Dec. 30--As 2015 comes to an end, investors are bogged down by loads of loser stocks, mutual funds and exchange-traded funds.
But rather than regretting ever buying them, or wishing that 2016 will be kinder, investors can transform losers into winners by turning ugly investments into tax cuts for their 2015 tax return. Losers can be sold before the markets close Thursday, and then will reduce, or eliminate, the capital gains tax you'd otherwise owe on winners you sold this year, said Edward Gjertsen, a Glenview financial planner and president of the Financial Planning Association.
If your losses are so great that they outnumber your gains, you can use them to reduce $3,000 in other income. And if your losses are even greater than that, you can use what remains to cut taxes in future years. Just keep in mind that to qualify as a loser for taxes, the value of the stock or fund has to have declined since you bought the investment, and not merely in the last year. Also, the stock or fund must be in an account that can be taxed, not an IRA or workplace plan such as a 401(k).
Financial planners have been telling clients for weeks that this year provides great opportunity to reduce taxes by selling losing stocks or funds. And since almost two thirds of stocks have been losers in 2015, there have been a multitude of options. Only a handful of powerful winners have lifted the market as a whole, and the S 500 is in sorry shape, trying to hold on to a 1 percent gain for the year.
The powerful stocks include Netflix, Amazon, Facebook and Google, which has been renamed Alphabet. Both Netflix and Amazon have climbed more than 100 percent this year, a feat that cannot continue indefinitely, although predicting the peak is anyone's guess.
Gjertsen said anyone worried that high fliers could plunge in 2016 could use the last trading day of the year to cut back somewhat on the hot stocks and sell losers to offset the gain. Finding losers among energy and commodity stocks should be easy. Many energy stocks have lost 30 to 40 percent this year as oil has plunged in price amid a slowdown in the global economy. Commodities have been hit hard too, with basic material stocks as a group down about 11 percent. Emerging market funds, which invest in many countries that depend on selling commodities into the troubled global economy, have dropped about 14 percent.
When trying to decide if you should sell a hot stock, Gjertsen said to look at the impact a major decline might have on your overall portfolio rather than to try to figure out if your hot stock will stay hot.
Typically, it's not wise to let a single stock monopolize more than 5 percent of your portfolio. So, says Gjertsen, "If Netflix has gone from 5 percent to 10 percent," that could be a reason to cut back.
If you have a mutual fund that's been soaring this year, it's likely that it includes all or some of the four high fliers, which pros have named the FANGs based on the initials for Facebook, Amazon, Netflix and Google, said analyst David Kathman of Morningstar. For example, one of the few mutual funds with sizable gains this year is Morgan Stanley Institutional Growth. It's up 11 percent for the year, while Standard Poor's 500 index funds are up only about 2 percent.
Gjertsen notes that an investor selling a fund now for a loss could replace it with a similar fund but cannot buy an identical fund for 31 days. He said it's fine to temporarily park the money in a money market fund.
gmarksjarvis@tribpub.com
