For many expat Americans in Israel, this Thanksgiving weekend is a way to reconnect with the old country and feast on turkey, stuffing and other classic holiday staples. All this is done in recognition of the first Thanksgiving, when the Pilgrims gave thanks for the agricultural bounty they received and the fact that they were still alive.
The last 11 months for investors have been anything but bountiful. For the last two weeks I have been inundated with client calls inquiring about making some portfolio adjustments to both reposition their investments for the new reality of much higher interest rates and to try to create tax efficiency in their portfolios. The amount of calls dealing with this specific topic can only mean one thing: It must mean that we are approaching the end of the year.
Without doubt, this year so far has been lousy for most investors as global stock markets have tanked due to the Russian war with Ukraine, surging inflation and spiking interest rates. Most major global markets are down over 15% this year. It might be hard to believe but some good can actually come of these losses. With these market losses it’s important to be strategic in order to potentially save thousands of dollars. Here are some tips to make your portfolio more tax efficient as well as make sure that it still matches the goals and risk tolerance levels set forth.
Losses are not so bad
With markets down so much this year there is a good chance that you might have sold positions at a loss and now have substantial capital losses. But keep in mind that the previous few years were good for investors. Now is the time to review your portfolio to see if you have any positions that are currently at a gain. I know that many investors shudder at the thought of selling something at a loss, or hate selling a favorite position that has appreciated a lot.
Even if you believe that a certain stock will appreciate over the long term, selling off the losers/gainers can actually make you money. Market drops can be beneficial. When the position is sold, the investor realizes the loss, which has certain tax advantages. The loss can be used to offset other gains, thus lowering the tax bill.
FOR MANY INVESTORS, tax-loss selling might be the most important way to reduce their tax bill. If done correctly (be sure to speak to your accountant before making any trades), tax-loss selling can save a tremendous amount of money. Let’s use a real life example.
A woman has a loss in Zoom stock and decides to sell it. But let’s say that she also bought shares of Apple years ago, and has a big gain on the investment. She can sell part or all of the Apple stock and realize the gain. Then she can use the amount of the loss and offset it against the gain in Apple, drastically reducing the taxes owed.
You might ask why she should sell the Apple stock. By selling it and using the loss from Zoom to offset any capital gains tax, the investor can actually reset their cost basis at a much higher level without incurring any tax liability. That means you can buy back the Apple shares at a higher price than you had originally purchased them, thus creating tax efficiency in your portfolio. Again I can’t stress enough the importance of speaking with your accountant before implementing these strategies. Offsetting gains and losses have different rules in different jurisdictions.
In Israel, one can sell a stock and use the loss to offset gains and repurchase the stock the next day. It’s different in the US. There is a rule in the US, called the wash-sale rule, where the IRS disallows a loss deduction from the sale of a security if a “substantially identical security” was purchased within 30 days before or after the sale. The wash-sale rule is designed to prevent investors from making trades for the sole purpose of avoiding taxes.
Much has changed in the world over the last year. Especially with the drop in global financial markets, investors should take the time to make sure that their portfolios are well positioned for current conditions. One of the most overlooked aspects in long-term investing is the need to rebalance a portfolio. Rebalancing is important for two main reasons. First, it keeps your portfolio in tune with your long-term goals, and second, it keeps your asset allocation in line with your risk level.
Use this time of the year to sit down and reassess your financial situation. If there are changes, take the time now to reallocate your funds to get back to the type of allocation that makes sense for you.
Speak with your accountant and financial advisor in order to fine tune your portfolio before year’s end.
Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing. www.gpsinvestor.com; [email protected] The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.