As we approach the end of another strong year in global stock markets, many clients are a bit nervous about what the future has in store for their investments. I’ve been getting calls from clients asking if maybe they should sell and book some profits. After all, they say, they read that the market is going to crash. I guess if it appears somewhere online, it must be true!
When we discuss the pros and cons of such a decision, the moment I mention that there could be capital-gains tax to pay, the response I usually get is: “Forget it, I don’t want to have to pay tax.”
While I fully agree with that sentiment, sometimes paying a bit of capital-gains tax is a good sign: It means you made money. While I am usually a big advocate for holding good investments for the long term, in certain instances, it does make sense to sell and cash in your profit.
Just because it’s been a good financial year doesn’t mean that investors should become complacent. The end of the year is always a good time to review finances and compare your current situation to your stated goals and needs, and evaluate how you are progressing to achieve your goals.
How to save thousands of dollars with strategic planning
Now is the time for some strategic planning. Some smart planning can literally save you thousands and thousands of dollars. With Hanukkah fast approaching, that’s some serious gelt!
Let’s say you decided to sell at a profit and now have substantial capital gains. As I have written previously, don’t assume that guarantees you a hefty capital-gains tax bill.
Review your portfolio to see if you have any positions that are currently at a loss. I know many investors shudder at the thought of selling something at a loss, but even if you believe that a certain stock will appreciate over the long term, selling off the losers can actually make you money.
Some good can actually be derived from losing stock positions. The loss can be used to offset other gains, thereby lowering the tax bill. In fact, for many investors, tax-loss selling may be the most important way to reduce their tax bill. If done correctly (be sure to speak to your accountant before making any trades), it can save a tremendous amount of money.
Let’s use a real-life example. A woman has a gain in Palantir stock, and she decides to sell it. She will be taxed on that gain in full. But if she holds a company like Lululemon, which has been shellacked this year, and is sitting on a huge loss that she actualizes by selling, she can use the amount of the loss and offset it against her gains, drastically reducing the taxes owed.
Again, I can’t stress enough the importance of speaking with your accountant before implementing these strategies.
There is another approach to planning that doesn’t get as much airtime but can be very effective. Donor-advised funds (DAFs) have quietly become one of the most flexible and tax-efficient vehicles for those who want to combine financial planning with meaningful impact.
A DAF allows you to make a charitable contribution today, receive the immediate tax deduction, and then recommend grants to qualified charities over time. For investors facing a high-income year, the ability to “front-load” charitable contributions into a DAF can provide substantial tax relief while ensuring donations are distributed thoughtfully in future years.
As I mentioned above, many investors hesitate to sell long-held stocks, ETFs, or even shares of a private business simply because the embedded capital-gains tax is too steep. A DAF changes the equation.
When you contribute appreciated securities directly into a DAF, you receive a full fair-market-value tax deduction (subject to IRS limits) and avoid paying any capital-gains tax on the appreciation. That means you’re effectively donating with “pretax” dollars – something that’s simply not possible when selling assets first and then donating cash.
Consider a simple example: You purchased a stock years ago for $10,000, and today it’s worth $50,000. If you sell it, you could owe tens of thousands in capital-gains taxes. If you donate the shares to a DAF instead, you not only avoid the tax, but the full $50,000 goes to charity. That’s a far more efficient form of giving.
One of the most overlooked aspects in long-term investing is the need to rebalance a portfolio. Rebalancing is important for two main reasons. First, it keeps your portfolio in tune with your long-term goals, and second, it keeps your asset allocation in line with your risk level.
Let’s say that a few years ago, you started with an allocation of 70% stocks and 30% bonds. From the stock-market gains over the last few years, your asset allocation may now be 80% stocks, meaning that your portfolio is more aggressive than you want.
Use this time of the year to sit down and reassess your financial situation. If there are changes, take the time now to reallocate your funds to get back to the type of allocation that makes sense for you.
Speak with your accountant and financial adviser to fine-tune your portfolio before year-end.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
aaron@lighthousecapital.co.il
Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.