You Win Some, You Lose Some

razor-for-christmas

The holidays are around the corner and no doubt we are all thinking about the time off that we’ll be spending with family and friends, or the festive meals that will be stuffing our stomachs.  With so much activity going on, it’s easy to neglect our investment portfolios during this busy time of the year.  However, as the New Year looms near, we head towards another deadline that fast approaches.  Tax-loss selling.

We all want to be superstar investors, but the fact is, we can’t always pick a winner.  If we could, why the heck would we be working a 9-5 job?  We should be roosting with the Wall Street bigwigs, drinking Dom Perignon and rolling in our Ferraris.  Alas, we don’t have magical crystal balls that tell us the next big thing, or a DeLorean to bring us back in time so that we can make an investment in Google when the first initial public offering came out.  An inevitable outcome of investing is that one day you will suffer a loss, but that doesn’t mean the end of the world.

I know, I know.  Why ruin the festive mood with talk of taxes and losses.  If you are already an avid investor, you no doubt already realize that capital gains are taxed by the government.   When you buy and then sell a stock that makes money, half of that gain is taxed.  If you don’t sell an investment that has made money, you won’t get taxed.  In Canada, capital gains are taxed at your marginal income tax rate.  This is essentially income added on top of any regular income you might be making.  Tax-loss selling is a strategy to write off your losses for the year against some gains that you may have made.  This reduces the amount of taxes that you will end up paying when filing your tax returns in March and April.

If your brokerage didn’t setup up an alarm for you, you should be aware that in order to write off your losses, all trades must be completed by December 24.  It’s not December 31, which we might all think it would be.  Banks need time for transactions to be finalized.  It may seem like your transactions are done in real time when you buy or sell online, but in reality, it takes time for that transaction to go through the system.  Even in today’s day in age where computers run in gigahertz, we still can’t do instant transactions.

The careful thing to be aware of when selling any investments to claim a loss is that you cannot buy that same investment again within 30 days.  If you do, then the government will think that you are scamming them and catch you when you file your tax returns.  What the government doesn’t want is for individuals to claim superficial losses just to get around paying taxes.  If you plan on selling something that is temporarily down but you really plan on holding it, then forget about trying to claim any tax-loss.  It certainly isn’t worth the hassle and you definitely don’t want to be paying the extra commissions of buying and selling just to save a few bucks.  If the tax savings is insignificant, then it’s better off not trying to manipulate your portfolio for a few measly dollars.

Selling an investment means that you no longer feel that the fundamentals of why you bought in the first place exist any longer.  Don’t try to sell just to time the market.  The market is unpredictable and no one is ever going to be perfect at timing the market no matter how much research and mathematics you decide to do.  Part of the market is based on emotional sentiment.  Emotions are unpredictable, there’s no way you can predict the next time your significant other decides to have a temper tantrum, can you?

I sincerely hope that for the year of 2013, that we’ve all have the opportunity to build growing investment portfolios with very few losses.  With strength in the equity market and real estate it’s hard to fathom that a good diversified portfolio would turn out to be poorly performing.  As the year ends, I hope to recap some of the highlights of 2013, review some good housekeeping chores for the year end and cap off the one year anniversary to this blog!

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