On the morning of Nov. 8, 2016 — Election Day — the S&P 500 opened at a touch below 2,130. By the end of the day, well before anyone could predict that Donald Trump would win the White House, the S&P 500 closed about 9 points higher, up .5%.
Certainly not a flat day, but certainly not any indication of what the markets expected to happen later than evening. The next day after the Trump victory the S&P 500 climbed a little more than 1% as investors began to digest what had occurred the night before.
Fast forward to May 5. Just a few days shy of six months from Election Day, the S&P 500 closed at 2,399, a new all-time high and 12.6% higher than on Nov. 8.
Much is usually made, rightfully so, about investors who during a stock market decline choose to sell stocks rather than ride out the decline. However, failing to rebalance your portfolio as the stock market advances — in other words, sell stocks — can be equally as concerning, even if it garners much less attention.
This is especially the case when the increase in the markets comes over a short period of time.
Investors who know they should rebalance their portfolios can sometimes be hesitant to do so when ma rkets run up quickly. Momentum investors will continue to ride the market up.
For the average investor, however, this can be dangerous. The desire to eke out additional gains overrides the good sense that rebalancing brings. Even when the market starts to decline, it becomes hard to sell since the investor believes the decline is temporary, especially due to the recent increase in the market.
At some point the market declines to the point where the investor’s allocation to stocks is back to where it once was, thus eliminating the need to rebalance. The roundtrip would not be so bad if it ended there, but many times it does not.
Stocks continue to fall and the resistance to selling holds on until capitulation occurs and sells. Inevitably, this occurs at the bottom and the market begins to rebound from there, locking in losses for the investor.
An argument some make against selling stocks as the market rises is that in non-retirement accounts there are tax costs incurred to rebalance as appreciated stock is sold.
This is true, which is why investors should pay careful attention to when and what investments they rebalance. There is a considerable tax difference between a long-term capital gain and a short-term capital gain, so being aware of when the holding period of an investment you are going to sell becomes a long-term gain is important.
In a well- diversified portfolio, there may be certain investments which would result in a lower capital gain and still accomplish the goal of rebalancing the portfolio in its entirety. For a sale of only a partial amount of an investment, it can make sense to identify purchase lots that would result in a lower capital gain to help mitigate the tax cost as well.
Tax costs can also be eliminated if the sales occur in a retirement account. This is not always possible depending upon how the retirement accounts are invested, but should at least be considered.
Rebalancing by selling stocks in an increasing market is equally as important as buying stocks in a declining market, especially when the ascent or decline takes place over a short period of time.
Doing so keeps your portfolio at a risk level you are comfortable with and in the long run is best suited for you.
Howard Hook is a Certified Financial Planner and CPA with the wealth management firm EKS Associates in Princeton, N.J.
[The content provided through this article and www.nydailynews.com should be used for informational purposes only and is not intended to be a substitute for professional advice. Always seek the advice of a relevant professional with any questions about any financial decision you are seeking to make.]
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