Lifepoint Financial Design – LifePoint Financial Services – Mike Metzger Financial Planning

With market volatility imminent in our current scenario, there is no doubt some investors have some losses inside of their investment portfolios. The current culprit being rapidly rising interest rates, historically high inflation, war, and unstable political climates.

The fact is, there will always be unstable market conditions. And no doubt, there will be times where your investment portfolios are not making money.

But trust me when I say, it’s okay to take your losses!

I know, I know… “but, what if that stock, fund, ETF explodes in a few months?!”

Look, I’ve been there too. I’ve played the waiting game. I’ve waited and waited for a particular stock or fund to turn out for years. At some point you’ve got to face the grim scenario that some of those speculative picks may not work out. In fact, they may get worse!

But, this isn’t a blog post to make you feel bad. And its’ not a blog post saying that you shouldn’t make speculative bets in the stock market. I like a good speculative bet here and there. Nope, this article is to help you change your mind set on taking losses and to see the good that can come from it.

Being a financial planner for real estate professionals, the same can be said for real estate investments, as well. This financial blog post is not specific to stocks, but can said for the real estate world too. However, in real estate, your losses can be used to offset income rather than just gains- like in the stock market.

Tax- Loss Harvesting:

In general, tax-loss harvesting is when you sell your “losers”. Then, in the same tax year, you sell some of your “winners”. Those two actions combined can help you wipe out any tax ramifications from capital gains tax.

Let’s say you own a mutual fund that has $10,000 in losses on the year. But, you also have a couple of other funds that have increased in value by a combined $9,000. By selling the $10,000 loss and capturing the $9,000 gain, you have potentially wiped out all taxation that would have later occurred.

3 Reasons Why You Should Consider Selling Your “Losers”:

1.) To Stop the Bleeding

Sometimes the best reason is because you were wrong! The stock that I’ll never forget was JC Penney. That one still eats me up inside. In 2008, after the start of the recession, the stock was spiraling. The company was losing money hand over fist and closing stores all over the country. It was shortly after that they announced a new CEO. This was the previous CMO for Apple who was responsible for the success behind the Apple Stores. His idea was to discontinue the discount coupons that JC Penney customers were addicted to and create everyday low prices. 

Long story short, he underestimated the strength of coupon addiction and the company continued to spiral for years to come. All the while, I held onto the stock believing that this new CEO could turn the company around. It was a foolish hope and I lost out on a lot of other opportunities.

Please learn from this story, hoping is not a winning strategy.

2.) You Need to Reduce Your Tax Bill

In high income tax years, it seems like there is no escaping Uncle Sam. You take your deductions, you contribute to your retirement plans, and you utilize your Health Savings Account. But, despite these efforts, you still owe a large check to the government.

Consider taking your losses. The IRS allows for $3,000 in capital losses to reduce your income in the current year. It’s not huge, but when you are trying to reduce your tax bill, this amount certainly helps.

If you are in the 35% federal tax bracket, that $3,000 capital loss can reduce the amount you owe the IRS by $1,050. 

Any losses beyond $3000 can be carried forward to offset future years.

I suggest you discuss your specific situation with you tax accountant.

3.) Your Investment Portfolio Should Be Rebalanced

One of the most overlooked components of investing that I see self-investors making, is not realizing that portfolios need to be rebalanced over time. Instead, most set their portfolio allocations once (based on their comfort with risk), and then never look at those allocations again. That just breaks my heart!

Here’s how that happens. Let’s say you own the traditional 60/40 portfolio (60% stock fund, 40% bond fund). Each of those investment funds has a certain distribution rate. That is, either interest from bonds or dividends from stocks. Overtime, those distributions keep getting reinvested back into the fund. However, not all distributions rates are created equal.

Let’s say your stock fund has a distribution rate of 4% and your bond fund has a distribution rate of 1.5%. Well, that means more money is getting reinvested back into the stock fund versus your bond fund. As time goes on, then your stock fund is getting bigger than your bond fund. Now you’re no longer 60/40, you might be more like 80/20 and now in a much riskier portfolio than you wanted!
Does that make sense?

So, you can rebalance on a semi-annual basis and that will likely capture both losses and gains because you are selling and buying the positions to get that back into that 60/40 target allocation.

Again, losses can be a good thing!

Wrap up:

Although it may seem counterintuitive to lock in your losses, you can see that it can also be a tremendous help. There are situations where it might make the most sense to better improve your financial situation.

If you want to get advice specific to your situation,

Disclosures: Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Asset allocation does not ensure a profit or protect against a loss. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

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