taxes

HOW TO LOSE YOUR SHIRT IN THE STOCK MARKET WITHOUT LOSING YOUR SHORTS TOO (PART ONE)!

Posted on by Joseph M. Brennan Jr.

It’s always a good idea to adjust your investment strategies over time. Those of you who have been following me closely know that I’ve had a real “knack” over the past 6 months for picking losing stocks. However, I refuse to let them go. And I continue buying into them because the buy signals keep getting stronger and stronger with every drop, and they became more and more attractive, with respect to all of the indicators I use to make investment decisions. And, as is usual, I refuse to sell on “buy” signals and frequently do the opposite.

As a result of all the buying I have done, I moved from being a low risk investor to an extremely high risk investor. This can happen from time-to-time and as long as I don’t remain a high risk investor for a long period of time, then that’s probably okay. I haven’t been too concerned because I’ve liked the patient approach I’d been using. And, frequently, losing stocks become leading stocks over time and stocks that continually get clobbered usually experience very strong reversals. So, I keep buying into them.

The low point for me so far this year was Monday (4 days ago – 14 March). I was 140% invested (yes – I was using margin) and down 30.34% for 2022 (and down 34% since September/October 2021). Ordinarily, as a low-risk investor I would rarely be anywhere close to 100% invested in the stock market (much less over-invested). But I was not willing to go down without a fight. And so far it has paid off handsomely. As of today, I am down 9.31% for the year and am 106% invested. So, that’s a huge, 21 percentage point gain in only 4 days. So, I’m very happy about this relatively speaking. It feels like victory even if it’s truly not in terms of me not earning any positive returns so far in 2022.

I haven’t been overly concerned with having a negative return for 2022 because all of the major stock market indexes are getting hammered this year so far (the recent lows being a 13% loss for the S&P 500 Index, a 20% loss for the NASDAQ, and a 14% loss for the Russell 2000). And eventually the market indexes will recover and so will most of the stocks I’m holding. I would be more concerned if I was experiencing substantial losses while the major market indexes were showing significant gains.

Now, a couple of years ago, I would have been “all in” several months ago and have been two or three times more negative using the strategies I had detailed in my “Invest Like a Pro in 10 Minutes a Day!” series of 4 books (https://brighterdayslifecoaching.com/published-books…/). And these might still be very good strategies to use for higher risk investors. But for low risk investors, they may not be. So, I’m very thankful that I modified my approaches quite a bit since then so that I have a chance to experience shallower losses (relatively speaking) and recover from these.

The approach I’m presently using to buy into falling stocks is the following:

  1. If the initial position of a stock I bought drops 10%, and the stock still looks attractive based on the indicators I use to make investment decisions, then I buy 10% more shares than I did the first time (e.g., if I bought 100 shares the first time, then the second time I buy 110 shares: 1.10 x 100 = 110).
  2. If the stock drops another 10%, and the stock still looks attractive based on the indicators I use to make investment decisions, then I buy 10% more shares than I did the second time (e.g., 121 shares: 1.10 x 110 = 121).
  3. I continue this process with every drop.

The approach I am presently using to sell the gains is the following:

  1. I determine what a reasonable gain might be for the stock from the current depressed levels it is trading at (20%? 25%?). If the stock gains that amount from the lowest price I paid, then I sell that set of shares (e.g., if the stock rebounds strongly after the second buy of 121 shares in the above example, then I will go ahead and sell the 121 shares if the gain is substantial enough).
  2. I determine what a reasonable gain might be for the stock from the current level it is trading at after selling the first lot of shares (10%? 15%?). If the stock gains that amount from the most recent sell price, then I sell that next set of shares (e.g., if the stock gains the amount I’m targeting beyond the price I sold the 121 shares for in the above example, then I will go ahead and sell the 100 shares I bought the first time).

So, I am currently using the above process throughout the rises and falls in the stock price no matter what the cycles might turn out to be. If the stock is dropping, I’m buying more. And if it is rising, I’m selling more. I continue the process until I get to the point where I am either “all in” (including margin – at least for now) or exit the position completely.

The above strategy has really worked out well so far. Using my previous strategy, I would have been a much more aggressive buyer on the drops which would have led to much deeper losses and a much longer recovery time.

I’m happy that I modified my investment strategy back in September/October 2021. And this something you always want to get into the practice of doing. Observe what happens and make adjustments to your investment strategies so that you can work towards improving your investment performance over time in accordance with your risk profile. I happen to presently be a low risk investor (although right now I am temporarily high risk) but many of you will probably be higher risk investors. So, your investment strategies will probably be a bit more aggressive than mine.

