When trying to gauge market volatility, we first look at what indicators are causing the swings and try to determine whether any of the fundamentals have changed. Currently, unemployment is at one of its lowest readings, the Consumer Price Index fell slightly, and first quarter’s earnings are poised for growth. With fundamentals in place, chances are you might be apprehensive to make sweeping changes to your portfolio.
However, having solid fundamentals doesn’t mean you can be complacent with your investments. Volatility like we’ve seen in recent months presents opportunities for tax loss selling. Every investor who has made money in the market knows, the tax man is always at the end of the game waiting to take his share. As part of your comprehensive planning strategy, you and your adviser should be looking at opportunities to control the tax implications of investments in your brokerage accounts throughout the year—not just at year-end.
Perhaps you’ve looked at your liquidity needs, and sold some stocks to secure those profits into fixed-income investments for the future. You may have sold investments both in December 2017 and January 2018 to spread out the capital gains over two years. In this instance, you may be starting off the year with capital gains. The recent market volatility allows you opportunity to sell some positions that have a loss because of the recent declines.
You’ll want to pay particularly close attention to your cost basis in your shares. You may have share lots with different cost bases if you have been dollar cost averaging throughout the year or if you’ve acquired shares through dividend reinvestment. By keeping track of the actual cost for each lot of shares, you should be able to specify the higher-cost shares to sell and increase the amount of your realized loss. Keep in mind, you cannot sell shares for a loss and buy the same stock within a 31-day period before or after the sale, as the wash sale rules will go into effect, invalidating any tax loss.
Knowing that a swing is the result of normal market fluctuations, the current volatility can also be a good reason to rebalance. Last year, the Technology sector was up more than 30%, so it’s very likely your portfolio is now overweight with the sector’s outpaced growth. Rebalancing your portfolio to your specified sector weightings allows you to trim the outperformers and buy some underperformers at a discount. Furthermore, with a rebalanced portfolio, you should be able to better manage your risk when the market swings 500 points or more each day.
When you own individual stocks that were purchased by dollar cost averaging throughout the year, you generally have more opportunity to manage your tax situation. With the trend toward passive investing, some investors may have put their money in an index exchange-traded fund. While they likely experienced gains around 20% in 2017 and an additional 7% in early 2018, now that the market is experiencing downswings, there is little they can do to take advantage of the losses.
Keep in mind, that your tax strategies should not undermine your financial goals. Tax considerations should not be the deciding factor of whether to sell an investment. But if you are in a position to minimize your tax liability through tax loss selling, market volatility can present a solid opportunity to do so.
If you have questions regarding your portfolio, the experts at Henssler Financial will be glad to help:
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- Email: experts@henssler.com
- Phone: 770-429-9166.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
