The second half of June is when a lot of share investors look at their portfolio and identify those stocks that have lost money and the ones they’ve lost faith in.
It’s a time of review and also, rejigging.
Here’s why.
Win some, lose some
The rationale is to sell the disappointments so that you can use any capital losses to offset the capital gains made on your winners sold during the financial year.
Capital losses can offset capital gains when working out if any capital gains tax is to be paid after the end of the financial year. Usually, the share price of those stocks being sold for tax losses goes down during this period.
Traditionally most investors just watch and observe the ‘tax loss selling season’.
An opportunity
But there are some at this time of year who are not just in the audience. Not at all. They are on the sidelines and ready to play.
They have a ‘tax-loss harvesting game plan’. That is, they’ll sell investments that have declined in value to offset gains made elsewhere in their portfolio. It’s a strategy, especially at tax loss season, which allows them to capture opportunities and generate more earnings in the long run.
But they are cautious. They know the ATO’s stance on ‘wash sales’ – that is, selling shares solely to create a tax loss, then buying them back immediately (disallowed by the ATO if viewed as tax avoidance) – and have an excellent accountant in their ‘investment team’.
They are also across the markets, read all the financial news and just generally know their stuff when it comes to investing.
What The Call experts are doing
I love hosting The Call on ausbiz (and streaming on the ausbiz app, SevenPlus and Samsung Smart TVs) when I can, and particularly when the expert panel is Gaurav Sodhi from InvestSmart and Mathan Somasundaram from Deep Data Analytics.
Every day, The Call analyses 10 stocks, suggested by viewers, in 60 minutes.
It was interesting that on that same episode of The Call, Gaurav and Mathan have a list of stocks they are waiting to buy when their share price drops as investors ditch them. They see this time of the year as a buying opportunity for selected stocks out of favour with the market.
Neither of them would disclose what was on their buying list, but the following day my ausbiz colleague Nadine Blayney put the question to Luke Laretive from Seneca Financial Solutions and Rudi Filapek van Dyke from FNArena.
Luke is looking to buy James Hardie and Monash IVF during the tax loss selling season while Rudi has Dicker Data and Macquarie Telecom in his sights.
For them, and others, tax loss time is an opportunity.
At the end of the day
If you’re in a high bracket or have significant realised gains, harvesting losses now could enhance your after-tax returns – especially when your capital gains tax rate exceeds your expected future rate. But always speak with your tax advisor or financial planner before executing a tax-loss strategy, to ensure it suits your circumstances.
While capitalising on tax loss season is smart, as we all know, it’s not the only way to build wealth.
Taking a holistic view of your investments – so not just the share portfolio, but superannuation, property and any fixed income or business investments is also important.
