Financial Planning for your Soul with Miguel Gomez, CFP®

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What should you do if you're sitting on a large gain? 

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Say that you bought a a few thousand bucks worth of Bitcoin a few years back. Or a stock that, for whatever reason, has gone up by a lot. What should you do? 

First of all, congratulations on your gains. Recognize, though, that your gains are on paper right now and that they could go away, literally, any moment now. As you probably know, just recently Bitcoin lost 50% of its gains in a matter of a few days. Or the investors of Wynn Resorts, whose stock lost almost 20% in 48 hours due to news about his founder and CEO. And, going back a few years, we can bring back memories of all the dot coms that went to the roof only to be burned to the ground in just a few months. 

But back to you. 

If you hold a widely diversified portfolio and it has significant gains, it may make sense to take a look and see if your level of desired and needed risk match the risk of your portfolio. Maybe it already is "there": maybe, thanks to these gains, you already have enough to satisfy your goals. If that's the case, congratulations! There's no need for you to take as much risk, and you should consider reducing how much risk you continue to take. 

However, if your gains are in "concentrated" positions (ie you have a holding that represents more than 20% of your portfolio), then I suggest you to take a deep look and ask yourself a few questions: 

  • How would I feel if if doubles in value? 
  • How would I feel if it loses 50%? 
  • What would impact my life more? This thing doubling in value or losing half of it? 

Would there be taxes involved if you were to sell? You bet there will be. If you've hold that position for over a year, taxes could easily take roughly 24% of your gains

But the issue is not really taxes. It's deeper than that. 

I've seen it many times. When talking with people that are in this position, I've found that their biggest concern is "what if it continues to go up?, what if I sell and it doubles?" My response to them goes about this: 

Imagine that this holding is a plane. And it's taken you to incredible places. You know exactly where the plane is today. But, you don't know how much fuel it has left, as the fuel gauge is broken. It may have a lot of fuel and will continue to go up and take you to even more incredible places. Or, it may be about to run out of fuel and, with it, it will crash. There's no way of knowing exactly how much fuel your plane has left. There are analysts, there's the media, and maybe even your neighbor or brother in law that assure you that your plane has a lot to go. But there's just no way to know for sure. And, of course, their opinion really doesn't matter, as they're not flying with you. 

What the analysts, the media, or your brother in law think about your investments doesn't matter. They're not flying with you. 

However, the plane has a parachute, it will help you land safely and take another plane, one with all instruments working (except for the crystal ball, they no longer make functioning crystal balls). There's only one issue: The parachute has a cost. 

Should you pay the cost of the parachute (the capital gains tax) and jump out of the plane? It's entirely your decision. Just remember that, as much faith you have on your current plane, you're flying with a broken fuel gauge. You could use your parachute and board a plane with all instruments in order (a financial plan created with all your needs, values and desires in mind) and hire a pilot to fly with you, your financial advisor, shall you need guidance along the way. 

If you have holdings with large gains and are not sure what to do about them, I'd love to help you make sense of it. I can help you determine the risk not only of that holding, but of your overall portfolio. And then, I can help you make and execute a plan. A conscious one, one designed in line with your dreams, your values and your goals. And, no worries. I have the technical knowledge, but I absolutely hate talking "Wall Streetese". 

I'm Miguel Gomez, I'm a Certified Financial Planner professional and a fee-only financial advisor. My only product is my knowledge and I'm only paid by my clients. Let's take a cup of coffee (in my office or virtually). Schedule your meeting here: https://miguelgomez.link/schedule