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Cents and Sensibility

BY GUY STEELE

Buy and hold stocks
for lower taxes

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Question: I have a large portfolio of stocks and mutual funds. I'm considering selling some of my holdings but have concerns about what I'll have to pay in taxes if I do this. What's your advice?

Answer: Successful investors understand the benefits of buy-and-hold investing. Choosing high-quality investments and holding them for the long term not only increases your chances for success, it also reduces your taxes. But keep I mind that there are risks associated with mutual fund and individual stock investing, such as losing money.

If you sell an investment after holding it less than one year, any gain is taxed at your ordinary income rate, which may be as high as 39.6 percent. But hold that investment for at least 12 months, and your gain is taxed at 20 percent.

Avoid fund turnover

Although you can control when you buy and sell individual stocks, you don't have the same control with stock mutual funds. If your mutual fund manager buys and sells frequently, you could be sacrificing long-term returns to capital gains taxes.

That doesn't mean you should avoid mutual funds. They offer professional management and broad diversification, making them a convenient and affordable way for some investors to own a portfolio of attractive stocks. Look for funds that subscribe to a long-term, buy-and-hold strategy. Ask your investment representative or your fund's shareholder representative for the fund's turnover ratio. Turnover measures how much trading occurs in a portfolio. The lower the turnover rate, the lower the capital gains taxes.

Diversify

If you have a large portion of your portfolio invested in one company, you might consider selling some of your shares to diversify your portfolio. You will owe capital gains taxes, but the move could reduce the impact that an adverse development could have on your entire portfolio.

Selling stocks simply to take advantage of lower long-term capital gains taxes is not a good idea. But if the outlook for a company whose stock you own has deteriorated, or if selling would improve your portfolio's overall diversification, it may be a good time to take advantage of low, long-term capital gains tax rates.

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Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com