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, have you noticed any accumulated gains that may be wise to take? And be thankful to cash in while you can?
Often we miss out on the gratitude of taking a gain while we can….only to then be left with a sorrier choice to take a loss later, if the position no longer fits with an investing strategy.
In a volatile year such as 2015, 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. People who have hesitated to sell because of the gains taxes otherwise due may reconsider in light of expectations for 2016.
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 portend continued weakness in some industry sectors, and more robust performance in others. If some of the larger positons that you hold are in the trouble spots, it may be prudent to reallocate and recalibrate for more performance success next year. This year’s winners may be next year’s losers, as a review of market performance “quilt charts” often shows.
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.
- 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, 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.
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 the losses exceeded one standard deviation range 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.
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.