Great news! The market has run up – and so is your account. But a gain is not a gain until it’s in cash – in your account. Selling a position that is up is the only way to capture that gain. And capturing gains presents several challenges:
- Timing: When do you know a position has peaked? Sell too early – and you leave money on the table. Wait too long, and some (perhaps all) of the gain can slip away.
- There’s a cost/commission to sell
- Once you sell – cash in on the sideline – not invested/not earning
- There’s a cost/commission to re-enter
- There’s a similar timing issue for re-entry. Do you wait for a dip to re-enter? Will you have the guts to shove your chips back in when the market is at low ebb?
- If you’re in a taxable account – capturing gains will trigger income, and/or capital gain taxes.
- If the security pays a dividend – you may want to accelerate or delay your decision to capture that dividend.
Not only is that exhausting – each of those decision points will have an impact on the net amount of gain you ultimately capture.
Consider a Money Contract instead. They perform with the market, and on the anniversary of the contract, gains are locked in and credited to your account – no fees – no decision points – no timing. What’s more, money contracts lock out losses – so you can never lose a captured gain.