Is it ever a good idea to sell at a loss?

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InvestorNewb
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Is it ever a good idea to sell at a loss?

Post by InvestorNewb »

Hello,

About 3-4 years ago, my brother put his life savings (about 50k) into a precious metals ETF. He didn't know anything about investing and did this on a whim without consulting anyone. He is still down ~9k or so. By the fact that he hasn't sold in the past couple of years shows that he has a good tolerance for risk. I'm just wondering if it is ever a good idea to take a loss in order to make your investments more diversified. Precious metals could stay down for years which means he could be (and already has been) losing out on other opportunities.

My advice so far to him is to invest any new cash into the S&P 500, including the dividends that he receives from the metals ETF. This way his allocation to metals will get progressively smaller with time. However, he makes very few new contributions, so I'm wondering if he should just sell so that the money can be moved into something safer.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
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nisiprius
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Re: Is it ever a good idea to sell at a loss?

Post by nisiprius »

One thing can be said: he should not fall victim to the "sunk cost fallacy." The loss is now in the past and can't be remedied, and he should do his best to make his decision in a way that ignores, as far as possible, the price that he happened to pay for it and the fact that he will be selling at a loss.

He should try to forget that he owns the ETF and say, looking at the situation as it exists today, if he had all his money in the bank, would he choose to invest all of it in this ETF today.
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sscritic
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Re: Is it ever a good idea to sell at a loss?

Post by sscritic »

InvestorNewb wrote: I'm just wondering if it is ever a good idea to take a loss in order to make your investments more diversified.
I always sell at a loss to save on my taxes.
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Taylor Larimore
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Sell losing taxable securities to get the tax-loss benefit.

Post by Taylor Larimore »

InvestorNewb wrote:Hello,

About 3-4 years ago, my brother put his life savings (about 50k) into a precious metals ETF. He didn't know anything about investing and did this on a whim without consulting anyone. He is still down ~9k or so. By the fact that he hasn't sold in the past couple of years shows that he has a good tolerance for risk. I'm just wondering if it is ever a good idea to take a loss in order to make your investments more diversified.
InvestorNewb:

It is nearly always a good idea to sell a losing taxable ETF (or fund) to get the tax-loss benefit. After 30 days (to avoid a "wash sale") the investor can then buy back the losing fund if desired.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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RyeWhiskey
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Re: Is it ever a good idea to sell at a loss?

Post by RyeWhiskey »

Depends if it's in a tax shelter or not. If not, then yes, as you can tax loss harvest. If so, then I'd be inclined to keep the fund and see it through a possible recovery. Precious metals are down about 50% on the year and have had several years of abysmal returns. Obviously this could continue but I think your advice is solid:
My advice so far to him is to invest any new cash into the S&P 500, including the dividends that he receives from the metals ETF. This way his allocation to metals will get progressively smaller with time.
To which I would add to that he might want to change his savings/spending habits so as to save more and hence contribute more to the new and more diversified investments.
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matjen
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Re: Is it ever a good idea to sell at a loss?

Post by matjen »

Why just today I sold my position in a Muni Bond fund (BMBIX) in order to lock in some tax losses. Will probably sit on the cash and re-buy the same fund in 31 days rather than go into another Muni Bond fund.

So this makes sense in a taxable account as others have noted. See tax loss harvesting in wiki: http://www.bogleheads.org/wiki/Tax_loss_harvesting
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MoonOrb
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Re: Is it ever a good idea to sell at a loss?

Post by MoonOrb »

InvestorNewb wrote: I'm just wondering if it is ever a good idea to take a loss in order to make your investments more diversified. Precious metals could stay down for years which means he could be (and already has been) losing out on other opportunities.

My advice so far to him is to invest any new cash into the S&P 500, including the dividends that he receives from the metals ETF. This way his allocation to metals will get progressively smaller with time. However, he makes very few new contributions, so I'm wondering if he should just sell so that the money can be moved into something safer.
It doesn't matter how much he put in to start. Forget about that. The issue is "my brother has ~$41k in precious metals and $[x] in ______ assets. How should he allocate his assets?" Note that the answer is the same whether he started out with $5k and it grew to $41k or if he started with $50k and it shrunk to $41k.

The fact that he would have a loss could be perhaps advantageous from a tax perspective, so this should make a move now more enticing than less.

This is a sort of first principles thing: get your asset allocation right, get your funds into low cost indexes, make your portfolio as tax-friendly as possible assuming you've done those first two things, etc. It's got very little to do with whether he's taking a loss or not.
avalpert
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Re: Is it ever a good idea to sell at a loss?

Post by avalpert »

Other than tax considerations, whether your position or a gain or loss is wholly irrelevant to what action you should take.

