Capital Gains and Losses

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. The IRS says when you sell a capital asset, such as stocks, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss. While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property.

A “paper loss” — a drop in an investment’s value below its purchase price — does not qualify for the deduction. The loss must be realized through the capital asset’s sale or exchange.

Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. For more information on the tax rates, refer to IRS Publication 544, Sales and Other Dispositions of Assets.

If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately).

Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040. There is a worksheet in last year’s Instructions to Schedule D to figure a capital loss carryover to this year.  This is usually a very complicated matter, so please contact us so that you may receive the professional advice you deserve.

Our Investment Philosophy

In a world (and market) replete with uncertainty, there are a few investment themes we can count on. Portfolio performance is more of an art than it is a science. In many respects, optimal portfolio construction is a constant balancing act between risk and reward while creating a mathematical problem that aims to prove 1 + 1 = 3.

We assert that there are three factors that determine long-term portfolio performance:

1. The long-term asset allocation between stocks, bonds, and commodities

2. The funds and/or vehicles selected to represent various stock, bond, or commodity types

3. The total cost incurred to manage the portfolio

When an investor has the right asset mix, holds the right funds representing those asset classes, and keeps their total investment cost relatively low, they have a much higher probability of achieving long term capital appreciation. While fairly basic, the above assertions could provide hardship to the average investor. For example, the points above could erroneously be understood to mean that;

1. There is one ideal portfolio construction for all investors

2. The average investor has the ability and skill to isolate representative assets, and,

3. The average investor can appropriately factor in the cost of commissions and taxes while actively managing their portfolio

The good news is that, with professional coaching, a solid understanding and acceptance of risk tolerance, and patience, investors can effectively achieve solid returns and build time-tested portfolios. RGA Investment Advisors provides portfolio construction and investment management services. Please contact us today to Get Started.

Portfolio Allocation: Slices of the Pie – Part II

So what is the proper allocation for you to achieve the risk adjusted return that you desire? Well, the first that you should probably determine is how much risk are you willing to take? Shaping an asset allocation is going to be largely impacted by your personality — will you be able to sleep at night knowing that your money is being subject to significant market fluctuations? Do you need immediate liquidity? These are important questions to ask yourself before you begin designing your own allocation (or buying pre-packaged products [to be discussed in the next segment]).

For those individuals who aim to preserve their capital (and this is their #1 priority) I would generally recommend that a portfolio be be structured to maintain in excess of 80% of their value in cash and cash equivalents (money markets, treasuries and commercial paper). High liquidity is a major benefit of this portfolio allocation — many individuals favoring this portfolio style have a need for capital within the next 12 months. Please note, while this structure may have less market risk, it does open you up to the risk of losing money over time because the appreciation of assets may not keep pace with inflation.

For individuals desiring current income, we can expect a similar (majority) component of the portfolio to be composed investment-grade, fixed income obligations of large, profitable corporations, real estate (usually REITs), treasury notes, and, to a lesser extent, shares of blue chip companies with long histories of continuous dividend payments. Usually, the investor who prefers this type of allocation is one who is income-oriented — usually nearing retirement or structuring some way to preserving the principle (with some upside potential) of a significant cash inflow (inheritance, etc.).

For most of us, we can find a certain level of comfort in a “Balanced Portfolio.” Most people find a sense of emotional comfort in knowing that this portfolio is structured as to balance long-term growth and appreciation of assets and current income. An ideal mix of assets would include those that generate cash as well as those that appreciate over time. Well balanced portfolios mitigate the risk of medium-term investment-grade fixed income obligations, shares of common stocks in leading corporations (some but not all that pay dividends), and real estate holdings via REITs. Generally, a balanced portfolio is always vested (meaning very little is held in cash or cash equivalents unless the investor (either you or a portfolio manager) has determined that there are no compelling opportunities.