Author Topic: When to take the profits from stocks  (Read 3301 times)

srad

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When to take the profits from stocks
« on: December 28, 2020, 10:37:14 AM »
When buying stocks on the dips.  What do you do when they have run back up to their normal highs?

I dropped some extra money i had on two stocks back in March.  Both have done well since, I'm up 85%.   I have stop losses on them and one of the stocks hit it last week where i pulled out my initial investment.  The other stock looks like its not going to need it and keep on going up  (for now anyway). 

Is there a standard play for this type of "investment"? 
Cash it all out, cash part of it, cash out more after a year to pay long term cap gains? 








bwall

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Re: When to take the profits from stocks
« Reply #1 on: December 28, 2020, 11:11:33 AM »
You are describing trading, which is different than investing.

There are different theories to profit maximization on trading:

1) Buy the dip, sell enough to pull out the initial investment and let the profit ride.
2) Buy the dip, sell everything. Do this again on the next dip. Rinse. Repeat.
3) Buy the rip, let it ride, once the hot streak is over, sell and forget. Also called momentum trading. Jesse Livermore used this to great effect. 
4) Buy the dip, watch it fall further. Set a stop loss. Get stopped out.
OR
5) Find a great stock. Buy. Wait until it's gone up 5-10x sell, even if it takes years. Repeat. Also called long term investing.

Obviously, if you can do #1, 2, or 3 reliably, you can earn a lot of money. If #4 happens too often your initial capital can go to zero. This is why smart investors, IMHO, chose #5. If you've got a winner, ride that horse until it dies. Here is an example of how one mustacian rode Apple to millionaire status: https://forum.mrmoneymustache.com/investor-alley/all-my-eggs-in-one-basket/

srad

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Re: When to take the profits from stocks
« Reply #2 on: December 28, 2020, 11:34:34 AM »
Ah, Trading it is then.

Thanks for the input,  I'm a real estate guy so this is pretty new to me.  One of the stocks i bought is Starbucks, its up 50% and I'm thinking of holding onto the majority of that one.  The other is Lincoln Financial, a little more volatile but I almost doubled my profits with it, so I may go the #2 route for that one.

Apple has been a good one.  I already own a few shares of it, had I been 100% in, I'd of FatFI'd a long time ago.  Funny story, one of my dads good friends started investing heavily in Apple back in the 80's.  He has been LOADED for some time now...

celerystalks

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Re: When to take the profits from stocks
« Reply #3 on: December 28, 2020, 11:49:29 AM »
When the top is in. Obviously.

reeshau

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Re: When to take the profits from stocks
« Reply #4 on: December 28, 2020, 02:27:10 PM »
Just to ask the question:

Are you doing this in an IRA, or a regular taxable account?  If the latter, you would at least want to hold for a year, to get long term capital gains treatment.
« Last Edit: December 28, 2020, 07:16:00 PM by reeshau »

srad

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Re: When to take the profits from stocks
« Reply #5 on: December 28, 2020, 03:57:08 PM »
This is a taxable account, which is why I'm asking questions.  Do traders just take their profits regardless of tax consequences?  As i said, I'm up almost 100% today for my Lincoln stock (I'm including the dividends I've received as well), but by this time next month i could be only up by 30%.  In the last 9 months, Lincoln has never been below what i paid for it, but for a while there I was only up a few bucks a share.  As stated, I already pulled the initial 70k out of Lincoln last week and have 65k remaining.  The Starbucks, I'll hold that for years.

Ouch, i just did a capital gains calculator.  I'm in the state of Oregon, so i get the pleasure of giving 9.9% to my state.  If i sold my remaining 65k of Lincoln today, I would end up paying 33k in taxes.  Hold it for a year taxes would "only" be 20k.   Guess i'll keep playing the house money till at least March. 

reeshau

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Re: When to take the profits from stocks
« Reply #6 on: December 28, 2020, 07:19:25 PM »
Traders will probably sell out, because they likely have plenty of capital losses to offset the gains.

