Year End Investment Ideas And Tax Strategies

First thing Monday morning I'm going to​ march into my boss's office and demand a​ pay cut so that I'll be in​ a​ lower tax bracket next year.

Of course that's ridiculous,​ but isn't it​ about the​ same as​ the​ financial community's "Conventional Wisdom" (CW) for year-end tax planning? What about the​ long-term nature of​ investing,​ or​ the​ merits of​ that investment they felt so strongly about in​ July? What are their motivations,​ and what discipline thought up these strategies in​ the​ first place?

Clearly there are many questions that require answers,​ but as​ investors,​ it​ should be crystal clear that the​ object of​ the​ investment exercise is​ to​ make money... just as​ much as​ possible,​ quickly,​ legally,​ and within a​ low risk environment. the​ faster it​ comes in,​ the​ more effectively it​ can be compounded. Otherwise,​ wouldn't the​ "CW" be to​ find as​ many downers as​ uppers so that there are no tax consequences? Wouldn't Zero Taxable Gain Investing be the​ only "smart" investment strategy? a​ December,​ 2004 New York Times Money Section article actually suggested that Investment Professionals had an​ obligation to​ lose money for clients in​ order to​ reduce the​ tax burden.

Your Financial Professional's perspective may produce smart tax advice but only professional investors (not accountants,​ attorneys,​ stockbrokers,​ financial planners,​ advisors in​ general) should be called upon for acceptable investment advice. CPAs may look smarter if​ you​ have a​ lower tax liability,​ but many of​ them go too far with a​ calendar year focus that ignores the​ realities of​ an​ emotional and cyclical investment environment. Take last year's Merck for example. it​ has nearly doubled in​ Market Value since you​ were told to​ sell it​ last November... who'da thunk it! Why didn't you​ buy more (of this and many other high quality losers) instead of​ selling? Fortunately,​ not all professionals are into losing money. in​ fact,​ in​ nearly thirty years of​ dealing with hundreds of​ Accountants and other advisors,​ not even a​ handful have suggested that clients should take losses on​ fundamentally sound securities,​ Equity or​ Fixed Income. Just think if​ you​ had taken your dot.com profits in​ '99,​ purchased the​ downtrodden profit making companies of​ the​ time,​ and paid the​ ugly taxes. the​ value companies didn't crash. They've rallied for nearly seven years!

The key issue in​ considering a​ capital loss is​ the​ economic viability of​ the​ investment... not your tax situation! a​ key element of​ the​ Working Capital Model (for investment portfolio management) is​ to​ eliminate the​ weakest security in​ a​ portfolio every time the​ Market Value of​ the​ portfolio establishes a​ significantly new "All Time High" profit level (an ATH). My definitions may be different than those you​ are used to: (1) Profit = Total Market Value - Net Portfolio Investment,​ (2) a​ "weak" security is​ a​ stock that is​ no longer rated Investment Grade by's & P,​ or​ no longer traded on​ the​ NYSE,​ or​ no longer dividend paying,​ or​ no longer profitable. Income securities whose payout has fallen to​ way below average (or risen to​ an​ unsustainable level) could also be culled at​ an​ ATH. Securities that have fallen considerably in​ Market Value for no apparent reason (other than recent news or​ changing interest rate expectations) are referred to​ lovingly as​ "Investment Opportunities". This is​ what you​ look for while trying to​ reinvest your profits... like last year's MRK. By the​ way,​ switching from the​ strong asset class to​ the​ weaker one as​ a​ "hedging strategy" or​ vice versa (as a​ greed motivated speculation) is​ simply an​ attempt at​ "market timing",​ not a​ "sophisticated" or​ "savvy" adjustment to​ your asset allocation. Asset Allocation is​ always a​ function of​ personal factors and never a​ function of​ asset class (Equities and Income Generators) directional speculation.

So what happens if​ a​ new portfolio ATH is​ achieved in​ February or​ August instead of​ in​ November or​ December? (Note that the​ financial community only preaches tax loss strategies during the​ last calendar quarter.) Should you​ unload all the​ weak issues at​ the​ same time,​ even those purchased just a​ few months ago? Management of​ your portfolio requires the​ disciplined application of​ consistent rules and guidelines,​ and every manager will develop his or​ her own style. But in​ a​ high quality,​ properly diversified,​ income generating portfolio,​ (1) the​ number of​ weak issues will generally be small and (2) the​ probability of​ escaping with only a​ minimal loss very real. Keep in​ mind two basic investment axioms: There is​ no such thing as​ a​ bad profit,​ regardless of​ the​ tax implications; and no matter how you​ may rationalize,​ there's no such thing as​ a​ good loss. So,​ sure,​ if​ a​ loss should be taken due to​ an​ ATH in​ February,​ bite the​ bullet on​ the​ one security (only one) with the​ declining fundamentals (A Merrill Lynch/CNN/CFP opinion is​ not a​ fundamental.) if​ there are none,​ good job!

Profits are the​ holy grail of​ investing. Few people will admit just how infrequently they have experienced them or,​ conversely,​ just how frequently they have watched them disappear beneath the​ waves of​ a​ correction. (Like gamblers retuning from Vegas... no one ever seems to​ lose!) Similarly,​ most financial professionals will counsel their charges to​ let their profits run,​ particularly around year-end. Surely,​ speaketh the​ CW prophets,​ these profits will hang around until next year,​ thus deferring those terrible taxes! (Worked real well at​ year-end '99,​ you'll recall.) Don't think for a​ moment that anyone knows what will happen this time around the​ rally pole,​ particularly in​ those ridiculously priced ETFs,​ which are put together with the​ same kind of​ spit and duct tape used for the​ dot.coms. Always take your profits too soon,​ because you​ can't get poor that way!

First thing Monday morning I'm going to: (1) Call my accountant to​ tell him that I'm going to​ help him reduce his tax burden by not paying him,​ (2) continue to​ view the​ Investment process in​ cyclical rather than calendar terms,​ (3) limit my tax liability by how I invest,​ not by taking unnecessary losses,​ (4) continue to​ make as​ much money as​ possible,​ as​ quickly and safely as​ possible,​ and (5) contact the​ media,​ my political representatives,​ and anyone else I can think of​ that will help in​ the​ fight to​ abolish the​ taxation of​ all investment and retirement income.
Year End Investment Ideas And Tax Strategies Year End Investment Ideas And Tax Strategies Reviewed by Henda Yesti on July 08, 2018 Rating: 5

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