Have your share investments risen sharply, possibly more than you had hoped? Then you may be toying with the idea of “taking profits” on the stock market. In this article, we look at this common practice and tell you when it makes sense to take profits and when it makes less sense.
Contents
What is meant by “profit-taking”? |
What is the error in thinking when you want to take profits? |
When does it still make sense to take profits? |
Our recommendation |
What is meant by “profit-taking”?
Profit-taking means realising price gains by selling the investment. This is possible if the price has risen since the purchase. The price gain results from the difference between the lower purchase price – the so-called acquisition price – and the higher selling price.
Investments can basically be divided into two types, investments with fluctuations in value and investments without fluctuations in value. If you want to take profits, think in terms of these two types of investment.
Examples | |
1. investments with fluctuations in value | Shares, bonds, property |
2. investments without fluctuations in value | Savings account, medium-term notes |
Example of profit-taking
Suppose you have inherited 100,000 francs. As you don’t need the money, you invest it in shares. After a year, these shares are worth 125,000 francs. This has exceeded your wildest expectations.
They are skeptical about the positive development and suspect that the market is exaggerating and that there could soon be a correction. You are therefore worried that the profit could melt away again. So you sell the shares and realise a profit of CHF 25,000.
Savings account | Securities | |
Initial situation | CHF 100,000 | CHF 0 |
Step 1: Purchase of the systems | CHF 0 | CHF 100,000 |
Step 2: Sale of the assets (at a higher price) | CHF 125,000 | CHF 0 |
Profit | CHF 25’000 |
Where is the error in thinking if you want to take profits?
Taking profits is generally not a bad thing. But what do you do after you have taken your profits? One thing is certain. You’ve tasted blood. It’s like a casino: Anyone who has made a profit will come back sooner or later to try again. So the chances are high that you will want to try again sooner or later.
Initially, you will certainly be pleased that the profit is now safe. After a short time, you will probably ask yourself whether you should invest again. After all, you are still hardly earning any interest on your savings account. In addition, inflation is eroding the value of the money in your savings account. If you simply leave it in your savings account now, you will probably be able to buy much less with it in ten or 20 years’ time.
So you will try to wait until the price correction you expect has taken place. Perhaps you will be lucky and you will soon be able to get back in at a favourable price. However, it is also possible that share prices will continue to rise and you will be annoyed as to why you sold the shares.
As you can see, realising the profit presents you with new challenges. This is because investing takes up more and more of your valuable time as you try to find the right time to buy and sell shares. You have to be careful not to become a trader who tries to make and take profits at ever faster intervals. That wasn’t really the idea, was it?
When does it still make sense to take profits?
Taking profits only makes sense if you no longer have a long time to invest your money. This is the case, for example, if:
- You want to buy your own home or are about to make other major purchases
- or you are about to retire.
Let’s take a closer look at the two cases.
Realise profits when buying your own home
Let’s assume you set up a fund savings plan ten years ago. Over these ten years, you have accumulated 50,000 francs. You would like to buy your own home in the near future and need the CHF 50,000 as equity. In this case, it is advisable to sell the investments. That way you know what you can count on.
The same principle applies to other things you would like to afford in the near future, such as travelling around the world. As soon as you have budgeted for such expenses, you should consider whether your investment horizon is still long enough for your investments.
Gains do not necessarily have to be realised before retirement
Another example: Suppose you inherited at the age of 40 and invested your inheritance in securities so that you would have enough to live on in retirement. You are now 60 years old and five years away from retirement. It’s quite possible that your investments have increased in value over the last 20 years. Because your investment horizon has shortened, it may now make sense to gradually sell your investments and take the stock market gains with you.
However, if you have so much money in the meantime that you no longer necessarily need it, you can leave it invested. The investment horizon can extend beyond your life expectancy if you include your heirs in the planning.
Our recommendation: Invest for the long term and stick to your investment strategy
Our recommendations to you:
- Invest for the long term, preferably with passive funds.
- Enjoy the profits you have made.
- Don’t be annoyed if profits are lost again. Setbacks are just as much a part of investing as gains.
- Only realise gains if your investment horizon has shortened or if your risk capacity has decreased for other reasons.
- Use your valuable time for more important things in your life than market timing.
Our motivation for writing this article
For us at finpension, it doesn’t matter whether you buy or sell investments frequently. This is despite the fact that we do not charge any fees on transactions. It does not increase our costs if you trade frequently. It is simply not our conviction that you can earn money sustainably with active trading. That is why we have written this article.
Reduce investment risks: You have these three options with finpension
If we have not been able to convince you and you would still like to reduce your investment risks, there are three different options:
- 1st variant: You customise your investment strategy (Self-Select > Self-determined) and add the following money market fund to the portfolio. Money market funds are bonds with very short maturities. Because they have very short maturities, price fluctuations are comparatively low. The money market fund can therefore be seen as an alternative to paying out into a private account.
Fund designation | ISIN | TER | |
---|---|---|---|
Liquidity | |||
Pictet CH-Short-Term Money Market CHF -P dy | CH0011292312 | 0.15 % | Factsheet |
- 2nd variant: You enter a transfer to another portfolio (procedure as for variant 3) with a different investment strategy that has fewer investment risks. This variant has the advantage that you can retain the investment strategy on the portfolio from which you enter the transfer for later.
- 3rd variant: You enter a payout. You can enter payouts in the portfolio as follows:

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