I just sold every single individual stock and cryptocurrency that I owned.
I didn’t decide to do that because I believe we have yet to hit the bottom. Because I see more losses in the future. It was a decision driven partly by strategy and partly by personal preference.
Tax loss harvesting and Spring Cleaning
The strategic piece was to take advantage of tax loss harvesting. Tax loss harvesting is not a strategy reserved for experienced investors or the wealthy. Selling investments at a loss to get the tax deduction is something everyone can do. Keep in mind that those losses are not a dollar for dollar tax reduction. They simply reduce your taxable income and save you the amount of your effective tax rate times the money loss. So, for example, if you had $3,000 in losses you are claiming, which is the per-year max, and your effective tax rate is 15% then you would be saving yourself $450 in taxes due. Still, that’s $450 you didn’t have to pay Uncle Sam.
If you are concerned about those investments moving upwards in value again, know that you can buy back into those same investments after a 30-day wash-rule period.
Another reason I sold everything was to do a bit portfolio “spring cleaning.” I’m in a mode where I am simplifying just about everything I can. Until this recent fire sale, I had investments spread across five or more accounts. Some where held at Coinbase, Robinhood, TD Ameritrade, my 401k, my IRA, an employee stock-purchase plan I participated in, etc. I was even considering opening another account with a roboadvisor such as Wealthfront. It was just too much.
Finally, I see even more losses piling up. By selling everything now I limit my losses.
Manual or automated tax loss harvesting?
There are a few ways to benefit from tax loss harvesting. If you manage your own investments then you will have to manually determine which investments to sell and then execute those trades. If you use a roboadvisor there solution likely automates the process for you.
So far I’ve elected to actively manage my investments. That preference driven in part by results and in part because I enjoy the process. It’s a hobby for me.
My record investing has been better than average. Even through the most recent downturn in the markets, I was able to minimize my loses. When most people I know were seeing 20%-30% losses in their accounts, I was able to stay about even. In some instances, with a few stock plays, I was able to make a decent return.
Doing so meant I had to be actively involved with the investments I made. That’s the main difference that I noticed. Most of the people I know don’t actively manage their investments. Because they don’t have the skill or time. Or, if they have a financial advisor they work with, their advisor doesn’t actively manage their investments. Even in an account where they are paying for active management.
Keeping an eye on the economy, the markets, and your investments takes a lot of energy and time. It also requires some level of skill. Which is why “set it and forget it” strategies are recommended for most people. But, using that type of approach means you have to be willing to ride out the ups and downs of the markets. While that generally works out for people who can afford to hold fast, for others, such as people who were planning to retire soon, it means that decision is delayed.
The timing of tax-loss harvesting
I sold everything last week because I believe that there are more losses to come and I already had my $3,000 worth of losses to leverage. However, as long as you make your trades before the end of the calendar year you are good to go.
If you don’t feel you have the skill or time to manage your own investing but you don’t like the idea of a computer making all of your investment decisions for you there is a third option.
Find yourself a financial advisor who can offer you what is called a “managed account.” This will cost you a little bit of money. Usually 1-2% of the amount of money they manage for you. But, there general idea is that by actively working your account they can limit losses and beat average returns. Assuming they can get you 8% growth per year it might be worth the 1% fee.
Just make sure you work with an advisor that is actually going to actively manage your account. Rather than earn the fee but rarely make any trades on your behalf.
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