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Retirement > 401(k)s & IRAs
Managing your nest egg
March 14, 2000: 12:34 p.m. ET

Check how much your investments have gained before you 'take profits'
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NEW YORK (CNNfn) - The market rises or falls and you read that investors are "taking profits." But what does that really mean, you wonder? Should you do the same thing?
    In response to a reader's question, Barbara Steinmetz, a certified financial planning from Burlingame, Calif., and a member of the Financial Planning Association, said people "take profits," or look at how much their investments have gained, when the market is soaring.
    

    Ask the experts a question.
    

    What exactly does 'taking profits' mean and how should I do that if my investments are all in mutual funds?  I would like to either balance my risk, if possible, or move part of my gains to a 'safe haven.' It's not that I think a crash is likely, but since I'm 53 and this is my retirement fund, I think I should be looking at protecting some of my fund in less risk areas.
    In the recent market run-up, many investors have seen substantial growth over their original investment.  "Taking profits" means that some or all of the difference between the purchase price and current market price (or profit) is "realized."  The investment is sold and the proceeds are invested in other investment vehicles or placed in a cash account.  The profit is only "a gain on paper" until there is a sale.
    A similar process takes place when an investment is in mutual funds.  If you have a diversified portfolio utilizing mutual funds with different objectives (i.e., large cap growth, international, emerging growth, etc.), you will notice that over time the original allocation will have changed.  In order to "take profits" or rebalance the portfolio, some of the investment in one or more funds may have to be sold and reinvested in another area.
    If all of your mutual funds are held inside a tax-deferred account (such as a 401(k), IRA, SEP-IRA, etc.) there will be no tax consequence on the sale of any of the mutual fund shares.  If they were held outside such an account, you would pay tax on any gain.
    You indicated that you are 53 and that this is your retirement fund.  It is important to remember that while your risk tolerance and time horizon will greatly influence your selection of investment, you may eventually retire but your money does not have that option.  It needs to continue working to keep ahead of inflation and taxes.  It sounds like you have seen a very healthy run-up in the value of your holdings, and this may be due in part to a well allocated portfolio, or because you "luckily" placed too much of your holdings into a very successful sector.
    As you are probably aware, some sectors have grown to extremely high levels.  If you find that this is the case or that your risk tolerance was not really as great as you once believed, it would be prudent to reposition your portfolio with a more conservative allocation of funds.  While it is important to have your money working hard, there is a "sleep factor" to contend with.  If you cannot sleep comfortably with your investments, it is time to re-evaluate them. 
    While we often refer to U.S. Treasury investments as "safe investments," there is really no true risk free investment, since even Treasurys can be adversely affected if interest rates change or inflation were to erode purchasing power.  Some of the risk and volatility can be mitigated with a diversified portfolio.  Depending on the time horizon until your retirement, you might want to commitment a larger portion of your portfolio allocation to fixed income investments.  Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.