Win from Losing

Cash in on underwater stocks

reinvest once again. “By constantly harvesting losses and reinvesting in more promising issues, you will avoid selling winners too soon and holding on to losers too long,” says Jason Hsu, principal at Research Affiliates, an investment firm in Pasadena, California. “Those behavioral tendencies hurt investors’ performance.” A disciplined strategy for taking tax losses will delay taxes on gains and improve your after-tax returns, according to Hsu. “The value of your portfolio may be multiple times the value of a portfolio where no tax losses have been harvested,” he says.

Don’t buy back what you’ve sold. “If you sell a stock or a bond or a fund and buy it back within 30 days, that’s considered a wash sale,” Ochsenschlager says. Your loss won’t count as a tax loss. Instead, you can buy something that’s not substantially identical. If you sell one bank stock, for instance, you can immediately buy another bank stock. If you sell one growth fund at a loss, you can buy another growth fund.

What if you’re selling a stock at a loss but you think the stock still has great prospects? You can sell the stock and immediately buy an exchange-traded fund (ETF) in that industry. Use a discount broker to cut your trading costs.

Say you’re selling a depressed bank stock now. You could use the sales proceeds to buy State Street’s KBW Bank ETF (KBE) right away. This ETF tracks an index of bank stocks so it probably will move in line with the stock you’ve sold. After at least 30 days have passed since you sold your bank stock, you can sell the ETF and go back to your original stock, if it still looks appealing. You’ll have a tax loss you can use and you’ll still have your original holding.

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