The market is up over 25% this year and even if you didn’t generate those kind of returns in your portfolio, you likely have some gains in the stocks and ETFs you hold. You may be wondering if you should hold on to these investments or take your profits? It is a good question since the market has had quite a run. But in addition to considering the potential future appreciation your investments may or may not achieve, you will also want to consider the tax implications of selling your winners.
It is important for you to know that when you take investment gains they are subject to the prevailing tax rules. As of the end of 2013 the taxable rate for long-term capital gains ranged from zero to 20% depending on your tax bracket. Short-term capital gains are taxed at your income tax rate. So tax planning is critical to enhancing your long-term total return. If you are investing in a 529 college plan or an IRA you don’t have to worry about taxes. All gains (and losses) are tax exempt. You don’t pay taxes on those funds until you begin to withdraw them and they are treated as income in the year(s) you do so. So breathe easy about college and retirement accounts. You will be able to maximize your total return in a tax-free environment (which, after all makes sense since you have already paid taxes on the acquisition of that money via income tax when you earned it in the first place). Your savings account/ portfolio is another story. In this case, though you’ve paid income taxes on the acquisition of this money as well, you will have to pay again if you generate gains. But you can offset those gains against any losses you’ve realized. And you can work to ensure all your gains are taxed at the lower, long-term rate (for stocks you’ve held over 12 months).
The rules for tax harvesting, as it is called, require that you may not buy any security you are selling for tax purposes for over thirty days before or after the sale of the security. This is important because you may have a holding you like for the long-term but have a loss in for the short-term. Selling that stock in order to realize the loss does not preclude you from buying it back. But you must wait thirty days plus one.
Your discount brokerage platform will keep track of your unrealized as well as realized gains and losses. Discount brokers keep track of what are called your tax lots. Tax lots represent the increments in which you buy and sell securities. Each trade is logged in as a tax lot and the broker keeps a schedule of how much you paid for that particular stock and when you purchased it. Additionally you can view an up to date realized gain and loss schedule to assess your tax liability at any time during the year. The schedule will break your gains and losses into long and short-term segments–again providing valuable insight as you determine what, if any, year-end trades you may want to execute. And for planning purposes you can review your unrealized gains and losses at any time during the year.
I am not suggesting that you should hold onto stocks or ETFs simply to avoid generating taxable gains. Taxes should not dictate your investment strategy. I am simply suggesting that you should be aware when you create a tax liability so you can set aside funds to pay the taxes or find a corresponding loss you can realize to minimize your tax liability.
I trust you had a successful year of investing and look forward to sharing more ideas in 2014.
Call it American exceptionalism. Call it the indomitable spirit of capitalistic innovation. Call it whatever you like. America’s energy production is surging thanks to new technologies for extracting oil. Hydraulic fracturing (fracking as it is often referred to) has allowed US companies to access shale-rock formations of oil and natural gas that were not fathomed as recent as a decade ago.
The Wall Street Journal posted a front-page headline today that said: “U.S. Rises to No. 1 Energy Producer.” Overtaking Russia as the largest producer of oil and natural gas in the world.
Our energy advantage is making American companies more competitive around the globe. So much so that manufacturers are beginning to move facilities back onto U.S. soil. This is the kind of macro trend that will eventually rise above the noise of government shutdowns and poor government policies and drive growth for company earnings…in spite of Washington.
I am not advocating that stocks will rise tomorrow but they will over the long-term. Recently the head of a major European company told The Wall Street Journal he hadn’t seen this kind of economic and competitive advantage available to any company during his entire career. This energy advantage is going to make U.S. companies very hard to compete with he concluded.
You should always buy stocks for the long-term. If you have a shorter time horizon this may not be the time for you to invest. But with the market fretting over government shutdown and default now may be a good time to pick away at some of your best ideas.
Over twenty years ago, I acquired an initial position in Oracle Corporation (NYSE: ORCL). I didn’t know much about the company then but I spent an evening seated next to CEO, Larry Ellison at a private dinner in San Francisco and found him to be one of the most compelling, arrogant, driven and hard-as-nails individuals I had ever met. When the market opened the following day, I bought the stock. Since then I have learned a great deal more about the company and have continued to add to my holdings when market perception about the company’s prospects pressure the stock price. We are once again in one of those periods, and for long-term investors, it may be time to take a hard look at the stock…
In my previous blog post for the Arizona Republic on July 22nd, I wrote about the importance of looking for value by going against the Wall Street majority. I also introduced my “Intelligent Investing Rule #2: Avoid the temptation to follow the crowd. Stick with what you know and look for value.” (For the full blog post, click here: ”What to make of the current bull market.” )
The example I cited was Apple Computer. I wrote: “Consider the table pounding to buy Apple Computer (AAPL) when it briefly traded at $700 last September. The stock currently trades at approximately $426 after dipping below $400 and it is close to impossible to find a bull on the stock, though everyone loved it at $700.” The post went on to discuss the cheap valuation AAPL carried at $426–the stock was trading at 9.9 times 2014 earnings compared to a price/earnings multiple of over 15 times for the S&P 500. In other words: not a lot had to go right for Apple to become of interest to investors. That is often the case with great companies when their stock is acting badly. Good things happen.
Since then the stock has appreciated slowly but surely, a nice climb out of the price trough the stock had been wallowing in. But today legendary investor Carl Icahn announced a position in the stock. Apple is up another (approximately) $22 today to over $489. Icahn has been nibbling away (perhaps the reason for the slow, steady appreciation) and now that he has announced his holding in the stock, Wall Street investors are jumping in. The company hasn’t materially changed since late July. Rather, a badly performing stock of a great company finally caught the eye of Wall Street.
As value investors we want to already be in position when Wall Street becomes interested. We want to be nibbling away at the bad stocks of great companies before the crowd charges in.
That is essence of my Intelligent Investing Rule #2. Pay attention to great companies who are currently out of favor. Remember to buy what you know and look for value while Wall Street is looking the other way. Inevitably, my thirty years of market experience proves that good things happen to bad stocks because investors eventually pay attention to cheap stock valuations, just as Icahn has with Apple. And when they do, they will take a Wall Street size bite.
That’s how to make money in your portfolio over the long-term.
With the bull market chugging along, it is difficult to determine where to invest for long-term outperformance. If you’re like me you don’t want to chase the market or the crowd. Please see my blog post for the Arizona Republic for some insight.
Recently I published a blog post on The Motley Fool regarding the exchange traded fund: PowerShares QQQ. This exchange traded fund tracks the NASDAQ 100 at a modest annual fee of 0.20%. Please check it out: The Motley Fool
(Note: I wrote this for the Arizona Republic Tuesday, June 25th. Though somewhat time sensitive because the market did indeed move up as I had expected, the principles are firm and sound.)
Please click here to read the article: “The Market Sell-Off–Is it Different This Time?”