Making the Most of your Money – Re: Portfolio Decisions

Making the Most of your Money – Re: Portfolio Decisions

Most of us don’t have unlimited funds to invest. At some point we get maxed out where all available money for equity purchase is ‘in the market’. If you come across a new and compelling idea you must triage your portfolio and sell to buy.

There’s nothing earth shattering about that concept. The process is often done haphazardly or even against traders’ best interests. If tax consequences were not a factor you’d theoretically search for the weakest link in your current holdings and sell those shares to fund the new purchase.

Human nature often clouds that fairly easy goal and leads to bad decisions. Suppose you have one position [Stock #1] that was purchased for $10,000 and is now worth $20,000. You also have a different holding [Stock #2] that was bought for $30,000 and has declined to $20,000.

You feel great about the winner as it’s ahead by 100%. That bad position represents a 33.3% paper loss. That makes you feel like a chump, not a champ. Here’s a quick look at the possible actions you could take to get the cash for your newest exciting idea.



Sell Winner

Sell Loser


Tax Implication

Inner Feeling

Stock #1




Owe Tax on $10,000 Gain

Winner’s Glow

Stock # 2




Save Tax on $10,000 Loss

Loser’s Remorse


In either case you would free up $20,000 of cash to make the new investment. Selling the winner made you feel smart but adds a big tax liability. Exiting the losing position abandons all hope of a recovery by locking in a loss. Either action provides $20,000 for the new investment. It could cost $2,000 – $4,000 next April 15th to revel in your success. Any psychic damage from feeling dumb is offset by the hard cash tax savings.

Even knowing all the above doesn’t stop most people from taking the gain while continuing to ride with the underwater position, hoping to reach breakeven.

Before making your own choice, go back to your research. Evaluate each company based on all available information available right now. Figure a realistic target price for each. Unless the presently depressed stock has substantially better future potential than the winning stock does think about taking the loss and shifting the funds to the new, more promising shares.

The taxation angle gives that strategy a big statistical advantage.


Dr. Paul Price for Real Money Pro July 24, 2012

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