You have the right idea on the math:  the tax difference for long-term gains equates to an offset to any price drop you might fear.  If there is no reason to expect the price to drop more than the tax break, then the best move is to wait and hold.  If you worry that this could blow up any day, then take your profit, pay your taxes, and move on.

MustacheAndaHalf

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Re: When to take the profits from stocks
« Reply #7 on: December 29, 2020, 06:35:42 AM »
It helps to know that you're market timing.  Starbuck's stock is up 20% according to Morningstar, so if you were waiting for a recovery it may have arrived.

I like to benchmark my market timing, like comparing Starbucks (SBUX) to Vanguard Total Stock Market (VTI).  Since the March 23 market close, SBUX is up 87%.  Compare that to VTI, which is up 76%.  It becomes less impressive, but more realistic, when you use that measuring stick.

I'd sell SBUX for a few reasons.  From Jan 1 to Mar 23, SBUX lost 37% while the market lost 33%.  Now both are up 20% YTD.  Given that both have recovered with the same YTD performance, the total stock market seems like a more diverse choice.

yachi

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Re: When to take the profits from stocks
« Reply #8 on: December 29, 2020, 09:57:42 AM »
Your tax numbers look off (the 33k is high, and the 20k is low).  Make sure you subtract out your cost basis and use the right tax brackets.
I'm getting a tax of $30,485 for selling 135k of stock with a tax basis of 70k, but the only way it goes that high is if you're in the highest income tax bracket (37%).

Looks like you already locked in about half of those taxes ($15,807 by selling 70K).  Waiting until the rest are long term capital gains (20% again depends on your tax bracket) you'll pay another $9,358, for a total of $25,165

This is a taxable account, which is why I'm asking questions.  Do traders just take their profits regardless of tax consequences?  As i said, I'm up almost 100% today for my Lincoln stock (I'm including the dividends I've received as well), but by this time next month i could be only up by 30%.  In the last 9 months, Lincoln has never been below what i paid for it, but for a while there I was only up a few bucks a share.  As stated, I already pulled the initial 70k out of Lincoln last week and have 65k remaining.  The Starbucks, I'll hold that for years.

Ouch, i just did a capital gains calculator.  I'm in the state of Oregon, so i get the pleasure of giving 9.9% to my state.  If i sold my remaining 65k of Lincoln today, I would end up paying 33k in taxes.  Hold it for a year taxes would "only" be 20k.   Guess i'll keep playing the house money till at least March.

srad

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Re: When to take the profits from stocks
« Reply #9 on: December 29, 2020, 11:08:26 AM »
Your tax numbers look off (the 33k is high, and the 20k is low).  Make sure you subtract out your cost basis and use the right tax brackets.
I'm getting a tax of $30,485 for selling 135k of stock with a tax basis of 70k, but the only way it goes that high is if you're in the highest income tax bracket (37%).

Looks like you already locked in about half of those taxes ($15,807 by selling 70K).  Waiting until the rest are long term capital gains (20% again depends on your tax bracket) you'll pay another $9,358, for a total of $25,165

Maybe the case, I just used a capital gains calculator I found online.  It asked for my income and what i'm selling. Remember, I pay an additional 9.9% to my state.  And if I locked in taxes on half the gains, I guess it is what it is.  I thought I could pull out my initial investment tax free?  But I am looking at my latest brokerage statement, says I have 35k of my initial investment left. So I either sold it incorrectly, or that's not the way selling goes.  That's a bummer, the tax bill will sting a bit.  But as I say, I love paying more taxes, means I'm making more money...


srad

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Re: When to take the profits from stocks
« Reply #10 on: December 29, 2020, 11:19:07 AM »
After i hit the post button, it hit me, duh, of course i have to pay taxes on it.  I paid X for each share at purchase and I sold that share for XX.  So yea,  I have some extra cap gains to pay this year.

