I know, I know, all this is probably familiar to you. But when I tell people to sell their losers in taxable accounts, they look at me as if I were urging them to commit treason. And I’m not just talking about selling bad stocks. I’m talking about losers even if they are good stocks.
Why NOT sell good stocks now? Big losers in taxable accounts? Let’s look at the arguments.
1. The stocks are good companies and they will rebound big-time.
2. You will be contributing to the sell-off, causing more panic, delaying a market rebound.
3. What kind of a rat are you? Selling a good stock? Only cowards and back-stabbers turn on their friends when they are down. You’d probably mug your mother!
4. Besides, you’re taking money away from Uncle Sam – money he could use for schools, bridges, food stamps, Medicaid, and weapons of mass destruction. Finally,
5. Like me, you simply don’t have any big losers in taxable accounts.
Ok, I lied. I do have a loser—something I bought a few months ago. One swell mutual fund. I know the guys who run it. Smart, splendid fellows. Screw them. It gets defenestrated.
Why SELL losers now?
1. Because you may have a BIG loss—and you’ll get a big tax deduction. Easily compensating you for any commissions you pay.
2. Because you can buy something substantially similar—not identical—and be back almost where you started. Eat your cake and still have it. The SSNI security should have plummeted in line with the security you sold and should rebound when it rebounds. (A drawback: When security B rebounds and you eventually sell, you’ll have high capital-gains taxes to pay—because you bought it low.)
Of course, you can wait 30 days and re-buy the security. Except…good things can happen in 30 days. Besides which, I’ve been told on good authority that nobody, nobody at all, buys back a loser after 30 days.
Jan. 1: “I’ll re-buy that wonderful stock.”
Feb. 1: “Don’t talk to me about that dirty dog!” (If you buy back a losing security within 31 days of selling it, you cannot deduct the loss. The so-called wash-sale rule.)
Or you could double up. By buy the same number of shares; wait 30 days; sell the original shares for a loss; and wind up with your original holding—and a tax deduction. Problem here is: For 30 days, you’ve got twice the exposure to a disappointing stock.
Replacing your loser with a similar security has its dangers, too. Just as there are no true synonyms, no two securities are identical. Actually, it’s not that simple. Can you sell a losing index fund (say) and buy another index fund without breaking the wash-sale rule? I’m not sure. But you don’t have to choose a “similar” security. Just a security that seems equally good.
I can produce one more reason why people should sell their losers. Loss-aversion. People absolutely hate to sell their losers. We hate losers twice a much as we enjoy winners.
I once asked Richard Thaler, the behavioral economist, why people are so averse to selling their losers. His answer: It’s an inheritance from the days we lived in caves, when any loss at all—food, water, shelter, fire--threatened our very lives.
In other words, people hold on to their losers for irrational reasons.
In short: You know the folk wisdom about eating possibly tainted food?
“When in doubt, throw it out.”
Same goes for losing securities in taxable accounts. Throw them out.
Especially when they can bless you with tax deductions.