What sell at a loss? I thought that was the worst thing I could do? What ARE you talking about? Is probably what you’re thinking when you see the title of this blog. So, I will explain my reasoning and how sometimes it can be good to sell at a loss. We have all been told to buy low sell high and I completely agree with that investment strategy! But, every once in a while we have a bad year in the market and if you can get and need some capital losses, it can really work for you.
Why You Should Normally not Sell Low
The biggest reason you should not sell low most of time is because you are usually tempted to do it for emotional reasons and at the wrong time. This then causes you to miss out on the growth that normally follows market corrections. The growth just after can be significant, so I agree – don’t sell low for emotional reasons.
How Capital Losses Work
However, with the strategy I am going to recommend you can get your losses and still stay in the market. Basically the rules are: if you sell at a loss you can claim a capital loss against capital gains and not have to pay taxes on your gains. If you buy the same investment again you do have to wait 31 days. The beauty of this is you can carry losses back three years and forward indefinitely. Depending on your situation, that can make an incredible difference to your future and possibly even your past taxes.
So What Should You Do?
Working with a competent advisor, review your portfolio and identify any losses you have. You will need to think about why you have them, and whether you want to stay with the same sector/fund type that you have, or move onto something else. This is where an advisor will provide invaluable help. She/he will remain unemotional and will be able to recommend the best steps to take.
Finally, How Does it Work?
To illustrate I am going to use the energy sector, because of the huge losses this past year, and I will also use a mutual fund as an example. However, it works for any investment you own outside of a registered plan.
Let’s look at the energy sector, you like it and don’t want to miss out when things go back up, but you are down anywhere from 25% - 50% or more. Here’s what you do. Sell your investment then look for similar or better companies or funds and buy them. You are still in the energy sector and will not miss out on the upside, but you also have a tidy little (or big) capital loss.
The next example is if you have a fund that you bought and it is down, sell it and buy another one of equal or better quality in the same category. Again, you have not left the market and are still poised to take advantage of the growth when the market goes back up.
Another reason to do this is if you have funds and/or stocks that you really shouldn’t – say they are too risky or chronic underperformers – you can sell them and buy something else. It can be in the same sector or fund category, or you could go into an investment that would be more appropriate for you.
Sell whatever you have and if you love it wait the 31 days to buy it back.
So now you know what to do to save taxes, completely legally and without losing out on future growth. I have recommended this to clients in the past as appropriate, the last time was 2008. It seems 2015 is going to be another good year to do this. I would suggest you don’t wait too long, as markets sometimes go up in December.
It is important though to see an advisor, because not every strategy is right for you, you need to find out where you are at and where you should be. If you would like more information, please feel free to contact me. My contact information can be found on my profile or at http://cathystanton.com/contact.