Year_End_Investment_Ideas_and_Tax_Strategies by georgetitan


Year End Investment Ideas and Tax Strategies

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First thing Monday morning I'm going to march into my boss's office and demand a pay cut so that I'll be in
a lower tax bracket next year. Profits are the holy grail of investing. Few people will admit just how
infrequently they have experienced them or, conversely, just how frequently they have watched them
disappear beneath the waves of a correction.

Investment,stock market investment advice,capital gains taxes,tax losses,financial planning,tax
planning,CPA,advisor,diversification,investment strategy,Working Capital,fixed
income,stocks,bonds,financial advisors,market timing,ETFs,Merck

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First thing Monday morning I'm going to march into my boss's office and demand a pay cut so that I'll be in
a lower tax bracket next year.

Of course that's ridiculous, but isn't it about the same as the financial community's "Conventional Wisdom"
(CW) for year-end tax planning? What about the long-term nature of investing, or the merits of that
investment they felt so strongly about in July? What are their motivations, and what discipline thought up
these strategies in the first place?

Clearly there are many questions that require answers, but as investors, it should be crystal clear that the
object of the investment exercise is to make money... just as much as possible, quickly, legally, and within a
low risk environment. The faster it comes in, the more effectively it can be compounded. Otherwise,
wouldn't the "CW" be to find as many downers as uppers so that there are no tax consequences? Wouldn't
Zero Taxable Gain Investing be the only "smart" investment strategy? A December, 2004 New York Times
Money Section article actually suggested that Investment Professionals had an obligation to lose money for
clients in order to reduce the tax burden.

Your Financial Professional's perspective may produce smart tax advice but only professional investors (not
accountants, attorneys, stockbrokers, financial planners, advisors in general) should be called upon for
acceptable investment advice. CPAs may look smarter if you have a lower tax liability, but many of them go
too far with a calendar year focus that ignores the realities of an emotional and cyclical investment
environment. Take last year's Merck for example. It has nearly doubled in Market Value since you were told
to sell it last November... who'da thunk it! Why didn't you buy more (of this and many other high quality
losers) instead of selling? Fortunately, not all professionals are into losing money. In fact, in nearly thirty
years of dealing with hundreds of Accountants and other advisors, not even a handful have suggested that
clients should take losses on fundamentally sound securities, Equity or Fixed Income. Just think if you had
taken your profits in '99, purchased the downtrodden profit making companies of the time, and paid
the ugly taxes. The value companies didn't crash. They've rallied for nearly seven years!

The key issue in considering a capital loss is the economic viability of the investment... not your tax
situation! A key element of The Working Capital Model (for investment portfolio management) is to
eliminate the weakest security in a portfolio every time the Market Value of the portfolio establishes a
significantly new "All Time High" profit level (an ATH). My definitions may be different than those you are
used to: (1) Profit = Total Market Value - Net Portfolio Investment, (2) A "weak" security is a stock that is
no longer rated Investment Grade by S & P, or no longer traded on the NYSE, or no longer dividend paying,
or no longer profitable. Income securities whose payout has fallen to way below average (or risen to an
unsustainable level) could also be culled at an ATH. Securities that have fallen considerably in Market
Value for no apparent reason (other than recent news or changing interest rate expectations) are referred to
lovingly as "Investment Opportunities". This is what you look for while trying to reinvest your profits... like
last year's MRK. By the way, switching from the strong asset class to the weaker one as a "hedging strategy"
or vice versa (as a greed motivated speculation) is simply an attempt at "market timing", not a
"sophisticated" or "savvy" adjustment to your asset allocation. Asset Allocation is always a function of
personal factors and never a function of asset class (Equities and Income Generators) directional

So what happens if a new portfolio ATH is achieved in February or August instead of in November or
December? (Note that the financial community only preaches tax loss strategies during the last calendar
quarter.) Should you unload all the weak issues at the same time, even those purchased just a few months
ago? Management of your portfolio requires the disciplined application of consistent rules and guidelines,
and every manager will develop his or her own style. But in a high quality, properly diversified, income
generating portfolio, (1) the number of weak issues will generally be small and (2) the probability of
escaping with only a minimal loss very real. Keep in mind two basic investment axioms: There is no such
thing as a bad profit, regardless of the tax implications; and no matter how you may rationalize, there's no
such thing as a good loss. So, sure, if a loss should be taken due to an ATH in February, bite the bullet on
the one security (only one) with the declining fundamentals (A Merrill Lynch/CNN/CFP opinion is not a
fundamental.) If there are none, good job!

Profits are the holy grail of investing. Few people will admit just how infrequently they have experienced
them or, conversely, just how frequently they have watched them disappear beneath the waves of a
correction. (Like gamblers retuning from Vegas... no one ever seems to lose!) Similarly, most financial
professionals will counsel their charges to let their profits run, particularly around year-end. Surely, speaketh
the CW prophets, these profits will hang around until next year, thus deferring those terrible taxes! (Worked
real well at year-end '99, you'll recall.) Don't think for a moment that anyone knows what will happen this
time around the rally pole, particularly in those ridiculously priced ETFs, which are put together with the
same kind of spit and duct tape used for the dot.coms. Always take your profits too soon, because you can't
get poor that way!

First thing Monday morning I'm going to: (1) Call my accountant to tell him that I'm going to help him
reduce his tax burden by not paying him, (2) continue to view the Investment process in cyclical rather than
calendar terms, (3) limit my tax liability by how I invest, not by taking unnecessary losses, (4) continue to
make as much money as possible, as quickly and safely as possible, and (5) contact the media, my political
representatives, and anyone else I can think of that will help in the fight to abolish the taxation of all
investment and retirement income.

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