Tax loss harvesting

by Evan on October 28, 2009

It is that time of the year again when I go over my client’s taxable portfolios and look for any opportunities to harvest tax losses or offset gains taken previously in the year with losses. The way this works is fairly straight forward. If you have a stock, mutual fund, or ETF that is below where you purchased it, and it is held in a taxable account (ie not a retirement account), you can sell the equity and take a loss. This loss can be offset against other gains that you have, or in the case that you have no other gains, you can use up to $3,000 worth of the losses directly against your taxable income. Furthermore, if you have more than $3,000 in losses that do not offset with gains, you can carry the losses forward to any future tax year. There is no limit on the number of years the losses can be carried forward to. However, understand that you must use the losses to offset capital gains in future years before you can apply the losses against your normal taxable income.

The best thing about harvesting losses is that you can buy the same security back 31 days later and start all over again. Or you can buy a similar security to the one you sold right away and take your losses while leaving your portfolio setup roughly the same way as before.

If you are interested in learning more about this process, please feel free to contact me.

Is Buy and Hold dead? Not according to me and not according to this article

by Evan on October 21, 2009

One of the questions I hear from my clients on a regular basis is: Is buying funds/ETFs/stocks/bonds and holding for the long-term dead? My answer is always a resounding ‘NO!’ Risk and reward has changed, but the premise of buying securities and holding them for long times has not. Financial planners need to re-evaluate asset allocations after the turmoil of the past year, however, there is no reason to try to time the markets, trade actively, concentrate positions, or advocate non-standard practices. The following article from Financial Planning magazine summarizes my beliefs very well:

Why taking the safe route does not work; DO NOT HOLD ALL BONDS OR CASH!

by Evan on October 12, 2009

While listening to the Rick Edelman show a week ago, I heard a great statistic that is very useful for everyone to understand. Here it is:

–Over the last 83 years since 1926, there have been 880 rolling 10 year periods.

A.) Bonds have only beat stocks 17% of those 880 periods.

B.) That means 83% of the time stocks have outperformed bonds!

With interest rates at all time lows, it is especially important not to chase bonds, as a majority of your investment holdings, because as interest rates go up, which is going to happen over time, bond prices must go down. Thus, right now is completely the wrong time to shift to a more conservative portfolio full of bonds because bond prices will be decreasing and bonds statistically do not beat stocks over 4 out of 5 10 year time periods!

The conclusion to draw from this set of statistics is to always be diverse with your investments. It is important to hold both bonds and stocks, but remember that due to inflation and current interest rate risk, bonds on their own, do not make sense.

Market Tendencies

by Evan on October 6, 2009

While I do not advocate short term trading or timing of the market for profit, there is some merit to understanding the stock market’s ups and downs. There have, historically, been times of the year that behave more rationally than others. The point of this discussion is to allow for individuals who are rebalancing, dollar-cost-averaging, or buying into a large long term position, the ability to understand patterns.

January – March The first quarter of the year. This is usually a good time for equities and companies are looking to make sure their balance sheets are boosted for 1st quarter earnings. A good majority of stock market gains are made in this quarter and the 4th quarter.

April – May Transition period. Flip a coin and hope for the best! The old adage of “sell in May and stay away” means that it used to be common practice for traders to liquidate positions going into May for the summer months.

June – September The “summer doldrums”. Most purchases and sales during this time are related to specific events and economic news. The markets tend to be choppy, low volume, and have very little direction. Nothing changes until after the summer season is over and institutions begin to start purchasing/selling securities again.

October – December Where much of the action takes place! Most of the large movements up or down in the markets occur during this time and during the first few months of the 1st quarter. October tends to be a large sell-off month if the market is going to correct for a large upswing earlier in the year. November and December tend to be much more to the upside due to the “Santa Claus” rally. People act more positively around the holidays and it ends up showing up in the stock market, too.

Market timing is a zero sum game for long term investors, but knowing when to act prudently through out the year gives each and every investor more power to understanding the markets.

Bogleheads 8 was a blast!

by Evan on October 4, 2009

To all of my fellow Bogleheads out there that I met, last week was a blast! Special thanks to Rick Ferri for his kind words of encouragement and continuing service to the community. Here is to hoping that we all meet up again in Philly next year to spend time with our mentor Jack in his home town. Stay safe and see you all soon!