yachi

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Re: When to take the profits from stocks
« Reply #11 on: December 29, 2020, 12:38:23 PM »
Can confirm that's how it's reported in taxes.  Number of shares, purchase date, purchase price, sold state, sold price.  I got nailed a year or two with really large gains on Long-dated options.  They had to be sold because they have expiration dates and I didn't have enough cash to exercise them.  I've since moved most of my options purchases into IRA accounts instead.

mistymoney

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Re: When to take the profits from stocks
« Reply #12 on: December 29, 2020, 12:51:15 PM »
Can confirm that's how it's reported in taxes.  Number of shares, purchase date, purchase price, sold state, sold price.  I got nailed a year or two with really large gains on Long-dated options.  They had to be sold because they have expiration dates and I didn't have enough cash to exercise them.  I've since moved most of my options purchases into IRA accounts instead.

I didn't know you could do option in IRAs? Maybe I need to investigate this. I've ignored everything except purchasing shares for long term as I only have money in reitrement accounts, and thought you couldn't do anything else in there.

frugledoc

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Re: When to take the profits from stocks
« Reply #13 on: December 29, 2020, 03:41:25 PM »
Sell - when you need money or for tax efficiency
Buy - when you have money

mistymoney

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Re: When to take the profits from stocks
« Reply #14 on: December 29, 2020, 04:17:30 PM »
Can confirm that's how it's reported in taxes.  Number of shares, purchase date, purchase price, sold state, sold price.  I got nailed a year or two with really large gains on Long-dated options.  They had to be sold because they have expiration dates and I didn't have enough cash to exercise them.  I've since moved most of my options purchases into IRA accounts instead.

I didn't know you could do option in IRAs? Maybe I need to investigate this. I've ignored everything except purchasing shares for long term as I only have money in reitrement accounts, and thought you couldn't do anything else in there.

looked at the 'Options too expensive" thread....too much for me to take on. Buy and hold.....

lemonlyman

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Re: When to take the profits from stocks
« Reply #15 on: December 30, 2020, 07:50:01 AM »
I'll make a valuation 5-10 years out based on what the company intends to do, how the TAM could grow, etc. If the valuation is significantly higher than the price discounted 10% to today, I'll buy/hold. If not, I'll sell. Then monitor over time and update with any material changes. Taxes are important to consider in those decisions as others described above. The most important thing is having a plan. It's easy for short-term new cycles and fluctuations to influence decisions if you don't.

MustacheAndaHalf

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Re: When to take the profits from stocks
« Reply #16 on: December 30, 2020, 08:49:09 AM »
...
I didn't know you could do option in IRAs? Maybe I need to investigate this. I've ignored everything except purchasing shares for long term as I only have money in reitrement accounts, and thought you couldn't do anything else in there.
looked at the 'Options too expensive" thread....too much for me to take on. Buy and hold.....
This year I started buying call options in my Roth IRA, so I can confirm that's possible.  To enable options trading, you need to apply and get approved for it.  Setting aside my approach in that thread, there's less risky ways to use options.

You could spend $17,600 to buy one contract (100 shares) of SPY (SPDR S&P 500) call options with a deep $200/sh strike price (expiring 2023-Jan-20).  Or you could buy 100 shares of SPY, and pay $37,200.  You pay 1.1% more for the call options, but get the same gains and losses as someone who invested twice as much.

yachi

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Re: When to take the profits from stocks
« Reply #17 on: December 31, 2020, 12:55:14 PM »
...
I didn't know you could do option in IRAs? Maybe I need to investigate this. I've ignored everything except purchasing shares for long term as I only have money in reitrement accounts, and thought you couldn't do anything else in there.
looked at the 'Options too expensive" thread....too much for me to take on. Buy and hold.....
This year I started buying call options in my Roth IRA, so I can confirm that's possible.  To enable options trading, you need to apply and get approved for it.  Setting aside my approach in that thread, there's less risky ways to use options.

