Last time, I wrote about the importance of rebalancing the portfolio. Today, let’s look at the other year end portfolio fixing task – selling your losers to get the capital loss tax deduction. Tax deduction? You may think I don’t have to worry about tax until April. However, you have to take action now before the year is over to get the tax deduction for 2011. If you wait until 2012, then you won’t get the tax deduction until April 2013. That’s why the end of the year is a great time to sell some of the losers in your portfolio.
Some of my stock holdings are not doing well and I no longer believe they are a good investment for the long term. I’ve put off selling them because I was hoping they would recover. The capital loss tax deduction is just the kick in the pants for me to get rid of these losers and raise some money for rebalancing.
Most of our investments are in index funds and ETF, but I do have about a dozen stocks in various accounts. Most of these stocks were purchased a few years ago and I find that I don’t have time to follow all of them closely anymore. My plan is to reduce the number of stock holdings to about 6-8 stocks. Most of these will be dividend paying stocks with low volatility like AT&T and Intel so I don’t have to watch them like a hawk. I will probably keep a few growth stocks for a while longer and see how they do. I should be able to keep a close eye on 2-3 speculative stocks without too much trouble.
Let’s look at one of my losers – Rosetta Stone. (RST)
This was one of my speculative buys and it didn’t pan out. I know their language learning software is very nice and many people like it. I know they are expanding internationally and are making headway into the foreign market. That’s about all I know. Unfortunately, I didn’t keep a close eye on their management and finances. These two things dragged down the stocks tremendously. Rosetta Stone lost money every quarter this year and the way it is going, I don’t know when they will be positive again.
I think a I need to cut my losses with Rosetta Stone and move that money into a sector that I am under-weighted in. For 2011, that sector is emerging market. Most of my emerging market holding is in VWO, an emerging market ETF from Vanguard.
By selling the Rosetta Stone stocks, I hit two birds with one stone. I get my tax deduction and the fund will help with the rebalancing effort. What do you think of this method? I have a few more losers that I probably should get rid of at the same time as RST. These will give me enough fund to nudge the foreign market toward my target asset allocation.
PS. I did took some profit earlier this year when I sold NFLX so some loss offset would be a good thing. It is a pain to look at tax in December, but we have to do it to minimize our tax.
Disclosure: We own every stocks and ETF mentioned in this post.
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Love your disclosure statement! *Exactly* the opposite of so many articles in the major business press (and even including Seeking Alpha), where the writer propounds opinions on stocks, but has no “skin in the game”. I’m thinking about a couple of uranium stocks to sell before year-end… but I may buy them again in the new year.
Haha, thanks! I can barely keep up with the stocks I own so that’s the only thing I can write about at the moment.
Selling to take some losses and then buying them again is a good strategy too. I usually just hold on to the stocks if I want to keep them long term.
Yes, this is definitely a painful but needed part of investing. It’s always tragic when the fundamentals (i.e., management team and finances) end up biting in the tail. Anyway, thanks again for the rebalancing reminder.
Hope you get your rebalancing done!
“We own every stock and ETF mentioned in this post.” – that’s an awesome disclosure line, if only because it’s the exact opposite of what I usually read. “Buy this! I haven’t”.
Yeah, plus you can carry over losses. It makes the downside a little less painful… or you can use your loss to paper over a win in another stock.
Thanks! You reminded me to go over all my transactions this year. I’m pretty sure we are up for now because I took some gain on NFLX before it went down.
It sucks when you have losses to report and that sometimes you have to cut and run but that seems to be the way with markets these days. You just never know what is going to happen. I think it is wise for you to reinvest that money into something different.
I lost my appetite for speculation these days. I’ll probably move any extra money into one of the index fund or a stable dividend stock.
Don’t sell off all losers, keep some for next year to offset next years gains
I don’t know about that strategy.
Your rationalization seems logical to me. If your asset is not performing and you have the opportunity to redeploy those funds more productively, and get a tax benefit, then why not? If you were selling the losers to buy Christmas gifts, then that simply would not fly
What’s wrong with Christmas gifts? Are you anti Christmas???
Definitely not anti-Christmas. Haha. But, if you’re selling stock to pay for it then you’re living on the red-line….stand back, she’s gonna blow!
I sold a couple of losers yesterday and I’m keeping the liquidity for now. I want to add more to my foreign market holding, but I’m just too scared right now. I think the European crisis will take a while to work out and price will fall.
