You’re Running Out of Time to Secure Your Portfolio

None of us like taking losses.

We’re programmed to hate losing with a psychological behavior called “loss aversion.” We hate to lose and would rather hold onto a tanking stock than to sell and accept the loss.

In a recent issue, we told you that there’s evidence of people disliking losses about two times more than they enjoy gains.

But this time of year is a great time to “trick yourself” into thinking about losses in terms of future gains on your taxes. That can make it easier to face a portfolio with a lot of positions in the red… And you likely have some red in your portfolio given the market lately.

For the losing positions that you sell before the end of the year, you can deduct up to $3,000 in booked losses on your 2018 taxes (and you can carry over additional losses to future years’ taxes). You’ll be putting cold, hard cash back in your pocket.

Even better, if you have capital gains from the year, you can also sell positions at a loss to reduce your tax burden.

Say you have $2,500 in capital gains. Depending on your income level, you could face up to 20% tax on that amount, or $500.

But if you sell stocks at a loss for $2,500, those will cancel out your capital gains. You won’t owe any tax. Use the $500 you saved for a nice, relaxing trip.

The only caveat here is to avoid the “wash sale” rule. Basically, you can’t buy or sell the same or a very similar security within 30 days. So, if you sell a tech stock for a loss, you must wait 30 calendar days to buy it back.

That’s not a terrible rule. If you’re already considering selling a loser, you don’t have the temptation to buy it back. Some time away from a stock will also help you combat a phenomenon called the “endowment effect.” That occurs when we place a higher value on something simply because we own it.

Here are five simple steps to start…

1. Pull up your portfolio. Go through trades for the year and calculate your capital gains. Remember, this applies for trades made in 2018 only – the rules follow the calendar year, so you can’t count Tax Day to Tax Day.

2. Go through your trades and calculate any losses you’ve accumulated in 2018.

3. If you have $3,000 or more in capital gains, compare them with your losses. If your losses are lower, consider selling more. (Remember, I’m on the record saying that now is the time to reduce risk and increase your cash holdings.) You can only use this capital gains tax avoidance strategy up to the $3,000 cut off.

4. This step is one everyone should take, regardless of your gains and losses for the year. Review every position you have. Ask yourself if the reasons you bought that security still apply today. I’ve written before about the benefits of writing down your reasoning for every investment and reviewing it periodically. The end of the year is a great time to do so.

5. If you decide to sell some stocks, consider two things:

  • Sell stocks that no longer match your investment goals.
  • Sell stocks that reduce your risk as we head into the final innings of this bull market. Your portfolio doesn’t need to be all risky tech stocks. Selling a few risky positions not only helps with taxes, but it also helps build up some dry powder.

And you’ll be happy you hold cash when the bull market flames out.

Make sure you take these steps before the end of the year… and set your portfolio up for success in 2019.

What We’re Reading…

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
December 19, 2018