Brain Melt: Did She Make or Lose Money?

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dbc47
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Brain Melt: Did She Make or Lose Money?

Post by dbc47 »

My sister has owned a stock for roughly 10 years and over that period of time she has collected (taken in cash) approximately $26,000 in dividends. Now she is considering selling the stock for about a $17,000 loss. Since she collected more in dividends than what she is taking as a loss, did she actually make money?
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JoeRetire
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Re: Brain Melt: Did She Make or Lose Money?

Post by JoeRetire »

Sounds like she did.

Does it matter?
Just remember: it's not a lie if you believe it.
livesoft
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Re: Brain Melt: Did She Make or Lose Money?

Post by livesoft »

Might depend on what kind of taxes have been paid. :twisted:
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fabdog
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Re: Brain Melt: Did She Make or Lose Money?

Post by fabdog »

From a total return perspective, she likely has a positive return even after taxes on the dividends...not a great overall return, but positive none the less

However, from a capital gain perspective, she has a capital loss if she sells it for less than she paid for it. The amount of dividends received is irrelevant for that calculation (unless she reinvested the dividends, then she has more shares and more cost basis)

The dividends were taxed each year as received.

As asked above, what difference does it make? Will she not sell if she has "made money overall"?

Mike
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dbc47
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Re: Brain Melt: Did She Make or Lose Money?

Post by dbc47 »

fabdog wrote: Tue May 18, 2021 7:29 pm From a total return perspective, she likely has a positive return even after taxes on the dividends...not a great overall return, but positive none the less

However, from a capital gain perspective, she has a capital loss if she sells it for less than she paid for it. The amount of dividends received is irrelevant for that calculation (unless she reinvested the dividends, then she has more shares and more cost basis)

The dividends were taxed each year as received.

As asked above, what difference does it make? Will she not sell if she has "made money overall"?

Mike
Thanks for the feedback. I will pass this along. I guess she just hates to see a loss even though she perhaps ended up making money in the long run (taxes aside).
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Re: Brain Melt: Did She Make or Lose Money?

Post by AznSaver »

I might be mis-understanding the question but yes she lost money, $17,000 in capital depreciation...
She may have received $26k, less any taxation, in dividends but still 10 years later she owns a stock that is less than what she paid for...

The (26K less taxes) - inflation over ten years may make that be less than or equivalent to $17k, but the ten years as comparison of assets shows what could have been...

Vanguard Total Stock Mkt Index Admiral (VTSAX) at 10 years ago with $100k would now be $334,685 and total dividends not reinvested would be $32,676

Hindsight 20/20...

If she is able to use the $17k loss to help offset future gains/income it isn't that bad, but it's still a loss...
Last edited by AznSaver on Tue May 18, 2021 7:43 pm, edited 2 times in total.
livesoft
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Re: Brain Melt: Did She Make or Lose Money?

Post by livesoft »

fabdog wrote: Tue May 18, 2021 7:29 pmThe dividends were taxed each year as received.
$26K in dividends with $17K loss is $9K except maybe she paid $10K in taxes on the dividends, so $1K loss if that happened.
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retiringwhen
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Re: Brain Melt: Did She Make or Lose Money?

Post by retiringwhen »

livesoft wrote: Tue May 18, 2021 7:37 pm
fabdog wrote: Tue May 18, 2021 7:29 pmThe dividends were taxed each year as received.
$26K in dividends with $17K loss is $9K except maybe she paid $10K in taxes on the dividends, so $1K loss if that happened.
Assuming the Dividends were Qualified, and depending on how the loss is used on her taxes, it is likely be a pretty small net tax.

Assume she has 22% tax bracket for earned income, and 15% for QDI for all the years (not true since rates changed in the last decade, but close enough for the internet!)

Assuming QDI are taxed at 15% for her, she paid $7,800 ($26,000 x 15%) in taxes on dividends in total.

Now she has a carry over for the next 6 years that will offset $17,000 in regular income, thus saving her $660 / year (22% of $3,000) for 5 years and $440 on the 6th year for a total $3,740.

So her net taxes on the investment would be ($7,800-3,740) = $4,060 leaving her a net gain of $4,940.

If she offset other realized capital gains this year, let's assume they are Long-term and taxed at 15%, then savings is less ($2,550) and a net gain of $3,750.

Depending upon the size of the investment, this doesn't sound like a very good return for a decade.

If these dividends were used for retirement spending or the like, then paying early is not all that bad and in fact could be good since tax rate was lower than most interest or bond income.
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Re: Brain Melt: Did She Make or Lose Money?

Post by hi_there »

dbc47 wrote: Tue May 18, 2021 7:32 pm
fabdog wrote: Tue May 18, 2021 7:29 pm From a total return perspective, she likely has a positive return even after taxes on the dividends...not a great overall return, but positive none the less

However, from a capital gain perspective, she has a capital loss if she sells it for less than she paid for it. The amount of dividends received is irrelevant for that calculation (unless she reinvested the dividends, then she has more shares and more cost basis)

The dividends were taxed each year as received.