Why did you pick Rosetta Stone when you were buying? I am just curious to see your logic behind it. I am not an investor but an inquiring mind.
Loved you disclosure too!
I was subscribing to a newsletter that recommended it. cough* fool *cough… Well, the other recommendations (NFLX for example) did quite well so I still came out ahead.
Great tip on selling the losers before the end of the year. Great for taxes, and since it can get hectic this time of year, selling off losers now before the holiday rush really hits is a great plan.
Right! If you wait until Christmas, it will be too late. I find stocks tend to drop in December anyway. Most people are probably selling off their losers and drive the price down further.
I was tempted by Rosetta myself, but didn’t jump in.
You and I have similar investment styles. I am almost exclusively invested in index funds with the exception of some dividend stocks I have been having fun with. I do continue to contribute though because I want to see what kind of revenue I can generate.
I recently bought LEG. We will see what happens with that.
I should have purchased the software instead of the stock.
I like LEG too and will be keeping an eye on it. The 5% dividend is very nice.
I almost bought Rosetta after seeing it in Fool newsletter (I think). Then I decided not to go ahead as I knew nothing about it. I still have Citi, I am hoping beyond hope that “some day” they will come back a bit better. If not, I should just sell it.
The Fool newsletter turned out all right for me. I had more gain than loss and I was happy with it. My strategy is changing to a more hands off and more conservative style so I unsubscribed.
Great reminders to start thinking about taxes now. Too many people wait until its too late!
I hate thinking about tax and try to limit it to only December and April.
This is exactly what I did last year end. I didn’t have the time to monitor and research my single stock holdings anymore and wanted to cut my losses and get a tiny bit of relief on my tax return. It feels good to simplify! -Sydney
We are way too busy with the full time job, blog, and baby to do anything else. Anything to help simplify our lives is a good thing.
I did the same thing a few years ago..sold individual stocks and bought ETF’s. I also figure if it’s a really down day or up day, it’s easier to sell a few ETF’s vs a whole army of stocks. I haven’t regretted my approach and it’s been loads easier to manage and understand. I do have a few more I’m looking to dump though. I should relook.
I dumped my worse losers yesterday! It was a great day to dump stocks since the DOW went up 500 points!
This is a really important article. So many investors forget the end of year pruning! And I totally understand your interest in moving towards ETFs and index funds. So much easier!
I just don’t have time to follow each stocks anymore. I need to simplify my life a bit.
That sounds like a smart idea. This the first year I’m trying to rebalance and have sold two of my big losers (COMV and OSTK) for a $5000 loss total. I know I need to diversify with more international exposure (Asia?) but I’ve managed to put all that money into US stocks. Oops. I also own VWO but not that much of it… probably should focus in 2012 on that ETF.
I sold RST and another stock for $3,000 loss. Ugh… It’s a pain to realize loss, but I need it to offset the gain I made earlier this year. I’ll probably pick up more VWO soon.
It’s hard to sell losers because it’s like admitting that you picked a loser (and we all know we all don’t want to view ourselves like that otherwise we wouldn’t have bought the stock in the first place), but it’s so important to do!
Thanks for the reminder RB40! I’m going to have a look at my portfolio in the next few days. I already have some capital losses and might sell something that I profited on to cut the capital gains.
That’s why I usually hold on to losers a bit too long. I should have sold these in October and I would have been $300-400 better off. Oh well, as long as the net worth is on the right track, I’m happy.
It’s important to remember not to sell everything, though. I recommend only selling enough to cover the gains and then and then taking an additional $3,000 in losses. The reason being that you are only allowed to use up to that $3,000 in capital losses to offset ordinary income, with any remaining losses being carried forward until they are used up. To me there is no sense selling out now just to have that possible deduction later, when no one ever knows where the market will be by the time you can actually use those loss carry-forwards in the future.
You’re right unless the loser doesn’t have a good prospect, then it’s time to sell no matter what. I think the question to ask yourself is – would I buy this stock today? If not, then it’s most likely time to sell. I checked my gain/loss statement before I sold the losers and it turned out I need those loss to offset the gain I made earlier this year.
Have a great weekend!
I completely agree, and would add in one more pre-requesite: is the stock still doing what you purchased it to do (ie: throwing off a strong dividend every quarter, or increasing dividend payouts each year). f it is, then I don’t think tax loss harvesting would be the best choice, but it would be a personal decision to make.
Great reminder to be mindful of tax losses. The market has been so volatile, I didn’t get into many stock positions. Hopefully can dabble a little more next year.
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