Another thing I am doing in 2022 to maximize my investment returns is performing tax loss harvesting strategies to offset my realized gains and minimize my tax burden. This essentially, involves selling some of your losses to offset your gains. You can read all about my tax loss harvesting strategies here: https://brighterdayslifecoaching.com/maximize-stock-market-returns-by-performing-tax-loss-harvesting-to-minimize-tax-burden/

To the extent possible, what I plan to do in 2022 to maximize my investment returns will be to hold off on selling until the individual lots of the stocks I purchased passes the one year mark. I rarely do this because I tend to take substantial gains as they happen (and I might continue this practice if the gains are compelling enough). However, if I am successful in waiting a year before selling gains, then I’ll only have to pay 15% taxes on those gains instead of my typical 24% tax bracket. So, the tax incentive is huge for waiting on selling your gains if you have that kind of patience. Often, I don’t. But we’ll see what happens. I know I’ll have to do some additional selling soon since I’m presently 106% invested which is much too high for a low risk investor. But I’ll probably get there eventually.

You can be a very successful investor if you effectively use all of the tools and techniques available to maximize your investment returns. It’s been an interesting investing experiment I’ve been running so far for 2022. We’ll see how things go.

You can learn about all of my investing techniques via my “Invest Like a Pro in 10 Minutes a Day!” series of 4 books where you can learn the “end to end” process to investing and gain key investing insights and skills (https://brighterdayslifecoaching.com/published-books…/)

Also, you can read all about my stock market activities here: https://brighterdayslifecoaching.com/stock-market-activities/

I wish you much success in creating a brighter financial future for yourself, your loved ones, and those who follow.

Happy investing everyone!

#finance #stocks #investing #stockmarket #success #taxes

HOW TO MAXIMIZE INVESTMENT RETURNS EVEN WHEN EXPERIENCING SEVERE LOSSES

Posted on by Joseph M. Brennan Jr.

It’s always a good idea to adjust your investment strategies over time. Those of you who have been following me closely know that I’ve had a real “knack” over the past couple of months for picking losing stocks. However, I refused to let them go. And I continued buying into them because the buy signals kept getting stronger and stronger with every drop, and they became more and more attractive, with respect to all of the indicators I use to make investment decisions. And, as is usual, I refuse to sell on “buy” signals and frequently do the opposite.

As a result of all the buying I did, I moved from being a low risk investor to a higher risk investor. That can happen from time-to-time and as long as I don’t remain a higher risk investor for a lengthy period of time, then that’s probably okay. I haven’t been too concerned because I’ve liked the patient approach I’d been using. And, frequently, losing stocks become leading stocks over time and stocks that continually get clobbered usually experience a very strong reversal. So, I kept buying into them.

A couple of years ago, I would have been “all in” several weeks ago and have been deeply negative for the year using the strategies I had detailed in my “Invest Like a Pro in 10 Minutes a Day!” series of 4 books (https://brighterdayslifecoaching.com/published-books…/). And these might still be very good strategies to use for higher risk investors. But for low risk investors, they may not be. So, I’m very thankful that I modified my approaches quite a bit since then and ended the year strongly positive.

The approach I’m presently using to buy into falling stocks is the following:

  1. If the initial position of a stock I bought drops 10%, and the stock still looks attractive based on the indicators I use to make investment decisions, then I buy 10% more shares than I did the first time (e.g., if I bought 100 shares the first time, then the second time I buy 110 shares: 1.10 x 100 = 110).
  2. If the stock drops another 10%, and the stock still looks attractive based on the indicators I use to make investment decisions, then I buy 10% more shares than I did the second time (e.g., 121 shares: 1.10 x 110 = 121).
  3. I continue this process with every drop.

The approach I am presently using to sell the gains is the following:

  1. I determine what a reasonable gain might be for the stock from the current depressed levels it is trading at (20%? 25%?). If the stock gains that amount from the lowest price I paid, then I sell that set of shares (e.g., if the stock rebounds strongly after the second buy of 121 shares in the above example, then I will go ahead and sell the 121 shares if the gain is substantial enough).
  2. I determine what a reasonable gain might be for the stock from the current level it is trading at after selling the first lot of shares (10%? 15%?). If the stock gains that amount from the most recent sell price, then I sell that next set of shares (e.g., if the stock gains the amount I’m targeting beyond the price I sold the 121 shares for in the above example, then I will go ahead and sell the 100 shares I bought the first time).

So, I am currently using the above process throughout the rises and falls in the stock price no matter what the cycles might turn out to be. If the stock is dropping, I’m buying more. And if it is rising, I’m selling more. I continue the process until I get to the point where I am either “all in” or exit the position completely.

