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 long-term capital gains taxed at 15% (0% in the lowest income tax bracket), if you are overweighted in a stock, now should be 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 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, and sell the SPDRs 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 a loser is the second biggest mistake people make.
At Henssler Financial 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 Henssler Financial at 770-429-9166 or [email protected].