You may have noticed a theme among our weekly stock picks, and that is that we do a lot of dollar cost averaging. You might think, “You’re just being lazy and don’t feel like picking a new stock, so you’re just redoing an old one.” Well, I’ve definitely been accused of being lazy before, but that’s not the case here.
Dollar cost averaging is such an important tool, and I’m not afraid to use it. If you look at the history of dollar cost averaging in the Thousandaire Portfolio, you’ll see that we have done it three times, and each time it has been successful. Our second purchases of LVS, F, and MXWL are up 4.80%, 4.92%, and 6.03% respectively. If you liked a stock when you bought it, and now it’s on sale for 10% less, to me it’s a no brainer to buy more while it’s cheap.
This week we are going to buy more Citi options ($4 strike with Jan 2013 expiration). Citi just reported earnings this morning and beat estimates, yet they are trading lower as of the market open because of general market concerns. The options we bought on March 1st are down over 27%, so it’s time to buy in again.
Since this was such a short stock pick today, I want to get your advice on a personal investment dilemma I’m faced with in the next few days.
Should I Sell for a Short Term Loss?
On April 29th, 2010, I bought some GE options. I invested about $1,000 into a $25 strike price with an expiration of January 2012. Unfortunately, those options are down about 75%. Now I’m faced with a dilemma. There really aren’t many good options when you are down 75% on an investment. I just need to pick the least crappy option.
Why does April 29th matter? When you sell stocks or options for a profit, you have to pay taxes on those profits. However, if you sell stocks or options for a loss, then that reduces your taxable income. The trick is, there is a greater tax impact for a short term loss or gain (1 year or less) than there is for a long term loss or gain (over 1 year).
If I sold these options today and lose $750, that will be pretty crappy. However, it will reduce my taxable income by $750 when I do my taxes next year, which means it will save me $187.50 on my taxes (because I’m in the 25% tax bracket). When it’s all said and done, I’ll really only lose $562.50 if I sold today.
My other option is to hold the options and hope they go up a little bit before I sell. The problem is, if I don’t sell before April 29th, then I save less money on my taxes. A long term loss of $750 will only save me 15% on my taxes, or $112.50. That’s $75 less than I would save if I sold for a short term loss.
In the grand scheme of things, $75 isn’t a lot of money. I could potentially make a lot more money if I hold onto the options and they go up. However, if they don’t start going up soon they could eventually be worth nothing and I’d have to take a long term loss on all $1,000 (which would be an $850 total loss after tax implications).
What do you think I should do? Should I let these tax laws affect when I sell these options, or should I keep holding and hope they turn around?
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
One of the investing traits I have improved on over the years is being willing to take a loss. Take a small loss isn’t so bad. It is much better than taking a much bigger loss or even missing out on opportunities for better gains. Still the psychology isn’t easy. It just isn’t fun to take a loss. I try to evaluate if I would really buy the stock today. If not, if I want something else, then I should probably sell.
Now if you found yourself selling too often (and watching stocks then shoot up) you would have to watch out for that. I don’t really have that problem. I still hang on too long.
I am also willing to average down but I do that much less now. I only do it when I feel very strongly about an investment.
Yeah, I definitely have experience selling for a loss. After writing this out and realizing that it’s just $75 of a difference, I think it will be better for me if I hold and hope for a comeback. I do really like GE and think there is a lot of upside to the stock.