The above strategy really worked out well during the slump I experienced towards the end of 2021. Using my previous strategy, I would have been a much more aggressive buyer on the drops which would have led to deep losses and a much longer recovery time. Back in early October, I had a 13% gain in the stock market which is an excellent gain for a low risk investor seeking to beat inflation (inflation was about 5% at that point in time). By early-to-mid December my gains had dropped to 1.5% for the year which was a pretty substantial drop – especially since it was only over a period of a few weeks. Fortunately, I was able to recover much of these losses by the end of the year with an 8.7% gain which still substantially beat inflation (inflation was 6.8% for the year). Much of the losses were probably due to investors selling losing stocks for tax loss harvesting purposes. As such, many of the stocks I’m presently holding are likely to start rising again in the new year. So, I should be positioned pretty well for at least the early weeks or months of 2022. You can read more about the above and all of my stock market activities here: https://brighterdayslifecoaching.com/stock-market-activities/

I’m happy that I modified my investment strategy back in September/October. And this something you always want to get into the practice of doing. Observe what happens and make adjustments to your investment strategies so that you can work towards improving your investment performance over time in accordance with your risk profile. I happen to presently be a low risk investor but many of you will probably be higher risk investors. So, your investment strategies will probably be a bit more aggressive than mine.

Another thing I did in 2021 to maximize my investment returns was to perform tax loss harvesting strategies to minimize my tax burden. This essentially, involves selling some of your losses to offset your gains. This really helped me because about $7000 of my investment gains in 2021 put me into the 32% tax bracket. So, offsetting this effectively represented a 32% gain on those assets. You can read all about my tax loss harvesting strategies here: https://brighterdayslifecoaching.com/maximize-stock-market-returns-by-performing-tax-loss-harvesting-to-minimize-tax-burden/

The last thing I did in 2021 to maximize my investment returns was to avoid selling any additional gains once I came to the realization that I was in the 32% income tax bracket. So, I decided to delay any selling decisions on gains until 2022 so that I could avoid paying 32% taxes on these gains. It’s always a good idea to track all of your income and stock market gains for the year so that you’ll know whether you are entering a higher tax bracket than usual. Because, if you do, you might be able to make some adjustments prior to the end of the year to minimize your tax burden and maximize your investment returns.

What I plan to do in 2022 to maximize my investment returns will be to hold off on selling until the individual lots of the stocks I purchased passes the one year mark. I rarely do this because I tend to take substantial gains as they happen (and I might continue this practice if the gains are compelling enough). However, if I am successful in waiting a year before selling gains, then I’ll only have to pay 15% taxes on those gains instead of my typical 24% (or in the case of 2021 32%). So, the tax incentive is huge for waiting on selling your gains if you have that kind of patience. Often, I don’t. But we’ll see what happens. I know I’ll have to do some selling towards the beginning of the year since I’m presently 85% invested which is a bit too high for a low risk investor.

AN INTERESTING TWIST ON EXECUTION:

I wrote the above post over the past week and decided to leave it as such since it potentially offered an educational benefit to my readers. In actuality, however, things did not happen as expected so I am going to write about that now to provide additional educational benefit to my readers.

I had planned to execute as stated above, but always make a point to check my math prior to executing. And just as I was about to sell some of my losses, I realized that I had forgotten to subtract my standard deduction of $12,550. Once I factored that in I realized I was actually several thousand dollars below the 32% income tax bracket threshold. So, to take advantage of that new realization, instead of selling some of my losses, I elected to sell more of my gains.

I can’t tell you how many times I have executed plans by mistake due to calculation errors, faulty data, and misinformation. So, always get into the practice of checking your math, confirming your data, and checking your facts before executing your plans. Otherwise, you may not realize the benefits you are anticipating and, in fact, might make things worse.

You can be a very successful investor if you effectively use all of the tools and techniques available to maximize your investment returns. And tax loss harvesting can be an effective strategy to use.

You can learn about all of my investing techniques via my “Invest Like a Pro in 10 Minutes a Day!” series of 4 books where you can learn the “end to end” process to investing and gain key investing insights and skills (https://brighterdayslifecoaching.com/published-books…/)

Also, you can read all about my stock market activities here: https://brighterdayslifecoaching.com/stock-market-activities/

I wish you much success in creating a brighter financial future for yourself, your loved ones, and those who follow.

Happy investing everyone!

#finance #stocks #investing #stockmarket #success#taxes

MAXIMIZE STOCK MARKET RETURNS BY PERFORMING TAX LOSS HARVESTING TO MINIMIZE TAX BURDEN

Posted on by Joseph M. Brennan Jr.

One way to maximize your returns in the stock market is to perform tax loss harvesting strategies to minimize your tax burden. Essentially, this involves selling some of your losses to offset your gains.

Typically, I fall into the 24% income tax rate category. However, due to my capital gains to date in 2021, about $6000 of my income would fall into the 32% income tax rate category. As such, it makes sense for me to look for stocks that I haven’t sold yet to see if there are any losses I can use to offset this. If I can successfully do this, then this would effectively represent a 32% gain on those assets which would be advantageous for me.

