Check Your Portfolio for Lumps of Coal

People love to take gains. That is, of course, the main reason for investing in the first place. With large portfolios, it is almost inevitable that some of your stocks will have done great while others declined. The only number that really matters is how your holdings as a whole do over the long-term. With that in mind, consider these two hypothetical potential trades: XYZ shares were purchased for $10,000 and now have a value of $20,000 ABC shares were purchased for $30,000 and now have a value of $20,000 Both trades generate $20,000 pre-tax to reinvest, plus or minus the taxes owed or saved. Selling for a profit makes you feel good. Your plan worked out well and your ego is stroked. Taking gains is always easy. Pulling the plug on a losing position seems much tougher. You are admitting defeat by removing all hope for a recovery. Your investment thesis on the shares has been proved faulty. Your ego suffers. That is why it feels so bad. In the end, though, you will have more net money to reinvest in your next great idea than when exiting the winning trade in my example. As we come toward the end of 2022 it pays to go through your entire portfolio. Do you have net realized gains from sales of winners? If so, ridding your portfolio of losers, which have not performed as expected, will absolutely cut you tax bill next April. Next, think about all possible new buys you are considering when you have more capital to put to work. Do any of them appear more promising than the down-and-out stock you could be exiting? If so, get rid of the bad one, take your tax loss and recycle the dollars freed up into more exciting positions. It makes sense from a forward-looking perspective. It also functions in the same way excising a cancerous tumor from your body does. You can then stop focusing on whether it will do further harm. Your mental health improves simply by no longer having to think about it. Do you have net realized losses? You now have a free pass to take profits on unrealized gains up to that amount without needing to pony up any extra tax. Accelerating gains against realized losses already in place can avoid wasting losses at state tax levels in future years. Net capital losses above $3,000 per year can be carried forward indefinitely against future profits on the Federal level. That is not true under most state tax regulations. My home state of Pennsylvania says if you have a net loss simply write the word loss on your Pennsylvania schedule D indicating no current capital gains tax owed that year. There is no provision for carrying over losses in the current year to use against gains later. Matching profits and losses in the same year as much as possible avoids wasting your write-offs. In high-tax states that can represent a large dollar amount. Putting your ego aside and doing what makes sense looking forward feels bad at the time but pays great dividends in the long run. Making a December review of your realized gains and losses a regular check list item is one of the highest return on investment things you can do each year. I perform the exercise described every single year.

Check Your Portfolio for Lumps of Coal

Here's what I practice prior to every new year, and, let me warn you, it doesn't always feel good at the moment, but pays off later on.

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