long you have held your investment(s) it could be between 0 and almost 40%, check out this simple article from Turbo Tax on Capital Gains: Capital Gains.
The third potential problem is the cost of selling. If you own multiple securities maybe 5 to 10 different ones than broker commissions are based on the sale of each type of security. For example, Scottrade charges $7 per trade, so in this case, your cost of sale could be $35 to $70, which I know isn’t really a lot, but it’s still something you may want to consider. And when you want to re-enter the market, don’t forget the cost of buying again!
Continue to Ride the Wave
Not so sure about this option. If you decide to hold on to your investments and not do anything, there is, of course, the risk that they could fall – AKA wave wipeout. We don’t as informed intelligent investors want to be too optimistic and not think anything bad will never ever happen.
Instead, we should continue to watch the market, keep up to date with earnings of large market-moving companies, social and economic development domestically and internationally to see how changes may or may not move the market. It might also be advisable to learn how to protect against inflation, because you will have to ensure that your investments give you the same purchasing power, say 10 years from now as they do today. A great example, which I hate to admit, is Under Armour (UAA). I bought this several months back and, although the market and its competitor Nike (NKE) have been going up or least holding on a bit, it has dropped significantly. Check out the chart below where UAA is down over the past year by around 50%:
Rebalance Your Investment Positions
A great way to protect your investments is to rebalance them, and this one is probably my favorite. Rebalancing hedges against losses because what goes up may come down and that’s why it’s important to fall back to your original investment objectives. It helps us to avoid the trap of being greedy by over-relying on the gains on one or two investments which may be outperforming the rest of our portfolio.
Additionally, rebalancing may make you pay taxes, but that’s a good thing because it means you’ve made money since you’ve sold potentially overpriced stocks. And if you have different accounts that that are before and after-tax, you can somewhat manage how much to pay in taxes either now or later; that is when you retire.
Even though you are selling good investments you are in-fact protecting yourself from the risk of less exposure. This is also known as portfolio risk which per Investor words is the chance that combination of assets or units within an individual group of investments fail to meet financial objectives.
And finally, don’t forget to diversify as a way to protect your investments. The easiest way to achieve this is by owning an Index of ETF that invests in the entire market. If you have separate stocks, you may want to consider investing in a fund that is uncorrelated. For example, let’s say you own stocks in Finance and Technology. Then you may want to consider adding or rebalancing to own in an uncorrelated sector like Energy.
A good way to put this as presented by The Street.com is “Having a properly diversified portfolio is like playing defense. Since markets have been doing so well lately, especially in the U.S., it’s time to move from offense to defense.”
Have you experienced gains in the market in the past 3-5 years? How are you protecting those gains?
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Great post! We try to rebalance to protect our portfolio. While, the market is up as a whole there are always some sectors that lag behind, depending on what stage of the economic cycle we are in. We try to lock in some of our long term gains by sell and then redeploying the proceeds into stocks of high quality companies that lag the overall market. One example of that right now are energy stocks, with gas prices so low many well known and safe energy companies are lagging the overall market.
Thanks! I should look into the energy companies as well…nice tip. Maybe I’ll look into an energy ETF to continue to be diversified. It’s hard to find value though in an up market.
I feel like this is the time that people feel super confident and like to show how smart they are in the market. I feel like it’s going to be a rude awakening. Heck, I read today that the VIX was at it’s low. So clearly people are confident in the market but I’m not sure why. There seems like a ton of trouble on the horizon. But clearly the market participants aren’t worried.
For sure. When times are good people feel good. I think many of us are wondering what will be the triggering event(s) that will set the market off to a downfall. That’s why it’s important to take steps now and be prepared for the blow.
It’s funny looking at some people’s views on the market. A stock could go up 50% in a short period of time and no one blinks an eye. But when something falls 5% in a short amount of time, everyone loses their minds. (Batman reference anyone?). Just try to stick to the long term strategy and it will work out.
Ahahaha, I loved the Dark Knight! Of Course and many people (including myself a lot of times) won’t check their investments against comparables to see if they can get a better return if we are in the positive column. Good times make us a bit lazy I suppose.
In my camp, we know a bunch of friends and coworkers who are holding onto buckets of cash waiting for a fall. Confidence seems low here in Seattle, it might be the gloomy weather. There’s lots of waiting here. My husband and I are not going all in but we’re not hoarding buckets either. We’ve only experienced gains in the past 3 years and for the perma-bears…it’s suspicious..xD
I can understand how it may be hard holding on to cash. It just seems so tempting at times. I haven’t done well in the past in timing the market, and I plan to invest for the long-haul anyway. Isn’t is always gloomy in Seattle? 🙂