Hello everyone,
My PEA (equity savings plan) has reached the target performance for the year and I would like to secure all or part of my performance to protect myself from a potential market downturn.
Is this a good idea or does the tax friction from converting back to cash degrade the performance too much and is it better to stay invested?
Thank you for your insights
The flat tax has an enormous cost, yes. It risks making you significantly underperform the market. But that’s not the only problem with this strategy.
Targeting an annual return doesn’t make much sense for an individual investor. You’ll limit your gains without necessarily limiting your losses. The market works through major swings. It rises sharply, then falls sharply. You mainly risk missing the rebounds, and so that’s a second risk of underperforming the market.
The stock market paradox: it’s 100 times harder to sell than to buy
As a CTO, you need to have an insane mindset during turbulent periods to hold your positions
Hello, I use these tools: money market fund in a PEA, stop loss to lock in gains, and predefined thresholds. But from a purely mathematical perspective (taxes included), the best thing to do is often to do nothing if your long-term objective is capital growth.
Otherwise, I use skimming or the threshold technique, meaning I say for example my world ETF will represent 10,000 in valuation, and if it exceeds that I cut the difference without thinking, if it drops, I reinforce without thinking. Now if you have few different assets, it’s better to do this every 1 to 3, or even 5 years and just focus on reinforcing through contributions the assets deviating from their initial target. Because if you do it too often, you lose the compounding effect. For example, if you sold 0.5 bitcoin when it was at €1,000 and you had already made x10, you potentially gave up €45,000 in gains at its peak 10 years later.
In summary: The longer the horizon and the more the objective is growth, the less you should intervene. Rebalancing should first be done through new contributions; skimming only comes into play when the deviation or concentration risk becomes significant enough to justify sacrificing part of the potential performance.
In your case, if you’ve reached an annual performance target and you’re ready to stop there, once taxes are taken into account it can be justified. For me, for example, I work on a 10-year basis, if it reaches 100% (target of 10% per year without counting compound interest) I’ll set a stop on the quantity to sell for skimming just in case… I did that with gold or silver which had risen to 128% at one point. Good initiative because when I woke up one morning it was down -20 
It’s important to understand that when you’re not invested and the markets aren’t falling, that’s performance you’re leaving on the table.
If it’s a long-term investment, there’s no reason to exit in principle unless you have a strong conviction about a decline and that it’s coming soon (which is much harder to do than it seems). You’ll also need to ask yourself when to re-enter if you decide to exit.
Because on the other hand, the tax friction is 100% guaranteed on exit.
I tend to sell mainly to make reallocations (switching ETFs, for example from World to EM, or from a stock to an ETF).