Dear Nancy Woods,
Everyone talks about the end of the year being "tax loss selling" time. I'm someone who hates to take a loss because it's not really a loss until you've sold it. Am I just being stubborn?
Selling a losing investment is never fun. As an investment adviser I know it is a difficult call to make to a client. It means that whoever or however the decision to purchase the investment in the first place made a mistake. Few people will easily admit that they made a mistake, especially if it means a money loss. Yes, selling the stock makes the paper loss become a reality.
This is the time of year when it makes sense to look at the capital gains you have realized year-to-date and see if there are any losing investments that will reduce your year-to-date gain and therefore reduce the tax bill that you may have on the gain.
Whether or not to sell a losing stock specifically to realize the loss I think is a personal choice. It should be decided based on:
- 1) Will the losing stock have the chance of recovery?
- 2) What is the percentage of loss of the original investment?
- 3) Is the loss greater than my loss tolerance?
- 4) Does the investment still pay a good-to-reasonable dividend or income?
- 5) Have the fundamentals or outlook of the company changed since I bought it?
- 6) Is the investment interest rate sensitive?
- 7) If I continue to own the stock will it bother me to see it on my statement each month and be reminded I made an error in judgement?
- 8) Does the benefit of not having to pay as much tax on a capital gain that I have already taken outweigh paying the applicable tax?
- 9) Am I just emotionally attached to the investment that I don't want to sell it? (I "believe" in it)
- 10) Am I willing to investment more money into a losing investment and buy more shares? (This I am usually hesitant to advise people to do.)
- 11) Am I trying to "time" the market because everyone else is selling so I'm going to lose more?
These are just a few examples of the thought process that you should go through before you decide to sell a losing investment just to take the "tax loss".
Ultimately, my advice is not to let a tax decision rule the investment decision. If you have realized a capital gain, pay the tax from that gain by either holding the anticipated tax amount aside or be prepared to liquidate to pay the bill.
Discuss with your accountant as well as your investment adviser before you sell. You may be carrying forward losses from previous years to offset any gains you are worried about.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to firstname.lastname@example.org. You can send your questions to email@example.com as well.