I’ve been investing for a long time, mostly buying and holding stocks through my brokerage, 401k, IRA, etc. But when it comes to figuring out when to take gains, how do people decide?
If I buy stock X in my account and it jumps 200%, what are some strategies to sell and move that money elsewhere? How do you also figure out the tax hit from that sale (around 20% of the gains)? For example, if stock X goes from $100 to $300, you sell it, pay $40 in taxes, and end up with $160 profit plus your original $100. This makes sense to me, but do other long-term investors follow this logic?
Last question: should I be too worried about paying capital gains tax when I sell? I always feel that paying taxes is bad, but if I want to lock in those gains, I have to sell and pay that 20%. Should that tax worry stop me from cashing in on my gains?
I plan to hold my investments until I retire, then sell within my lower tax brackets to reduce taxes. Index funds help me do this since I don’t have to time individual stocks. I just add money when possible.
@Zyler
I see what you’re doing. The low tax bracket plan won’t work for me though. I expect to be pulling in over $100k annually in retirement, and we won’t be fully retired either. Our goal is to teach at a university, bringing in some income and using their health insurance. It won’t be a huge amount, but it will keep us out of the low tax bracket.
If you don’t sell, you don’t get taxed, but you also don’t see any profits. Buy, let it rise, sell, and pay the 20% tax—it’s better than riding the stock up and watching it drop again. That way, you lose profits, which feels like a 100% tax loss, and even worse if it goes below your initial investment! Look into short-term vs. long-term gains too.
@Max
I’m not really a short-term trader. Most of what I own I’ve held for 5-15 years. I’m okay with holding on for a while and I’m definitely not a day trader.
Payton said: @Max
I’m not really a short-term trader. Most of what I own I’ve held for 5-15 years. I’m okay with holding on for a while and I’m definitely not a day trader.
@Max
That’s something I need to check out. I’ve sold some underperforming stocks in the past but never done a year-by-year review. The ones that lag behind I can offload without much tax impact.
Payton said: @Max
That’s something I need to check out. I’ve sold some underperforming stocks in the past but never done a year-by-year review. The ones that lag behind I can offload without much tax impact.
I usually pick a percentage gain to aim for. When a stock reaches that mark, I sell just enough to stay within the tax-free allowance for gains. If it goes higher, I sell more. After paying taxes, I still keep most of the profit. I reinvest the profits back into a broad index fund.
I place sell orders when I buy the stock, so emotions don’t come into play.
@Carter
I like that method, but how do you handle sudden jumps in price while still keeping investments for at least a year? Can you set a date for a sell order?
I usually set sell orders about 20% higher than the current price, but I’m not sure how to link that to a specific future date.
@Payton
What do you mean by setting a date? A limit sell order triggers whenever the stock price hits your target, whether that’s next week or years from now.
Carter said: @Payton
What do you mean by setting a date? A limit sell order triggers whenever the stock price hits your target, whether that’s next week or years from now.
I meant aiming for long-term capital gains instead of short-term. For example, if I buy at $5 and set a sell at $20, but it jumps in three days, I’d owe more taxes since it’s based on income bracket.
Do you wait before setting sell orders to avoid this, or do you just sell whenever it hits your goal?
@Payton
I see now. You could wait until you’ve held it long enough to qualify for long-term gains, then set the sell order.
In my country, capital gains tax doesn’t change based on holding time, so I don’t consider that. I just sell once it hits my target. I set the target high enough to avoid quick, random price bumps.
You’re asking a question that most forum investors don’t have much experience with. You might find more help in other investment groups, like those focused on older or retired investors.
This is also why I don’t keep my portfolio 100% in growth stocks. Dividend stocks help manage this problem.
Payton said: @Reid
Thanks for the tip. I do hold some dividend stocks in my IRA and Roth, so I’ll think about using those more.
Oh, and try asking this in FIRE (Financial Independence Retire Early) forums too. They’ve got lots of people who have sold off parts of their portfolios to fund their retirement.