Your advice here is bad advice - he should decide on an appropriate diversified portfolio and move to it as soon as he can.
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momar
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Re: Is it ever a good idea to sell at a loss?

Post by momar »

If your brother had 41k to invest today, would he buy this fund? Probably not. So sell the darn thing and invest wisely. And enjoy the extra couple grand of tax benefits.
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MrMatt2532
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Re: Is it ever a good idea to sell at a loss?

Post by MrMatt2532 »

In a tax advantaged account, if the market were efficient, it doesn't matter when you sell (assuming you turn around and buy something similar with the proceeds).

In a taxable account, if the market were efficient, you are better off selling at a loss (assuming you turn around and buy something similar with the proceeds).
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Watty
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Re: Is it ever a good idea to sell at a loss?

Post by Watty »

My advice so far to him is to invest any new cash into the S&P 500,

A low cost target date retirement fund, like a 2050 fund might be a better choice for a simple recommendation since it is more diversified. There are pros and cons to these but they are a good starting point.

Putting it in to a tax advantages account(IRA, ROTH, 401K, ect) would also be good thing to suggest.
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Re: Is it ever a good idea to sell at a loss?

Post by BolderBoy »

InvestorNewb wrote:By the fact that he hasn't sold in the past couple of years shows that he has a good tolerance for risk.
Not sure his unwillingness to sell tells you anything about his "good" risk tolerance. It could as easily tell you how much he disdains losses, which would actually show you how risk averse he really is.

If you are a BH, the best thing you could do is show him how you've done with a well diversified, properly AAed-for-your-situation, portfolio over the same period of time he has been sitting on an accumulating loss (can't ignore inflation).
NuB 2013
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Re: Is it ever a good idea to sell at a loss?

Post by NuB 2013 »

As one who has looked in the rear view mirror at some bad choices personally, perhaps he could keep 10% or whatever percent you/he would choose to still hold on and move on with the rest.

That way perhaps he could still have the chance to say "I got you, you all should have known" without messing up the rest from here moving forward.

Might be the best of both worlds. I really fear commodities and raw materials personally. They could be the next big winner also, you never know.
2comma
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Re: Is it ever a good idea to sell at a loss?

Post by 2comma »

I don't invest in precious metals but I did find a couple of pearls of wisdom in this thread:
from MoonOrb...
It doesn't matter how much he put in to start. Forget about that. The issue is "my brother has ~$41k in precious metals and $[x] in ______ assets. How should he allocate his assets?" Note that the answer is the same whether he started out with $5k and it grew to $41k or if he started with $50k and it shrunk to $41k.

The fact that he would have a loss could be perhaps advantageous from a tax perspective, so this should make a move now more enticing than less.

This is a sort of first principles thing: get your asset allocation right, get your funds into low cost indexes, make your portfolio as tax-friendly as possible assuming you've done those first two things, etc. It's got very little to do with whether he's taking a loss or not.

And from Boulder Boy...
Not sure his unwillingness to sell tells you anything about his "good" risk tolerance. It could as easily tell you how much he disdains losses, which would actually show you how risk averse he really is.

If you are a BH, the best thing you could do is show him how you've done with a well diversified, properly AAed-for-your-situation, portfolio over the same period of time he has been sitting on an accumulating loss (can't ignore inflation).
Thank you both for putting it so succinctly! Not sure they will make it to "Taylor's Gems" but I'll be adding them to "Rick's pearls". There are a of better than average oysters surrounding the island of Boglehead!
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kenyan
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Re: Is it ever a good idea to sell at a loss?

Post by kenyan »

Several people have alluded to it, but I suggest you (and probably your brother) read:

http://www.bogleheads.org/wiki/Tax_loss_harvesting

If this is a taxable account, your brother can save a boatload on his taxes over the next three years (assuming that he has an income), and as a bonus he can move his assets into a more appropriate asset allocation.
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Sidney
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Re: Sell losing taxable securities to get the tax-loss benef

Post by Sidney »

Taylor Larimore wrote:
InvestorNewb wrote:Hello,

About 3-4 years ago, my brother put his life savings (about 50k) into a precious metals ETF. He didn't know anything about investing and did this on a whim without consulting anyone. He is still down ~9k or so. By the fact that he hasn't sold in the past couple of years shows that he has a good tolerance for risk. I'm just wondering if it is ever a good idea to take a loss in order to make your investments more diversified.
InvestorNewb:

It is nearly always a good idea to sell a losing taxable ETF (or fund) to get the tax-loss benefit. After 30 days (to avoid a "wash sale") the investor can then buy back the losing fund if desired.