You could spend $17,600 to buy one contract (100 shares) of SPY (SPDR S&P 500) call options with a deep $200/sh strike price (expiring 2023-Jan-20).  Or you could buy 100 shares of SPY, and pay $37,200.  You pay 1.1% more for the call options, but get the same gains and losses as someone who invested twice as much.

I do it in my Vanguard account, so very much misaligned from their founding principles :-).  There are limitations due to IRA rules regarding margin.  Mostly I've been using it for Long-duration calls.  I'm currently holding $160 calls on Berkshire Hathaway that expire in June 2022.  They're selling for only 3 to 4% more than Berkshire Stock, which itself is cheap vs the overall stock market.  I try and start a position with the longest-available expiration date, and hold it to about 6 months before expiration.

davef

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Re: When to take the profits from stocks
« Reply #18 on: January 01, 2021, 03:18:26 PM »
Do you have kids? Plan on setting aside money for college? If so you can get $1,000 in gains for each kid tax free each year.

It works like this,
1. Open a UMTA
2. Transfer the stock equal to just under $1000 worth of GAINS in each UMTA each year. (Effectively gifting it to the kid)
 It is a taxable transaction, but if they earn less than $1000 per year they are not taxed.
3. Sell Stock  Move the money to the college fund, or where you want it. 

srad

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Re: When to take the profits from stocks
« Reply #19 on: January 04, 2021, 09:21:02 AM »
As I've worked through this post, its become clear to me that i shouldn't worry about the taxes on this play.  I made a purely timing bet, and I'm currently ahead.  I have stop losses back on will take my profits off the table at that point or after a year held.  Doing the math in my head, if the stocks are a few bucks lower in March, I basically come out the same as selling now.

FWI - I almost never buy individual stocks and I have never bought and sold a stock in a matter of months, but the covid drop seemed too good an opportunity to miss out on. 

Financial.Velociraptor

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Re: When to take the profits from stocks
« Reply #20 on: January 04, 2021, 05:00:17 PM »
I'll give my standard advice (and I am a heretical active trader).  If you have to ask such questions, you should absolutely 100% certain be indexing yourself (for now at least).  You don't know enough to trade without getting burned, and probably badly.  Honestly, 95% of investors should be indexing and only rebalancing on an annual basis.  Plenty of people have successfully gone FIRE doing so.

If you insist on learning more so you can trade in the future, my best answer on when to sell is to learn about "trailing stop losses".  Do NOT enter these losses in the market.  Track them offline based on daily closing prices.  If that is too much trouble, trading really isn't for you and, you guessed it, you should be indexing.

srad

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Re: When to take the profits from stocks
« Reply #21 on: January 05, 2021, 11:11:44 AM »
I'll give my standard advice (and I am a heretical active trader).  If you have to ask such questions, you should absolutely 100% certain be indexing yourself (for now at least).  You don't know enough to trade without getting burned, and probably badly.  Honestly, 95% of investors should be indexing and only rebalancing on an annual basis.  Plenty of people have successfully gone FIRE doing so.

If you insist on learning more so you can trade in the future, my best answer on when to sell is to learn about "trailing stop losses".  Do NOT enter these losses in the market.  Track them offline based on daily closing prices.  If that is too much trouble, trading really isn't for you and, you guessed it, you should be indexing.

Appreciate your advise here. You are probably right,  i don't have the expertise to be playing with any large part of my NW.  Fortunately, I'm at that point in my life where i have some extra money laying around.  This bet was literally low single digits of my NW, and i'd like to keep it that way :)  Which is why i've been lurking around this site for a while now and becoming more interested in my own personal finances.  Aside from these two trades and my monthly 401k, VTSAX is where I've been putting my extra money for the last several months.


terry1979

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Re: When to take the profits from stocks
« Reply #22 on: January 16, 2021, 12:14:31 AM »
I like to buy stocks on big down days, such as today. At one point the S&P 500 was down 1% and we were hearing comments about revisiting the March 2020 lows. Fear is high, but smart money start to buy!