Tax Losses from Stocks

I generally have my clients "harvest
losses":

Scenario A: You have stock in ABC Corp. at a cost of 1,000 shares at $15, or $15,000, that you bought in 2006. In 2008,you sell 1,000 shares at $10, for $10,000, thus a loss of $5,000 (33% loss). The $5,000 loss saves you $1,000 on your tax return in 2008, at a 20% tax rate (Either against other income or against capital gains or capital gain dividends).

Scenario B: You then take the $10,000 and buy stock in XXX Corp. at a cost of 1,000 shares at $10 a share. In 2012 XXX Corp has gone up 50%, to $15 a share and you sell 1,000 shares, obtaining $15,000, for a gain of $5,000.
The $5,000 gain results in taxes owed of $1,000 at a 20% tax rate.

This seems like a wash of the 1,000 saved and the 1,000 paid but actually you also get the use of the $1,000 taxes saved in Scenario A for a couple of years, to make additional profits on.

Scenario C: You keep the original ABC Corp that you had bought in Scenario A and instead just sell those shares in 2012 for the same that you paid for them, $15 a share, and thus have no gain or loss. However, they actually went up in value from $10 in 2008 to $15 in 2012, or 50%, but no taxes owed on this increase.

Scenario A/B is actually better since you are saving on taxes in 2008 no matter what ABC or XXX does in 2012 (for instance the XXX Corp. might stay at $10).

A few observations:
1. Similar stocks or mutual funds are relatively easy to find, to avoid the wash sale rule, that may have the same performance in the future, especially mutual funds or ETFs.
2. Use of the losses: Some clients have made positive short term trades and are showing these profits. Also, a number of clients have mutual funds outside of their IRA and 401(k)s and since the open end mutual funds have certain rules that they have to abide by it results in these mutual funds declaring "Capital Gain Dividends", even though the mutual fund is down in value, which are of course taxable.
3. Transaction costs: My clients have sizable accounts and thus they qualify for low transaction costs, i.e. at Fidelity it is $8.00 a trade no matter how many shares or dollar amount. I charge most of my clients $2,000 a year for my advice, and do not get any of the $8.00.

Comments on the markets

Dear Clients,

The stock market continues to be in a declining state. There are concerns that interest rates will go up and that inflation will go up.

With all that said, the USA will continue to grow internally, though not as fast as the developing countries. However, the USA corporations will externally earn additional dollars by serving the needs of the developing countries. For example, they will continue to be hired to build items such as highways and other infrastructures, for, and supply equipment, such as gas turbines and airplanes, to these developing countries.

The government and Federal Reserve officials now appear to be taking a more pro-active approach so that markets are not illegally manipulated, so that is good.

The stock market is "on sale" now so all new purchases look favorable for good gains over the next 5 years or so. All of you that are still working and adding to their retirement plans are thus going to be buying things "on sale" with these new additions. For all of you, retired or not, please make sure check that your various stocks and mutual funds are set up to reinvest the dividends and capital gains when paid. Fidelity makes that very easy by, when you bring up your positions page, click on the Update Accounts/Features on the left side, this brings up another page, where on the left, click on the Dividends & Capital Gain section. This will bring up another page where you can make the reinvestment choices. Other brokerage firms should have a similar way to do this. If not, another good reason to move to Fidelity!

Most of you who are retired know that we once or twice a year look to see what may be needed to be sold to generate cash that may be needed that calendar year, to be added to your "Retirement Spending Account", or "RSA". We of course will continue to do that, so do not be concerned that you are reinvesting dividends and capital gains that you may need for current retirement spending.

Regards,


Peter Cacioppo, CFP...Eagle Hill Wealth Management
Phone: 925-377-6416
Web: http://www.eaglehilladvisor.com/
Blog: http://www.eaglehillwealthmanagement.blogspot.com/
Fee-only Financial Planner and Registered Investment Advisor

One reason dollar is falling

USA Government officials continue to say they want and are working for a dollar that is stronger. However, they may not be really working towards this for the following reasons.
They want our car manufacturers to survive (remember the old saying of 'as General Motors goes so does the US economy') since it is still a large part of the US economy. By allowing the dollar to devalue, the car manufacturers who make their cars outside of the USA (for example Mercedes) will be forced to sell Mercedes here with higher price tags. This will make a Cadillac produced here look a lot cheaper then a Mercedes and thus Cadillac sales should go up. Also, the non USA companies will be forced to build more factories here in the USA so their products can be priced competively with the USA companies. These results will then put more of the USA residents to work and also help the USA economy.

Peter T. Cacioppo, CFP ; http://www.eaglehilladvisor.com/
Comprehensive Wealth Management and Registered Investment Advisor
Moraga, CA
Telephone: 925-377-6416.
Blog: www.eaglehillwealthmanagement.blogspot.com

Higher interest rates, lower bond prices

The credit markets have been wrecking havoc with entities that have borrowed money to buy bonds, as the bonds have done down in value. They have gone down in value because investors feels the bonds themselves have less value backing them up (for instance the value of homes). Unfortunately, this is only one problem. Another large problem that might happen is the bonds could lose even more value if interest rates around the world go up dramatically, as bond prices move in the opposite direction of interest rates.

Here is a comment I sent to a Financial Publication back on September 20, 2007:

Appropriate to buy a house in California?

Over the last 60 years in California, no matter what you paid for a house if you held on for at least 10 years you made a profit over what you paid for it. When my clients ask me should they buy a house now, I am beginning to question whether my old answer of yes may not be a good answer. The reason: while my clients all make over $100,000 a year I am seeing people now who even at a high income level have to stretch too much to buy a home. Once we reach the point where homes are priced too high for people in the $100,000 to $200,000 income level, I think perhaps the past sure thing in California may be not true anymore.

Peter Cacioppo, CFP...Eagle Hill Wealth Management

www.EagleHillAdvisor.com

Fee-only Financial Planner and Registered Investment Advisor

Here is a reprint from a letter I wrote a financial publication in September, 2007:

The appropriate way to lend:

When I was a commissioned bank examiner with the FDIC and then a loan officer at a FDIC insured bank, we stressed you make a loan only if there were a number of sources of repayment of the loan: one, the normal income of the borrower, two, liquidation of the collateral (and the loan was made along with real dollars put in as a down payment by the borrower), and three, suing the borrower to recover from their other assets, or a co-signer. Obviously our problems right now in residential real estate are that loans were made on only one source of repayment: liquidation of the collateral. We need to go back to the basics of lending in this country.

It does not help when normal borrowers see the Federal government year in and year out spend more than they take in. We need to reduce government spending!

Peter Cacioppo, CFP...Eagle Hill Wealth Management

www.EagleHillAdvisor.com

Fee-only Financial Planner and Registered Investment Advisor

Change in asset allocations:

While we have been comfortable with China and India investments for a number of years,

we may reduce our investments there and move to areas here in this country if prices

decrease even more because of the sub prime mess, such as financials.

Peter Cacioppo

Eagle Hill Wealth Management, Moraga, CA

www.EagleHillAdvisor.com

First Blog

This will be a way to share various comments on the financial world.
Peter Cacioppo, CFP
Eagle Hill Wealth Management, Registered Investment Advisor, Moraga, CA