Best wishes.
Taylor
What he said. Plus, it is a good time to give up on sector investing.
I always wanted to be a procrastinator.
Khanmots
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Re: Is it ever a good idea to sell at a loss?

Post by Khanmots »

Nisiprius mentioned it, and several others alluded to it.

I'd strongly suggest that your brother read up on sunk costs. It's a very easy trap to fall into.

One thing to keep in mind is that choosing to not sell something is really the same as choosing to re-buy it. Right now your brother has $41k that can be used to purchase anything. If he does nothing he buys $41k of a precious metals ETF. If he does something, he gets $41k of something else. If he were to find $41k on the street tomorrow, would this precious metals ETF really be what he bought with it? If so, ok. If not, then he's falling prey to paying attention to a sunk cost.

And in this case... he may be able to Tax-loss-harvest which means that by doing nothing he's turning $43k (or whatever $41k + tax-break on loss is) into $41k of precious metals ETF.
island
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Re: Sell losing taxable securities to get the tax-loss benef

Post by island »

Taylor Larimore wrote: It is nearly always a good idea to sell a losing taxable ETF (or fund) to get the tax-loss benefit. After 30 days (to avoid a "wash sale") the investor can then buy back the losing fund if desired.

Best wishes.
Taylor
The concept of tax loss harvesting is new to me. Do the principles remain the same no matter what your tax bracket, if subject to the AMT, etc or something that phases out with higher income, like some other tax breaks? I'm a newbie so hope that makes sense!

I'm thinking of some ancient Lucent stock my husband still has because it's "not worth anything anyway". True, but sounds like it would be if we get rid of it for the tax loss harvesting, yes?

How does it work exactly? With regard to the OP, if his brother sold all this year for a loss of 9K. He would report a loss of 3K over 3 tax years, is that correct?

Thanks.
avalpert
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Re: Sell losing taxable securities to get the tax-loss benef

Post by avalpert »

island wrote:
Taylor Larimore wrote: It is nearly always a good idea to sell a losing taxable ETF (or fund) to get the tax-loss benefit. After 30 days (to avoid a "wash sale") the investor can then buy back the losing fund if desired.

Best wishes.
Taylor
The concept of tax loss harvesting is new to me. Do the principles remain the same no matter what your tax bracket, if subject to the AMT, etc or something that phases out with higher income, like some other tax breaks? I'm a newbie so hope that makes sense!

I'm thinking of some ancient Lucent stock my husband still has because it's "not worth anything anyway". True, but sounds like it would be if we get rid of it for the tax loss harvesting, yes?

How does it work exactly? With regard to the OP, if his brother sold all this year for a loss of 9K. He would report a loss of 3K over 3 tax years, is that correct?

Thanks.
Negative capital gains would first be used to offset any capital gains you have on this years return (assuming it is a long term loss, it will count against long terms gains first) - after that, you can report up to $3,000 a year in capital losses against regular income and carryover any remaining losses to future years to do it all again.
island
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Re: Sell losing taxable securities to get the tax-loss benef

Post by island »

avalpert wrote:
island wrote:
Taylor Larimore wrote: It is nearly always a good idea to sell a losing taxable ETF (or fund) to get the tax-loss benefit. After 30 days (to avoid a "wash sale") the investor can then buy back the losing fund if desired.

Best wishes.
Taylor
The concept of tax loss harvesting is new to me. Do the principles remain the same no matter what your tax bracket, if subject to the AMT, etc or something that phases out with higher income, like some other tax breaks? I'm a newbie so hope that makes sense!

I'm thinking of some ancient Lucent stock my husband still has because it's "not worth anything anyway". True, but sounds like it would be if we get rid of it for the tax loss harvesting, yes?

How does it work exactly? With regard to the OP, if his brother sold all this year for a loss of 9K. He would report a loss of 3K over 3 tax years, is that correct?

Thanks.
Negative capital gains would first be used to offset any capital gains you have on this years return (assuming it is a long term loss, it will count against long terms gains first) - after that, you can report up to $3,000 a year in capital losses against regular income and carryover any remaining losses to future years to do it all again.

Avalpert thanks for your quick reply.
Is there a limit of how much capital gains you can offset with capital losses?

Say if the OP had 9K in capital gains and 9K in capital losses from this ETF, he'd claim the entire loss on the same tax year?

Thanks.
avalpert
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Re: Sell losing taxable securities to get the tax-loss benef

Post by avalpert »

island wrote:
avalpert wrote:
island wrote:
Taylor Larimore wrote: It is nearly always a good idea to sell a losing taxable ETF (or fund) to get the tax-loss benefit. After 30 days (to avoid a "wash sale") the investor can then buy back the losing fund if desired.

