When to Take Capital Gains and Losses
By: Karen Rinehart, CFP®
The Henssler Financial Group Position Paper

It is imperative to follow a disciplined, analytical approach when taking capital gains and losses. You must consider the potential appreciation for the security(ies) under review and other relevant financial planning issues such as: liquidity needs, tax impact, investment alternatives and portfolio fit.

Why take profits when the stock has done well for you, if there may be adverse tax consequences as a result of selling?

  • The stock will not perform as well for you at the appropriate level of risk as another investment, or
  • The stock has done so well that it has become overweighted (10% or more of a portfolio), and subjects your portfolio to unnecessary risk. Lack of diversification is the single biggest problem we see in poorly managed portfolios. Trimming overweighted stocks is a good way to diversify your portfolio without having to add new money. The reluctance to take capital gains is the single largest factor that stands in the way of portfolio performance.
  • With capital gains taxed at 15% (5% in the lowest income tax bracket), if you are overweighted in a stock, now is a good time to take gains.

Should I take losses when the stock is down?

Do not sell a stock because its price has fallen. If you assessed the company's potential and it fits your portfolio, do not panic and sell just because it is down. If you have a substantial loss and would like to offset gains, you can sell the stock and buy it back in 31 days. For a minimal cost, you can reduce the risk of being out of the market by purchasing SPDRs, then selling them when you repurchase the stock. By recognizing capital losses, you can offset capital gains, or use up to $3,000 against ordinary income per year.

On the other hand, if fundamental changes have occurred in the company or your financial plan, do not dwell on the occasional "loser" that everybody experiences. Failure to sell losers is the second biggest mistake people make.

At The Henssler Financial Group we continually analyze the stocks we recommend for our clients, as well as other stocks that meet our criteria for financial strength, dividend quality and safety. We also consider other relevant financial planning issues before we take capital gains and/or losses for our clients. We remind our clients to remember two things when it is necessary to take capital gains and losses: 1) Long-term investing, as opposed to stock trading, will allow you to meet your financial plan objectives; and 2) It is important to consider tax implications; however, do not let the "tax-saving tail wag the investment dog." For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
 
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