Profit-taking

I’m not planning on doing it, but I am curious about the theory.

Often one sees stories in the financial press about ‘Profit Taking’.

Is this usually people selling their entire holding to lock in profits, or selling the portion that has had capital appreciation and retaining their original investment?

 

Best used when you have a better use for your money than the existing investment.

 

In theory
Investor buys 100k Bank for $20, price goes to $25.
Investor sells 20k worth of shares and thanks the market goods.

In practice it's mainly the banks and funds

 

So it is a variation of trying to time the market, with (I assume) the same lack of success that strategy seems to have.

How about when you are following the Total Return strategy for income? As I understand it, you sell your most successful investments.

 

Why not be both active and passive?

I speculate with geared share funds which involves market timing and relies on taking profits.

I also invest regularly into LIC's,ETF,s and direct shares with a focus on dividends and a never sell strategy where it doesn't matter what the market is doing. (Thornhill approach)

You just have to have a split personality and remember who you are on any given day!

Willy

 

No it is usually just a portion, it is balancing a portfolio for risk management. You can quickly have wealth concentrated in high risk companies. A 10% drop in a small position will have negligible effect, a 10% drop on a position that has grown to 30% can hurt badly. Some funds have a mandate which limits weightings to a certain % of portfolio, if limits are passed profits are taken and paid out as dividends. If shares pass a price point where you would consider them too pricey to buy at that price than maybe you would sell some, perhaps to take advantage of a low tax threshold, but often you would not sell a large portion because the tax you pay may be more than coping a 30% fall in share price, that is why it is better to use an LOC for income but you may need to take some profits to top up and cover LOC cost. If you sell all and take a 50% tax hit you have to double your next investment before you get even. Taking a profit is no different than taking a dividend, often it is better to sell and take a profit before exdividend and have DRP at a lower share price so you get more shares for your $.

 

If you are going to do some profit taking make sure you understand the tax cost of taking profits. At the end of the day after tax outcomes matter.

The after tax proceeds is what you will reinvest.

You can separately identify shares within the same investment holding. So when looking at the after tax outcome you can choose those with the highest tax purchase price.

Also take care with the 50% CGT discount. Sometimes a few days makes a big difference in cost.

 

It may well come down to the trading style of the person,as historically during January most go up in price then February they go down in the lead up too the div's starting ..Plus i would stay well away from any money media print forecasters every one will concoct a conspiratorial theory which will change from up to down over any 12 week period..

 

Profit taking works best in hindsight