Conversation about... Portfolio Analysis

Our portfolio analysts have been reviewing many of our clients' accounts, as we do each fall, looking for opportunities to harvest losses. Although it never feels right to sell something that has declined in value, it makes great sense to do so in order to reduce your overall tax burden. The fact that the market has dropped in recent months gives us the opportunity to sell some of the securities and recognize losses that you can use to offset some of your substantial capital gains. We took about $42,000 in gains when we sold some of the trust holdings and moved to the more broadly diversified portfolio earlier in the year. Currently, we could take about $25,000 or so in losses.

The losses are valuable to you from a tax standpoint and we want to recognize those losses to the extent we are able to do it without compromising the diversified nature of the portfolio and without incurring prohibitive trading expenses. The IRS Wash Sale rules prohibit us from buying back the stocks in which we take losses for 30 days. We do not want to sell and be out of the market for 30 days – it may run up while we are in cash for 30 days. For an example, imagine if we sold all of your financial stocks to get losses and then financial stocks rallied and were up 30% while we were in cash. To avoid this, we make lateral moves within the portfolio. For example, we sell two beaten down financial stocks and we buy two different beaten down financial stocks or an Exchange Traded Fund (ETF) that owns a basket of financial stocks. Or we sell Lowes and we buy Home Depot. Or we sell four energy companies and we replace with an energy ETF fund. In essence we are making lateral moves within the portfolio – we are remaining fully invested but we are "harvesting" those losses that are extremely valuable to you.

How valuable are the losses and does this make sense? Take the above example of $25,000 in losses offsetting $42,000 of gains. Paying capital gains on $25,000 at a 15%  federal cap gains rate plus 7% NC rate = $5,500. That is real money that you really get to keep instead of sending to the IRS. Most investment management firms ignore taxes which baffles us….our holistic approach to financial, tax and estate planning coupled with disciplined, well diversified investment management should put you well ahead over time with more money in your account.

These tax moves will create more trading activity than is the norm at Bragg Financial. Once we get the market to settle and start moving up (hopefully soon), our opportunities to take losses will be much more limited. In this case however, the market really declined sharply right after our first few installments (as I am sure you noticed). The only good news about a decline like this is that it presents a great opportunity to let these losses work for you.  

It is important to us that you understand and feel good about the tax process I have described above as it is an important part of the work we do for you in the portfolio. You can look for trade confirmations in the next week or so.