Year End Investment Ideas and Tax Strategies
Below is a MRR and PLR article in category Finance -> subcategory Taxes.
Year-End Investment Ideas and Tax Strategies
Summary
It's a playful thought to ask for a pay cut just to land in a lower tax bracket next year. Profits are the elusive target in investing, and most people often watch potential gains vanish during market downturns.
Article
Imagine walking into your boss’s office on Monday morning and requesting a pay cut to shift into a lower tax bracket. While this sounds absurd, it parallels some of the financial community's "Conventional Wisdom" (CW) concerning year-end tax planning. What happened to the long-term focus in investing or the once-favored investment from July? These strategies often provoke more questions than answers.
The primary goal of investing is clear: to make money as swiftly and legally as possible, in a low-risk environment. Quick returns enable effective compounding. If zero taxable gain was the ultimate goal, it might suggest we should balance losses with gains to avoid taxes altogether. In 2004, a New York Times article even hinted that financial advisors should help clients lose money to lessen their tax burden.
While financial professionals might provide savvy tax advice, only professional investors should give investment guidance. CPAs may seem successful by lowering tax liabilities, but many overlook the cyclical nature of investments, focusing too heavily on the calendar year. Take last year’s Merck, for example. Its market value nearly doubled since being advised to sell in November. Why didn't more investors buy these undervalued stocks instead of selling? In my experience, very few advisors recommend taking losses on fundamentally sound securities. Consider if you had cashed out on overpriced dot-coms in '99 and bought into profit-making companies?"these companies have rallied for years.
When taking a capital loss, focus on the investment's future potential, not just tax outcomes. The Working Capital Model for portfolio management advises removing the weakest security when a new "All Time High" (ATH) profit level is achieved. Definitions to consider include: (1) Profit = Total Market Value - Net Portfolio Investment, and (2) A "weak" security is one that loses its investment grade status or ceases to pay dividends, among other criteria. Stocks with unfounded market value drops are "Investment Opportunities" for reinvesting profits?"just like last year’s MRK example. Shifting from strong to weak asset classes, or vice versa, should be seen as market timing, not as a savvy asset allocation tweak, which should remain based on personal factors, not speculation.
What if a portfolio reaches a new ATH in February or August instead of November or December? Financial professionals often discuss tax loss strategies late in the year, but effective portfolio management requires consistent rules, regardless of timing. In a well-divided, quality portfolio, weak issues are minimal, and escaping with a minor loss is likely. Remember the basics: there’s no bad profit, tax implications aside, and no good loss, no matter your justification. So, if an ATH in February prompts a necessary loss, act on the declining fundamental. If none exists, congratulations!
Profits are the holy grail of investing. Many won't admit how often they've missed them or watched them disappear in corrections. Financial advisors may encourage letting profits run, especially at year-end, hoping taxes will be deferred. Recall the year-end '99 scenario?"it didn't hold. Nobody can predict another rally, especially with overvalued ETFs. Always take your profits too soon?"you can't lose with that approach!
Come Monday morning, here’s my plan: (1) Inform my accountant I’ll lower his tax burden by not paying him, (2) consider investments in cyclical terms over calendar ones, (3) limit taxes based on smart investing rather than unnecessary losses, (4) aim for maximum safe profits, and (5) rally support for abolishing taxation on all investment and retirement income.
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