Monday Money Report 9.16

The markets rebounded last week, reminding us again that short-term volatility is normal, and investing is a long-term proposition.

That said, short-term volatility offers investors with money outside of retirement accounts a great opportunity for tax loss harvesting. While “buy low, sell high” is still the overall goal of all investors, selling stocks while they are at a loss can create tax savings.

I know, you may be wondering why you want to sell your investments to purposely lose money. But say that you purchased Spacely Sprockets stock for $100 a share, and due to the short-term irrationality of the market, it drops to $75 a share. If you, or your advisor, is looking for loss harvesting opportunities on a daily basis, you can sell your Spacely Sprockets and realize a $25 per share loss. The proceeds from the sale are used to purchase another investment. If the entire industry is affected, perhaps you can buy Cogswell Cogs for $75 a share instead. Or, you buy a sector fund that invests in that industry overall. Another option is to wait 31 days and repurchase Spacely Sprockets.

If you’re worried that selling Spacely Sprockets and buying Cogswell Cogs would upset your portfolio, a research paper published in 1986 called “Determinants of Portfolio Variability” by Brinson, Hood, and Beeebower concluded that 90% of a portfolio’s volatility comes from overall asset allocation rather than individual stock selection. So selling one stock and purchasing another within the same asset class should not change the overall risk level of your portfolio.

It's usually not a good idea to sell out when the market is down; that’s when you buy high and sell low. Here, we’re staying invested, we’re just taking advantage of volatility to reposition investments, and realize losses for tax purposes.

Eventually, you’ll have to pay taxes on any gains. Because of inflation, a dollar saved today is worth more than a dollar spent in the future. In addition, you can write off $3,000 of capital losses against ordinary income, which is a more valuable deduction, as ordinary income is taxed at a higher rate than capital gains.

If you want to receive the maximum advantage here, it’s important to look at your investments throughout the year, and not just in December. Losses don’t just occur at the end of the year.

Your action item this week is to clean out your closet. Donate or consign your old fall and winter clothes. And if you have a sweater – or two – we’re participating with #justonesweater as a drop-off location. Come see us at 67 West Street Suite 200 to drop off your sweaters.

Be sure to check out our website at covingtonalsina.com, or our Facebook page, for more information and to register for our upcoming educational events.