Mick, Re:If you have the chance to take profits, by all means do so. Small, but meaningful profits, when done repeatedly, is how fortunes are made.
Let me quibble with how this is stated. If you mean "small, but meaningful taken profits, when done repeated, is how fortunes are made," I would have to disagree. In fact, I would submit that this is how fortunes are not made. The problem is that when profits are taken they are taxed. These are taxes the investor could have avoided, but elected to pay anyway. When "taking profits" becomes a frequent occurrence, the portfolio becomes a high cost portfolio. In contrast, when profits are allowed to run you have a low cost portfolio. In the long run, a low cost portfolio figures to beat a high cost portfolio.
We have any number of Dell shareholders on this thread who recently liquidated some or all of their shares. If their shares are like mine, most of the value represents past appreciation. Let's assume they pay a 20% cap gains tax on the proceeds when they sell. Selling the stock is equivalent to turning down an opportunity to buy the stock at a 20% discount to market. If I can buy a stock at a 20% discount, I think I should be buying -- not selling. Even if the stock doesn't perform as well as some replacement stock, it may still prove to be a better investment once taxes are considered.
Let's take John, for instance. John expects Dell to appreciate 50%, but expects another stock to do better than that, so he sells some long term (read highly appreciated) Dell. Now, assuming Dell appreciates 50%, how well must the other stock perform for this to become a wash? Answer: 87.5%! If John's replacement stock rises by less than 87.5%, then he should rue the day he sold Dell. The important point to remember is that when you sell highly appreciated shares, you may be setting a very high bar that your replacement stock needs to cross for you to break even.
assumptions
1. capital gains rate is .20
2. all of the share price is past appreciation
3. all of the proceeds in the shares which are sold (less taxes) are reinvested in another stock.
4. the investor only pays federal capital gains taxes, not state taxes.
GN |
