Investors who didn’t take some of their massive profits off the table when Apple (NASDAQ:AAPL) drove past the $700 per share level can feel free to puff out a big, sad sigh.
Believe me: You’ve earned it.
But what has happened to Apple in the past few months also can teach us an important lesson about portfolio strategies while heading into or even living in retirement.
Investors with diversified portfolios (I hope that’s all of you) can almost always count on dividend mainstays like AT&T (NYSE:T), Coca-Cola (NYSE:KO) and Pfizer (NYSE:PFE) for long-term stability and — better yet — regular income. Excepting enormous disasters, you can pretty much set ’em and forget ’em.
Peppering a retirement portfolio with growth stocks is a wise idea regardless of your retirement status, so long as you can manage the risks of big price swings over long periods of time without putting your hard-earned nest egg at risk. So when it comes to those big hitters, you need to have a plan in mind that answers the following questions:
- How long do you want to hold the investment?
- Do you have a “sell” price in mind — for both the way up and the way down?
- Will taxes affect your decision?
Let’s take a look at these one at a time:
How Long do You Want to Hold the Investment?
How long you hold an investment really depends on your age and time horizon. We’ll use Apple as an example.
AAPL stock soared almost 75% from Jan. 1, 2012, to mid-September, when shares reached an all-time high of $700. Investors with a shorter time horizon — either due to pending expenses or simply because because of required distributions — probably should’ve taken some profit off the table to take advantage of the short-term run-up, regardless of their longer-term views of Apple.
A 75% return is a 75% return, after all.
Investors with longer time horizons who still believed Apple was a long-term keeper might have taken some of their money off the table, too (even if to just reinvest in Apple on a later dip). However, they certainly would have had more time to withstand some disappointment as prices drop, so panic selling could have been avoided.
Do You Have a “Sell” Price in Mind?
Having a sell price essentially means having a specific stock price (or a percentage gain or loss) at which you plan to exit the stock no matter what the situation.
My parents always had that number in mind (Mom still does), which was, generally speaking, about 25% on either side. Of course, that meant untold dollars of lost appreciation on Microsoft (NASDAQ:MSFT) back in the 1990s, but a plan is a plan, and it would work well for all your portfolio high-fliers. Nobody should lose sleep from gaining “only” 25% on a stock.
Conversely, you don’t want to lose too much of your investment on a single stock, so make sure to set a low sell price, too, either mentally or by setting up a stop-loss.
Will Taxes Affect Your Decision?
Tax implications are especially timely right now as we head toward the presidential election and the possibility for tax changes down the road.
Today’s (federal) tax rate on capital gains is 15%, so if investors believe that might go up after the new year, taking profit — perhaps all of it — might be the best idea, particularly for those stocks that have appreciated the most (and also have the highest possibility of dropping off the table at the first sign of financial trouble).
The Bottom Line
Diversification in your retirement portfolio remains the single-most important idea out there — not just among sectors or geography, but also between income and growth. So keep a balance that fits your risk profile and lifestyle needs, and have a plan — whether it’s for taking out profits from big gainers, or hanging on after a pullback.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was XOM and MSFT, and kind of wishes he followed his own advice on some of his AAPL holdings.