What is the point of investing if you’re not going to sell at a gain? You’d be surprised at how often investors need reminding that to grow their money for their future; eventually, they will have to sell and pay taxes on the growth. While most investors are pleased with the performance of their portfolio, occasionally, we come across an investor who questions every action or recommendation their adviser provides.
We recently met with an investor who was looking for a second opinion. He held a large position in a stock that his adviser recommended he sell. While the company had done very well for him in the past, the current market was not the right environment for the company. His adviser had recommended selling the stock about two months ago, but he only acquiesced to sell half of his position last week. He was upset because the stock was sold on a day it was down and also because the investor still had significant gains for which he now owed taxes.
He asked us to take a second look at his situation. Indeed, he did have a large gain; however, we noticed that the position was sold on a day when it was down 10%, but the market was only down 3%. This prompted us to look back, noting that from the date of the recommendation to sell and his actual sell date, the stock was down nearly 25%. We pointed out that his decision cost him 25% of his gain—much more than what he was paying in capital gains.
Part of managing a portfolio is repositioning the portfolio for the current economic environment. That could mean taxes on your gains or taking losses. Currently, the general advice is to rebalance your portfolio, take defensive positions, and look for losses to offset your gains. Every year investors and their advisers need to look at the plan and modify it to accommodate the changes in circumstances and the economic environment.
Since 2010, growth stocks have outperformed every other investment class. It is hard not to expect that to continue. However, what allowed growth stocks to flourish was low interest rates. Now that interest rates are rising, growth stocks are expected to slow down. Still, investors get anchored to specific strategies and do not want to change what has worked in the past. When investors become emotionally tied to a stock or investment style, they stop considering rebalancing their portfolio as an option. They want their portfolio to increase, but do not want to pay the taxes.
It is important to understand that everyone does what they do well. When you hire an adviser, you must trust that the adviser is doing their job and considering all options when recommending changes that will incur taxes. You need to understand and believe in the investment philosophy your adviser follows.
This investor spent all his time second-guessing every decision his advisor made. We had to ask him if he was upset with the adviser’s decisions or if he was upset because he was losing more by deviating from the plan his adviser laid out for him. Ultimately, this investor and adviser were not a good fit, and our recommendation was for him to seek an adviser who matched his risk appetite.
If you have questions on how we use our Ten Year Rule to guide our investment decisions, the experts at Henssler Financial will be glad to help:
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- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the September 17, 2022 “Henssler Money Talks” episode.
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.
