Shareholders of General Electric are painfully aware of the fact that taxes are a secondary consideration when deciding whether or not a particular holding should be sold. After investors ceased believing that G.E. was a proxy for the broader equity markets, some listeners to our radio show stated that they nonetheless felt trapped in the stock as the tax on the gain, if realized, wasn’t worth it. In hindsight and despite the potential tax on the capital gain that would have accompanied the sale of G.E., investors would have been wise to have sold at almost any time over the past decade as opposed to riding it down from an all-time split adjusted high of around $480/share to where it currently trades at approximately $63/share.
We could have used as an example IBM, Eastman Kodak or any number of former blue chip companies that may still produce quality products, but whose stock price has languished due to factors within or outside their control. Buy and hold is dead because it never really existed. We strongly prefer buy and monitor, that is to say prudent investors keep a wary eye on all of their investments, regardless of the perceived quality. They have a plan in case that particular investment does not initially work out in their favor or as with General Electric, does perform for decades but then at some point in time begins to underperform relative to its competitors as well as the overall stock market.
Given the impact of taxes upon your net investment return, investors should work closely with their advisors regarding investment tax planning. Investors who are managing their own accounts should be able to calculate the impact of a capital gain/loss on their tax return.
The recently legislated tax reform specifies that long-term transactions, defined as those in which the underlying security has been held for one year or longer are generally taxed at zero percent for those taxpayers filing jointly with taxable income of $83,350 or less; at fifteen percent for those with taxable income between $83,350 and $517,200 and at 20% for those fortunate enough to have taxable incomes above $517,200. Short-term transactions, those which the security has been held for less than one year are taxed as ordinary income and subject to the same tax rate as your wages or dividend income. For most taxpayers, the rate is between twenty-two and thirty-two percent for the Federal Government. In both instances, for taxpayers in New York State, long-term and short-term capital gains are taxed as ordinary income.
The bottom line – have a plan that includes the impact of taxes, but do not make the avoidance of taxes paramount in the decision making process.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.
