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Year
End Investment Ideas and Tax Strategies (Page 1 of 2) |
"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.
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