As you prepare for a week of thanks with you and yours, don’t forget your portfolio gains. By realizing a few losses before Dec. 31, you may substantially reduce taxes on this year’s return.
Don’t miss an opportunity to recalibrate your portfolio.
As you review the year-to-date performance of your taxable portfolios, think about accumulated gains that may be wise to take. Market shifts ahead may make it preferable to say ‘thanks’ and take some gains now.
Often, we miss out on the gratitude of taking a gain while we can. If the position no longer fits with an investing strategy, think about selling now to recalibrate.
In a volatile years, there may be fewer large gains waiting to be taken in your portfolio accounts. However, in taxable accounts of long standing, often there are positions that compound upon themselves over a number of years.
When deciding whether now is the time to sell some of the longer held or overgrown gains positions, check in with yourself about your investment strategy for the account concerned. Are the stocks still a good fit for your goals? Do they pay income, if income is one of your objectives?
While no financial advisor has a crystal ball, there are trends becoming apparent through clues in futures markets that suggest continued weakness in some industry sectors, and more robust performance in others. Talk to an advisor to learn more. Also most financial advisors consider stock values exceeding 10 percent of a portfolio to be a concentrated position that should be cut to 10 percent or less. Otherwise, the holding may destabilize the portfolio.
The following advice pertains to taxable, not IRA accounts.
Follow the IRS rules to get full credit.
Keep in mind the IRS rules for netting short-term gains with short-term losses, and long-term gains with long-term losses, and then finally the two results. Do the math, and review the results, to see what tax impact if any you may face. If you plan any sales these must be done before December 31st to count for this tax year. Talk to a tax professional to plan:
* Net short-term gains against short-term losses
* Net long-term gains against long-term losses
* Keep these results separate to report on Schedule D of the 1040 tax form, if results for both time periods fall into the same category, that is, both gains, or both losses.
* If the results for the time period differ, so that one holding period results in a gain and the other in a loss, then the results would be netted with each other.
* If the capital losses exceed capital gains, up to $3000 can be deducted against ordinary income in any one tax year.
* You are able to carry forward any unused capital losses indefinitely to future years. Each year, unused capital losses should be applied first in the netting process against the current year’s capital gains. You would then take the $3000 deduction against ordinary income.
Avoid the wash sale trap.
Remember wash sale rules:
* Any stock sold then bought back within 30 days of the original sale may present a problem for taking the loss. A sale followed by a purchase in this manner is called a wash sale.
Adjust for risk tolerance.
A review of your holdings is a good time to allow yourself to check on your relative risk tolerance. One website, managed by the American Association of Individual Investors ( www.aaii.com), allows you to self diagnose your risk tolerance using factors such as age, time horizon, and maximum loss tolerance. Keep in mind that even a moderate portfolio can lose as much as 20% in a bad year; a conservative portfolio can lose as much as 15%. In 2008 these numbers were even higher as major index losses exceeded multiple standard deviations from the historical norms. For categories such as small cap stocks or international, loss figures and volatility can be higher.
Interestingly, standard deviation is a risk measure often little understood by individual investors. A conservative portfolio, that is, one comprising 50% in bonds and cash, might have an average standard deviation of 5.5%, according to the AAII. That is, portfolio results may exceed or lag the norm by as much as 5.5% within one standard deviation of historic results.
Consult with a tax professional before making decisions about loss taking against gains. Also consider whether charitable donation of highly appreciated stock might net more for your bottom line, for long-term goals.
When deciding whether to take some gains and losses this year, consult with your tax professionals regarding tax consequences and long-term implications for yield and growth. You should know your capital gains tax rate before making any decision to incur taxes upon sale.
You should also know what your expected rate of return and yield are for the portfolios concerned. These numbers should be used in your financial planning to determine what rate of contribution you will need to reach your retirement milestones. Or what rate of withdrawal can be tolerated to slow the rate of attrition of principal, once you begin withdrawals.
An Invitation.
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LPL does not provide tax advice.
