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.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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