30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances

Chapter 28. Harvest Tax Losses

One of my relatives called me in late 2008, seeking advice about what to do with her flagging portfolio. Like everyone else, she was panicked and wanted to take action, even though she has a good 10 to 15 years until retirement. She wanted to stop the losses by selling her many poorly performing stocks and stock funds.

I told her that she was absolutely right and agreed that she should sell at least some of her holdings—especially the ones that had performed the worst.

There was silence on the other end of the line. "But I thought you would tell me to sit tight, like you always do," she said, clearly puzzled.

This time was different, at least in one sense. I didn't recommend getting out of stocks altogether. Doing so would ensure that her portfolio would bear the brunt of the sell-off—even more than it had already—and would also fail to participate in any subsequent recovery.

However, completely sitting tight didn't make sense at that point, either. I suggested that she sell the biggest losers from her taxable brokerage account and then buy other, similar investments in their place. In so doing, she'd be able to use those losses to reduce her tax bill, not just for 2008 but potentially for future years, too. She may even be able to upgrade the quality of her holdings along the way. Amid the calamitous market environment of 2008, many long-closed and highly desirable mutual funds flung open their doors for new business, and many high-quality companies were ...