If you are the type of investor who, like me, typically adds to positions over time when they drop in price, then you will want to ensure your standard taxable investment accounts are set up to track your cost basis using “First In First Out” (this is usually the default setting). If you are more of a momentum type investor who typically adds to positions over time when they increase in price, then you will want to ensure your taxable investment accounts are set up to track your cost basis using “Last In First Out.” Note: The tax loss harvesting strategy does not apply to taxable accounts such as traditional IRAs, 401Ks, and such since they are always taxed based on your income bracket at the time any funds are withdrawn. So, this strategy can only be used for taxable investment accounts outside of traditional IRAs, 401Ks, etc.

To effectively use the tax loss harvesting strategy, you must be sure not to invoke the “wash sale” rule which occurs when a security is sold for a loss and, within 30 days before or after this sale, a “substantially identical” stock or security is bought. The reason you want to steer clear of this is because a “wash sale” will provide no tax benefit until after the point in which you exit your position entirely.

Many investment brokers track each of the lots you buy and sell for each of the stock positions you hold. This can be a very handy tool for considering which financial assets to sell to gain the benefits of tax loss harvesting. For example, Fidelity (which is the online broker I use) tracks each of the lots I buy and sell (see Figure 1 below for an example).

Figure 1: Stock Lots Bought and Sold

The first thing to check to ensure you don’t invoke the “wash sale” rule is the most recent date you purchased shares. As you can see in Figure 1, 11/22/2021 was the last time I purchased shares of stock XYZ (and if you have multiple accounts you need to check them all since the “wash sale” rule applies across investment accounts whether taxable accounts or not including Roth accounts). So, to ensure that I don’t invoke the “wash sale” rule I need to wait until 30 days have passed before selling the stock. So, to be safe, I will need to wait until 12/23/2021 before selling this stock.

Since I am trying to offset about $6000 of the gains I’ve had over the past year which would fall into the 32% income tax bracket, I would sell about 400 shares of stock XYZ if Figure 1 represents my losses at that time. Because, my taxable investment account is set up to track my cost basis using the default of “First In First Out” I would start from the bottom of Figure 1 and work my way up from there to reflect what losses I could use to offset my gains. So, starting from the bottom and going up if I sold 400 shares (160+140+100) at that time, then I would have $6092.45 ($5020.74+$625.21+$446.50) of capital losses I could use to offset my capital gains. And if I wanted to be much more precise about the $6000 figure, I could sell a couple of shares less. The other nice thing I can do with this strategy is wait to sell those lots in Figure 1 that I have gains on until after a year has passed. Because then instead of paying 24% tax on those gains, I’ll only have to pay 15%. So, this strategy can allow you to both earn a substantial “return” on your losses and and minimize the taxes on your actual gains.

Now, if you accidentally had your investment account set-up to track cost basis using “Last In First Out” then you would probably have to sell all of your shares to realize the tax benefit you’re seeking. However, the tax loss offset would be much less since you would first be selling all of the shares that had gains or were less negative in nature. So, it’s important to make sure you set up your taxable investment accounts to track cost basis using “First In First Out” unless you tend to be more of a momentum type investor.

For people who do tend to be momentum type investors who typically add to positions over time when they increase in price and have their taxable investment accounts set up to track cost basis using “Last In First Out,” then you would start from the top and move down since the newest shares would be sold first. And you would try to hold your gains until after a year has passed so that you’ll only have to pay long term capital gains taxes (typically 15% or 20% depending on your income tax bracket) instead of the short term capital gains taxes associated with your income tax bracket.

So, the above pretty much sums up how to maximize your investment returns by using tax loss harvesting strategies to minimize your tax burden. The last thing you will want to do, however, is to ensure the “wash sale” rule is not invoked going forward by refraining from buying the same stock(s) within 30 days after selling it for a loss. If you do, then the “wash sale” will be invoked again and you will have realized no tax benefit from selling your losses. So, always be mindful of this.

By using the above strategy, I will avoid having to pay about $1920 on my tax return for 2021 (0.32*$6000 =$1920). So, using this strategy can really help.

You can be a very successful investor if you effectively use all of the tools and techniques available to maximize your investment returns. And tax loss harvesting can be an effective strategy to use.

You can learn about all of my investing techniques via my “Invest Like a Pro in 10 Minutes a Day!” series of 4 books where you can learn the “end to end” process to investing and gain key investing insights and skills (https://brighterdayslifecoaching.com/published-books…/)

Also, you can read all about my stock market activities here: https://brighterdayslifecoaching.com/stock-market-activities/

I wish you much success in creating a brighter financial future for yourself, your loved ones, and those who follow.

Happy investing everyone!

#finance #stocks #investing #stockmarket #success#taxes