Investing Rules from an Old Guy

When it comes to investing, selling is harder than buying. There are only 2 reasons to sell a security and the second reason is actually a sell + buy/hold:

• You need cash to pay for something. Maybe a house down payment, or a car, or college tuition.

• You want to sell an asset and with the proceeds hold another asset that you think has a better risk-return profile going forward. For example:
• Re-balancing your portfolio
• The reason you bought the stock in the first place no longer applies. Maybe the stock was undervalued when you bought it but now the price reflects all the good news and it’s time to get out.
• Company cut its dividend. This an indicator that there may be problems ahead.
• Investor sentiment changes. For example, the health care sector will probably take a hit when democratic presidential candidate health plan proposals get closer to reality
• Company is going bankrupt
• All the reasons above just mean there are better opportunities elsewhere.

Rule #20

Don’t attempt to sell at the bottom. Instead re-balance your portfolio to take advantage of the recovery which tends to take longer than the downturn.

Rule #21

In general, try to buy and hold a stock for at least 12 months to pay less tax on the gains. When you sell stocks, you owe taxes on the net capital gains (gains minus losses). How much you pay depends on how long you held the stock before selling it.

• Did you hold the stock more than 1 year before selling it?
• Yes. Did you sell it for a gain?
• Yes. This is a Long-term Capital Gain
• No. This is a Long-term Capital Loss
• No. Did you sell it for a gain?
• Yes. This is a Short-term Capital Gain
• No. This is a Short-term Capital Loss

Net long-term capital gains are taxed at 15% while net short-term capital gains are taxed as ordinary income which depending on your income level, I’m guessing would be around 25-30%. Why this complexity? In theory this is to encourage investors to keep their money in the market for the long-term which is good for the economy. In practice, you want to consider the tax impact of your trades in this context.

For example, a sometimes-useful tactic is called “tax-loss harvesting”. Toward the end of the year, some investors will sell their losing positions. These losses will be used to offset capital gains incurred over the year.

Side note: Ever wonder how the super-rich are only taxed at around 15%? If you can imagine having so much wealth that your income is only coming from long-term capital gains, then you would only be taxed at 15%!

Rule #22

Paying tax on a gain is infinitely better than paying no tax on a loss. If a stock is trending down don’t wait to sell to a get lower tax rate without first running some numbers. If the stock drops quickly, your after-tax gain could evaporate!