As the year is nearing its end, I’ve started thinking about taxes. I’m making my annual IRA, 401k and HSA contributions. But on top of that, I’m sitting on some nice gains in the stock market. So today I’m going to review my stocks and determine if I should lock in the gains.
I haven’t made too many new buys and I’ve listed the last three below. Each stock has outpaced the S&P 500 based on each holding period…
|Buy Date||Company||Total Return||S&P Return||Days Held|
To determine if I should sell, I look at three important questions…
Change of Mind
Now here’s the most important question when it comes to selling… have the company fundamentals or valuations changed enough to warrant a sell?
Here’s my original research and reasons for buying each company…
The original reasons I bought a piece of these businesses remain intact. In a nutshell, they have solid cash flows and good growth potential. Although, the valuations have run up for all three positions so I won’t double down anytime soon. But I don’t think they’ve jumped to overvalued levels. So based on current valuations, I’ll continue to hold.
Now the next important question for before selling… can I lower total taxes paid and improve benefits of tax-deferral?
I hold these stocks in a taxable account so the first thing I check is holding period. Both Altria and AT&T are under a year and would fall under short-term capital gains tax. So if I sold them, I’d have to pay the government 22% of the gains. That’s hard to justify.
The only long-term holding is Facebook with a 34.4% gain. If I sold this position, I’d have to give Uncle Sam 15% of my gains. That’s also hard to justify.
Now if I didn’t have other income this year or the stocks were in a tax free account, the next question below would carry more weight in my decision to sell.
Also, at some point down the road I might take a year off work. If that happens I would sell some winning positions and buy them right back. I’d pay little-to-no taxes on those gains and lock in a higher cost basis. That would lower my taxes in the future.
Note: The wash-sale rule is also useful to know but it doesn’t apply to pushing gains forward. You should look into this rule if you’re considering locking in capital losses (tax shield) and then making the same investment again.
These little tax considerations can save thousands of dollars here and there. They add up over time and can easily result in an extra $100,000+ in your retirement portfolio.
Another important question to ask before selling stocks… is there a better investing opportunity?
If I sold my stake in Facebook, can I invest the proceeds elsewhere with a higher probability of return? I haven’t found any better buying opportunities. And this makes sense after a 10-year bull market and the Fed pushing interest rates near record lows. Investors have bid up asset prices across the board with so much cheap debt sloshing around.
Unless a much better opportunity comes knocking on my door, I’ll continue to hold shares of Altria, AT&T and Facebook.
I’m not the only investor struggling to find better investing opportunities. Warren Buffett is sitting on over $120 billion in cash. We’re both twiddling our thumbs for now but we know patience pays (and I hear it’s also a virtue).
Overall, I don’t plan on making any new investments or selling any of my stocks this year. I’m sure there will be setbacks with each position but I’m in it for the long haul.