Should I Stay or Should I Sell?
I must take a moment to thank everyone who has sent questions or comments about my articles. It is very flattering to hear such positive feedback. Taxes seem to prompt the most questions and confusion. Rightly so, as it is an extremely complex topic and issue.
I recently had a question from a reader named Tom: If I have capital gains to declare (say $2000.00) should I sell a stock in my portfolio that has not been doing so well in the last eight months to offset the gains? (Say the loss will equal to $3000.00). My annual salary is $45k/year. What should I do?
My options are:
- Declare the capital gains and pay taxes on them and hold the losers in my portfolio until they come back up.
- Sell some of my ‘dogs’ at a loss to offset my gains. This way I can get rid of some of the losers in my portfolio.
- Declare the capital gains and pay taxes on them and move the ‘dogs into my RRSP plan so that way they will hopefully have time to bounce back to where they were once upon a time.
My response goes something like this:
- Firstly, it is important to look at the big picture. Every financial decision has the possibility and probability of affecting other areas of your financial picture (taxes, investing, cashflow, income, estate, etc).
- One of the issues is the quality of the investments. An investment that has not done so well in the last eight months may not be a long-term loser. Anyone who is properly diversified will have losers from time to time. Also, the recent markets have not been very cooperative to many stocks, so it might be a case of timing as opposed to investment selection.
- Poor stocks may not come back. Good stocks will definitely come back. You must evaluate the quality of the stock and determine whether it is worth keeping.
- The stock with a capital gain has the same issues. Even though it has made money, it might continue to make money and in that case you may not want to sell. Taking profits on the other hand is never a bad strategy.
- From a tax perspective, paying taxes is not a bad thing. Your ultimate goal should be to choose investments that make money. If you are successful, you will pay taxes.
- Offsetting capital gains with capital losses is a common strategy. From an investment perspective, losing money is not a good objective to have, so capital losses is a ‘secondary goal’. If you think the stock is truly a bad stock then selling it to offset gains seems reasonable.
- Generally speaking, unless you need liquidity, you should maximize your RRSP before investing in non-RRSP investments. If you have significant unused contribution room, transferring these stocks into the RRSP may not be a bad idea especially if they are long-term retirement assets.
Thanks to Tom for sending in this question and allowing me to write about his situation. As you can see, every decision is not always black and white. I encourage everyone to get help from professionals like accountants, lawyers and financial advisors when needed.