Best wishes.
Taylor
The concept of tax loss harvesting is new to me. Do the principles remain the same no matter what your tax bracket, if subject to the AMT, etc or something that phases out with higher income, like some other tax breaks? I'm a newbie so hope that makes sense!

I'm thinking of some ancient Lucent stock my husband still has because it's "not worth anything anyway". True, but sounds like it would be if we get rid of it for the tax loss harvesting, yes?

How does it work exactly? With regard to the OP, if his brother sold all this year for a loss of 9K. He would report a loss of 3K over 3 tax years, is that correct?

Thanks.
Negative capital gains would first be used to offset any capital gains you have on this years return (assuming it is a long term loss, it will count against long terms gains first) - after that, you can report up to $3,000 a year in capital losses against regular income and carryover any remaining losses to future years to do it all again.

Avalpert thanks for your quick reply.
Is there a limit of how much capital gains you can offset with capital losses?

Say if the OP had 9K in capital gains and 9K in capital losses from this ETF, he'd claim the entire loss on the same tax year?

Thanks.
No limit to how much capital gains are offset - you have to offset all capital gains if there are there so yes, he'd claim the entire loss in the same year or more accurately he would report $0 capital gains.
island
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Re: Sell losing taxable securities to get the tax-loss benef

Post by island »

avalpert wrote:
island wrote:
avalpert wrote:
island wrote:
Taylor Larimore wrote: It is nearly always a good idea to sell a losing taxable ETF (or fund) to get the tax-loss benefit. After 30 days (to avoid a "wash sale") the investor can then buy back the losing fund if desired.

Best wishes.
Taylor
The concept of tax loss harvesting is new to me. Do the principles remain the same no matter what your tax bracket, if subject to the AMT, etc or something that phases out with higher income, like some other tax breaks? I'm a newbie so hope that makes sense!

I'm thinking of some ancient Lucent stock my husband still has because it's "not worth anything anyway". True, but sounds like it would be if we get rid of it for the tax loss harvesting, yes?

How does it work exactly? With regard to the OP, if his brother sold all this year for a loss of 9K. He would report a loss of 3K over 3 tax years, is that correct?

Thanks.
Negative capital gains would first be used to offset any capital gains you have on this years return (assuming it is a long term loss, it will count against long terms gains first) - after that, you can report up to $3,000 a year in capital losses against regular income and carryover any remaining losses to future years to do it all again.

Avalpert thanks for your quick reply.
Is there a limit of how much capital gains you can offset with capital losses?

Say if the OP had 9K in capital gains and 9K in capital losses from this ETF, he'd claim the entire loss on the same tax year?

Thanks.
No limit to how much capital gains are offset - you have to offset all capital gains if there are there so yes, he'd claim the entire loss in the same year or more accurately he would report $0 capital gains.

Thanks Avalpert! One more scenario if you don't mind.....

If 10K capital gains and 15K capital loss, both long term.
Use 10K off the loss to offset the 10K gain, another 3K of the capital loss against income, and apply the remaining 2K capital loss to next year's return? Is that accurate?
Thanks.
livesoft
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Re: Is it ever a good idea to sell at a loss?

Post by livesoft »

There is a Bogleheads wiki article on Tax Loss Harvesting: http://www.bogleheads.org/wiki/Tax_loss_harvesting
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avalpert
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Re: Sell losing taxable securities to get the tax-loss benef

Post by avalpert »

island wrote:

Thanks Avalpert! One more scenario if you don't mind.....

If 10K capital gains and 15K capital loss, both long term.
Use 10K off the loss to offset the 10K gain, another 3K of the capital loss against income, and apply the remaining 2K capital loss to next year's return? Is that accurate?
Thanks.
Exactly.
island
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Re: Sell losing taxable securities to get the tax-loss benef

Post by island »

avalpert wrote:
island wrote:

Thanks Avalpert! One more scenario if you don't mind.....

If 10K capital gains and 15K capital loss, both long term.
Use 10K off the loss to offset the 10K gain, another 3K of the capital loss against income, and apply the remaining 2K capital loss to next year's return? Is that accurate?
Thanks.
Exactly.
Fantastic thank you! I've read the Wiki, but getting answers to my dumbed down scenarios really helps. Appreciate your time.
KyleAAA
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Re: Is it ever a good idea to sell at a loss?

Post by KyleAAA »

When you have a loss is the BEST time to sell if it's in a taxable account!
MathWizard
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Re: Is it ever a good idea to sell at a loss?

Post by MathWizard »

You sell at a loss to avoid an even greater loss.
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InvestorNewb
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Re: Is it ever a good idea to sell at a loss?

Post by InvestorNewb »

Thank you for all the helpful advice. I'm going to pass this information along to my brother.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
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