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Representative is registered with and offers only securities and advisory services through PlanMember Securities Corporation, a registered broker/dealer, investment advisor and member FINRA/SIPC. 6187 Carpinteria Avenue, Carpinteria CA. 93013, (800) 874-6910. Randall Wealth Management Group and PlanMember Securities Corporation are independently owned and operated. Trevor R. Randall - CA Insurance License #0I08678

 

PlanMember is not responsible or liable for ancillary products or services offered by Randall Wealth Management Group. The views expressed may not necessarily reflect those held by PlanMember Securities Corporation (PSEC). Material presented is believed to be from a reliable sources and PSEC makes no representation as to it accuracy or completeness. 

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The Downside of Taxes Determining Investment Strategy


While you should always keep the tax consequences of investment decisions in mind, it’s a mistake to let them drive those decisions. Why? Because the goals for each are fundamentally different: the goal of investing is to make money over the long run, while the goal of tax planning is to minimize paying taxes in the short run. Ideally, these goals should complement each other to achieve the maximum long-term growth of your portfolio given your investment objectives and risk tolerance. The danger is that by trying to avoid paying taxes today, you will frustrate your efforts to make the money you could have made or need for tomorrow. A few examples of what can go wrong will illustrate the point.

Skewing Your Asset Allocation

Studies have found that the most important factor in determining an investor’s long-term rate of return is asset allocation, or how your portfolio is spread out among different classes of investments: stocks, bonds, cash, real estate, and commodities. When properly structured, your portfolio aims for a given rate of return that’s chosen to meet your long-term financial needs. One way to decrease the absolute dollar amount of taxes paid is to minimize your returns. You can accomplish that by concentrating in low-return investments like money market funds, savings accounts, certificates of deposit, or bonds. But if your investment goals require the higher rate of return only obtained through stocks, this strategy will succeed at minimizing returns, but fail at meeting investment goals.

Concentrating Investment and Credit Risk

Municipal bonds are a great way to reduce your exposure to both federal and state taxes. While a municipal bond from any state shelters interest payments from federal taxation, only municipal bonds issued from your resident state will lower your liability for state income taxes. For that reason, investors frequently confine their municipal bond investments to in-state issues. The problem with that is concentrating your exposure to the risk that your home state could run into financial problems, jeopardizing your returns. When it comes to municipal bond portfolios, it can pay to diversify, both away from a single issuer and single state. That way, you reduce the risk the market value of your bonds will suffer from a default or credit downgrade.

Holding onto an Investment Too Long

The higher tax rate on short-term capital gains — those realized in less than a year — than on long-term gains encourages some investors to hold on to an investment too long. Stock prices can move quickly, and holding on to a stock just because you want a more favorable tax rate can cause you to lose some or all of your profits or deepen the losses you’ve already suffered.

Selling an Investment Too Soon

Conversely, investors can be tempted to sell a stock prematurely in an attempt to harvest capital losses to shelter capital gains. While it might be a good idea to exit a stock position before its losses mount, you could regret it if the sold stock results in big gains. Selling may also leave a hole in your asset allocation strategy and diminish your portfolio’s level of risk-reducing diversification.

The Proper Approach to Tax-Efficient Investing

That doesn’t mean taxes are a good thing or you shouldn’t try to minimize the taxes your investments trigger. But there’s a wrong way to go about it — and a right way, which consists of doing the following:

  • Taking full advantage of tax-sheltered investment retirement accounts, like IRAs, 401(k) plans, and annuities.

  • Investing in municipal bonds only when they generate a higher after-tax rate of return.

  • Selling stocks based on their intrinsic ability to generate gains or losses.

  • Prudently culling losing stocks from your portfolio when harvesting capital losses.

Representative is registered with and offers only securities and advisory services through PlanMember Securities Corporation, a registered broker/dealer, investment advisor and member FINRA/SIPC. 6187 Carpinteria Avenue, Carpinteria CA. 93013, (800) 874­-6910. Randall Wealth Management Group and PlanMember Securities Corporation are independently owned and operated. PSEC is not responsible or liable for ancillary products or services offered by Randall Wealth Management Group or this representative. CA Insurance License: #0727953.

This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by PlanMember Securities Corporation. Material presented is believed to be from a reliable sources and PSEC makes no representation as to it accuracy or completeness.

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