EC Do Investors Need To Bank Gains On Highly Appreciated Positions?

An interesting strategy that I often hear from investors is the notion of banking gains on highly appreciated positions. Some are simply trying to time the market by buying low and selling high. I can understand that philosophy to some degree, as we all want to shape our entry and exit points at opportunistic levels. This type of investing is usually most appropriate for short to intermediate-term traders that have the time, tools, and discipline to make changes on a more frequent basis.  

Far more concerning is the group of long-term investors that may not know why they are selling their stocks or bonds to begin with. This latter crowd may think that by selling a core holding, they are now converting an unrealized gain to a realized gain. It creates a euphoric sensation and boost of confidence that you “banked a winner”. However, that elated feeling may be quickly dispelled when you have to answer some of the following questions:

A year like 2015, where stocks and bonds jostled in a wide range but made little forward progress, can be frustrating for most investors. It begins to eat at your psyche that you need to shake things up in order to forcefully create gains rather than sticking with an investment strategy that works for your goals and risk tolerance.

Making a big change to your asset allocation may also dislocate you from the market at an inopportune time. If you sell a significant portion of your stocks and sit in cash while the market rallies 10%, then you are already behind the eight ball and feeling pressure to play chase. This could potentially lead to greater frustration and poor decision making.