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To buy and to hold, through sickness and through health?
Linda Goin
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Look at you! You have this glow about you! You must be in love. Come on, spill the beans...is it that cute little stock you bought last summer when it was undervalued and overlooked by the rest of the ladies? Or is it that virile chip-off-the-old-block stock that's managed to stay so strong?
No - don't tell me you went blue chip. Wow. You must have spent a ton of money snagging that stock. What? Of course you want security, and those blue chips have a great reputation. But are you sure this is "the one?"
Let's get a grip. A portfolio isn't a marriage, and it certainly isn't monogamous. Diversity is the key, but that doesn't make your portfolio a harem. When you sell, it isn't a divorce. Investments are business relationships, not love affairs.
But there are feelings involved in this relationship. Cora and I discussed summer vacation plans this past week. When I mentioned that I would sell some stock to pay for our extravagance, she was silent for a moment and then asked, "Which stocks are you going to sell, and how many?" Her voice carried an undertone of rejection.
Cora is attached to our purchases, and reasonably so - we've spent a lot of time with them. Each company takes on its own persona because it becomes so familiar. How dare I put the axe to something that has become part of our daily lives? I felt a twinge of guilt, and I didn't sleep well that night. I had flashbacks to my daytrading experience, and my palms began to sweat. I knew I was going to sell some stock, but which one and how many? I had no answer for Cora (or for myself), but I knew I would have to come up with something quick - and it better be good.
Most of the information I've studied over the past year dealt with buying stocks. Selling doesn't seem to be part of the equation, unless it's a warning about Uncle Sam's share. These warnings are valid; if I
sell a profitable stock within a year from time of purchase, I'll pay more in taxes. If I wait a year, the most I'll pay Uncle Sam is 20% of the profit. If I use this rule to determine which stocks go and which ones stay, my job is a lot easier.
I've also discovered there's a method to sell stocks when they're purchased through a dollar cost averaging method or a DRIP. One of them is the "first-in, first-out" method (FIFO). Say I purchased 100 shares on January 1 and 100 shares on February 1, and I want to sell 100 shares the next year in March. I could sell the ones purchased in January, but I might have a higher tax bill if those shares are profitable, since they've appreciated more than the shares bought in February.
If I use the "specific share" method, I could sell the shares I purchased in February and my tax bill might be lower. If I purchase 100 shares in January and 100 shares in February and I want to sell 100
shares, I have to state this is a specific share sale from February. Otherwise I'll have to declare the sale as a FIFO on my taxes. FIFO is Uncle Sam's default method of figuring his take.
The third reason to be careful about sales is the brokerage fee. I don't want to sell one week, and then sell again the next week. I want to time my sales so they're made in one fell swoop if possible. I also need to decide whether to sell shares in one company, or sell shares in several companies. Each company I add to the list multiplies the amount I pay for brokerage fees.
By now you might think I'm ready to trash our pricey vacation plans and head to the folk's house for the summer. Not. There are various rationales for selling, and one of them is to gain immediate and long-term tax advantages. Right now, I'm attending school fulltime and my income is at an all-time low. I graduate in a year, and my guess is that my income will rise. My taxes will also rise. If I wait until next year to sell and have a good time with my daughter, the combination of my income taxes as well as taxes from sales of shares might be outrageous. Plus, vacation time might not even be in the picture. This is a gamble, but it's based on statistical probability (can you tell which class I have this quarter?).
Now that I have my stocks compiled into tax categories by profit and loss and tax advantages and disadvantages, I want to calculate the best time to sell. The article I wrote last week was a bit on the frivolous side, but it contained some nuggets of truth. I've discovered my strength is quarterly earnings and volume fluctuations of each of our companies, so that's when I feel most comfortable with trading. Your strength might be with the April tax slump, or the TGIF sag. Each company is different, also, and they all beg to be bought or sold at different times.
One thing I know for sure - I won't sell until the last minute. There's absolutely no sense in selling and sitting on the cash, when the shares could be making a profit. But what if they don't? Ah...then it's good to know that my folks have an open-door policy.
Maybe I'm wrong. Maybe owning a portfolio is a lot like marriage. There are responsibilities, and no one to blame for mistakes but myself. Commitment, resolve, self-discipline, attention, and feelings are part and parcel of both marriage and the market. Obviously, money becomes a real issue in both cases when a parting looms on the horizon.
But what do we do when our stock is a real loser and it's holding us back? What if we found it's cheating on us, or it's about to leave us high and dry? I'm neither marriage counselor nor a stock consultant, but we'll talk about possibilities next week. After all, we've held on this long...
Until next week,
Linda Goin
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