Expert Contribution

A Time To Take Some Losses

Quite often, to “take” a loss feels like the wrong thing to do and for good reason.

Our feelings around this probably stem all the way back to the Savanna when our only objective in life was to survive. Our prehistoric selves roamed the land focused primarily on just two things: where to get food and how not to become food.

Taking a loss in that context was unacceptable.

And while the creation of society and the progression of technology, civilization, and social activity have lessened, if not completely destroyed both of these outcomes, parts of our thinking have not evolved past them.

So, taking a loss can still sound unacceptable, at first.

But, here’s the difference: today, when we take a loss, the game does not end. Instead, we take stock of our current situation and begin to move forward from there.

The same is true for our stock investments.

If you have a taxable investment account with holdings that are under water, it may be a good time to sell them and reinvest in a better strategy. Or, more to the point, a more diversified strategy.

The IRS is ready to help, allowing you to net these realized losses against any realized gains, this year or in future years (with some limitations, of course!).

What this means is that by taking losses today and reinvesting, you end up with a better investment strategy going forward and a lower tax bill from other current or future capital gains.

This is an especially good time for this strategy if you’ve held onto an investment you aren’t too happy with, but have been reluctant to sell because of the tax you would owe.

Assuming that investment is down from the last time you looked, either the tax cost to selling is lower or you might even get a tax benefit if the position has converted to a loss!

Please note, however, this is not a freebie from the IRS. They are simply acknowledging that taxing gains alone, without consideration of losses, is nonsensical. They are simply allowing you to net them together within a current year and carry forward any leftover net losses to future years.

As for what to buy when you sell, well, that depends on your long-term objectives as well as your current overall cash situation and how much risk going forward you can really take.

In other words, that takes a considerable amount of more work!

For a limited time, I am offering a completely FREE financial conversation on the topic of your choice. FREE, that is, from cost and also FREE from any sales pitch. Simply schedule your call here: www.calendly.com/bestfinlife/free-financial-conversation.

Best Financial Life is a Registered Investment Advisor with the State of California and Joe Morgan is a fiduciary to his clients at all times. If you’d like to ensure your finances are on the right track, schedule a call with Joe at www.calendly.com/bestfinlife. 

 

By Joe Morgan, CFP®, CFA, Principal:Best Financial Life, Resident since 2004


About The Author

Financial Advisor
Joe Morgan, CFP®, CFA
Best Financial Life
925-389-3889

Joe Morgan is a fee-only financial advisor who acts as an educator, guide, and protector of wealth to individuals and families. He created his own firm after a successful investment career because he wanted to help people find clarity in their aspirations, resources, and risks. When he’s not showing how financial advice doesn’t have to be dictated by stuffy suited men from Wall Street, he enjoys tennis at Blackhawk Country Club and hiking the Tri-Valley area.

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