At this point, it looks like capital gains taxes are increasing tomorrow.
For all investors, the rate will climb to 20 percent (after holding at 15 percent for the past decade). For investors with even more than $200,000, the rate will jump to 23.8 percent.
Aswath Damodaran, the legendary professor of finance at NYU’s Stern business school, has a new blog product on how he’s adjusted his portfolio accordingly.
His premise is simple: ‘The goal in investing isn’t to reduce taxes paid but to maximize after-tax returns‘ (holding pre-tax returns constant).
That’s why he overlooked his first impulse, which was to sell the stocks he ‘d held for even more than a year to conserve taxes:
…the savings in capital gains taxes have to be weighed against the worth lost by selling early, if the holding in concern is still undervalued, he composes.
Here’s what he did:
I ranked the investments in my portfolio, based upon downright capital gains then revalued each of the 5 stocks at the top of the list, using updated details. The 3 stocks that were still under valued (based on today’s price and updated appraisal) by more than 5 % stayed in my portfolio, whereas the 2 stocks that were under valued by less than 5 % or were relatively valued (or over valued) were sold.
If you do not have the time or the disposition to do a complete fledged assessment, you can still ask yourself a question about your big winners: Would you get the stock at today’s prices? If the answer is indeed, you should be hold back on selling the stock, despite the fact that capital gains taxes are going up next year.
Damodaran additionally explains that too much trading and short-term thinking could prove pricey from an after-tax viewpoint. He provides this convenient chart showing the tax consequences of short-term stock flipping in the kind of turnover ratio (the volume of a stock vs. it’s worth):
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Investors with short time horizons normally pay more in taxes for two reasons: (1) their holding durations are too short to certify their gains for long term capital gains, thus transforming their price admiration in normal income (with greater tax rates) and (2) the high turnover in their portfolios makes it impossible to have a cohesive tax method.
Bottom line, he says: ‘I might be easy minded when it comes to taxes but I think that the most efficient tax management technique for most investors is to have a long period of time horizon. ‘