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03 December 2010
Any financial advisor worth their salt will sit down with clients toward the end of each year and have an in-depth conversation about the investments in their portfolio.
Some clients love these sit-downs because they are a way to take stock of the year that’s ending and to get mentally prepared for the one that’s coming up. But for other clients, yearend reviews are just one more chore at a time of the year that’s already too busy.
Here’s a very good reason to make sure you do sit down with your advisor for that year-end review: Tax-loss selling. Tax-loss selling involves selling losing stocks in order to offset the taxes that you'll owe on your winners. Many investors can save $1,000 just by selling one holding—which is a pretty good return for a one-hour meeting.An example occurred recently. One of my clients, a retired veterinarian, met with me for a portfolio review. We looked at his investment results and found a timber-company stock that hadn’t performed as we’d hoped: It was down 10% for the year. So we decided to sell the position in that stock, taking a $3,000 loss.
That loss will be applied against gains that the client took experienced this year. The result is that he will pay $1,050 less in taxes this year than he otherwise would have. Had we sold enough positions to save more on taxes than the client will actually owe, we would be able to apply to difference to any gains in the 2011 tax year.
By the way, tax writeoffs are not the only benefit of tax-loss selling. At the end of every year, investors rush to dump stocks and bonds that have had disappointing years--in order to gain the tax write-offs. The mass selling drives down the prices of these investments to the point where some of them are real bargains, with great upside potential for investors.
One warning about tax-loss selling: If you sell a security to gain the tax benefit, you can’t buy it back again for 30 days. If you do, your tax benefit will be negated. Still, come January, there are plenty of cast-off stocks and bonds at newly attractive prices. Savvy investors start the new year off by snapping them up.