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. 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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