What is your biggest investment expense? Have you ever thought of how you can keep it as low as possible?
I am sure you have not!
This is your biggest investment expense
Like me deciding what investments to buy and when to buy takes up the biggest part of our time.
BUT the boring topics of fees and taxes (your LARGEST investment expense over time) are neglected even though they may be more important to our returns.
As you know your stocks have wildly different returns. Some do great, others hardly anything, and others fall. Historically about 36% of stocks in the US Russell 1000 Index deliver a negative return annually.
Take a close look at your losses
Winding down each year gives us time to take a closer look at the stocks we own. And it gives us the chance realize tax losses (called tax loss harvesting) before the tax year ends.
For example, here in Germany I pay capital gains taxes of just over 26%. If I sell a loss-making investment, I get 26% of the loss back, either his year, if I had capital gain profits, or in future when I make a profit.
That is a great deal to either, lower my losses (I get 26% of the loss back) or pay less taxes on my profits, depending on how you look at it.
What stocks to sell
What stock to sell you may be thinking.
My portfolio spread sheet that shows me the net gain from selling my loss-making stocks.
This is how I calculate it:
- What is the loss (Current price – Purchase price)
- Tax benefit (Loss x 26% (my capital gain tax rate))
- Trading fees to sell and buy (my fees are about 0.5% so I calculate 2 x 0.5% of the current value of the investment)
- Net Gain is the Tax benefit minus the fees to sell and buy
If you do not want to buy the position back only calculate the fee to sell the stock.
Only if the net gain is large enough do I sell the position, typically over €200.
Another unusual benefit
The selling of a loss-making stock has another, unexpected benefit.
A lot of the time I do not buy the stock back after I have sold it. Selling the stock gives me a fresh look at the investment and a lot of the time I do not buy it again.
Wait to sell stocks with a profit
If you can, you may also want to wait until after the tax year ends to sell your winning investments.
If sell a stock for a profit shortly before the end of a tax year the profit is locked in, and you pay the taxes. But if you sell at the start of a tax year you have the chance to offset losses that may take place in the year.
In other words, more freedom to plan.
Always talk to your tax advisor first
A lot of countries have tax rules or laws in place to prevent tax loss harvesting so ALWAYS first talk to your tax advisor to make sure you play by the rules before you act.
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