As asked above, what difference does it make? Will she not sell if she has "made money overall"?

Mike
Thanks for the feedback. I will pass this along. I guess she just hates to see a loss even though she perhaps ended up making money in the long run (taxes aside).
Why continue to hold a stock that has failed to perform well for a decade while the stock market in general has tripled?
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Re: Brain Melt: Did She Make or Lose Money?

Post by phantom0308 »

livesoft wrote: Tue May 18, 2021 7:37 pm
fabdog wrote: Tue May 18, 2021 7:29 pmThe dividends were taxed each year as received.
$26K in dividends with $17K loss is $9K except maybe she paid $10K in taxes on the dividends, so $1K loss if that happened.
That’s almost 39% tax seems high especially if any dividends are qualified. If we’re going to be picky about the details it should also be noted that the dividends received 10 years ago - just before now are more valuable than the losses incurred now.
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Re: Brain Melt: Did She Make or Lose Money?

Post by Valuethinker »

dbc47 wrote: Tue May 18, 2021 7:12 pm My sister has owned a stock for roughly 10 years and over that period of time she has collected (taken in cash) approximately $26,000 in dividends. Now she is considering selling the stock for about a $17,000 loss. Since she collected more in dividends than what she is taking as a loss, did she actually make money?
The way you work this out in Excel is to figure out her *after tax* cash flows for each year. e.g. the sale value + tax value of any realised loss (offset against other gains) using the Internal Rate of Return function.

The first entry is always a minus: the cash outflow to buy the investment.

Lay those out in a row or column. If you have exact dates then you can put that next to each cash flow otherwise IRR just assumes end of year (beginning of year for first cash flow). You can simplify of course eg make all dividend payments equal.

use =IRR(cash flow range) or =XIRR(cash flow range, date range)

The Internal Rate of Return takes into account the time value of money, and will tell you whether it was a positive or negative return on the investment. I suspect slightly positive including the tax loss on sale.
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Re: Brain Melt: Did She Make or Lose Money?

Post by livesoft »

A lesson here might be: Avoid loss aversion.
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Re: Brain Melt: Did She Make or Lose Money?

Post by nisiprius »

dbc47 wrote: Tue May 18, 2021 7:12 pm My sister has owned a stock for roughly 10 years and over that period of time she has collected (taken in cash) approximately $26,000 in dividends. Now she is considering selling the stock for about a $17,000 loss. Since she collected more in dividends than what she is taking as a loss, did she actually make money?
Yes. (Ignoring tax details.)

On a pure arithmetic basis she made $26,000 - $17,000 = $9,000.

Imagine that she has a dedicated bank account for the whole transaction. You don't actually say what she paid for the stock. But let's say it was $100,000. The account balance starts at $100,000. It drops to zero when she buys the stock. The dividends flow into the account and ten years later it is $26,000. Now she sell the stock at a $17,000 loss, i.e. she sells it for $83,000. So her bank account now has $26,000 + $83,000 = $109,000. She started with $100,000, she ended with $109,000, she made money.

But it is better than that, because of the time value of money. She got the $26,000 sooner and realized the $17,000 loss later. So in analyzing investment performance, "sooner" money counts more than "later" money. The $17,000 loss didn't occur until she actually sold, while the $26,000 dividend payments occurred earlier and they were available for her to reinvest in something earning more money.

Yes, you can allow for the time value of money by imagining that the dividend payments earned interest so the the final total was more than $26,000, and then of course you can subtract taxes off at the end. Whether that literally comes out to a gain or a loss depends exactly on her tax situation.

It's legitimate enough to think about alternate scenarios and calculate difference between what happened and what might have been, but I think it is bad to drift into a situation of thinking that "missed out on a potential higher gain" is the same thing as a "loss." In a race or an athletic competition, sure, winning and losing refer to relative performance between competitors.

But unless you are a professional money manager, investing shouldn't be a competition. The runner who ran the 2014 Boston Marathon in 4:25:18 and came in in 26,000th place reached the finish line and achieved their goal.
Last edited by nisiprius on Wed May 19, 2021 9:21 am, edited 1 time in total.
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Re: Brain Melt: Did She Make or Lose Money?

Post by livesoft »

nisiprius wrote: Wed May 19, 2021 7:10 am..., but I think it is bad to drift into a situation of thinking that "missed out on a potential higher gain" is the same thing as a "loss."
But this entire social media forum is about missing out on a potential higher gain that one would get with index funds because of their lower costs -- risk adjusted, of course.

When I no longer see a chart from PortfolioVisualizer, then I will know that things have changed.
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Re: Brain Melt: Did She Make or Lose Money?

Post by dbc47 »

Thanks nisiprius, that was a terrific answer. Thanks for taking the time to answer my question!
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Re: Brain Melt: Did She Make or Lose Money?

Post by nisiprius »

livesoft wrote: Wed May 19, 2021 7:34 am
nisiprius wrote: Wed May 19, 2021 7:10 am..., but I think it is bad to drift into a situation of thinking that "missed out on a potential higher gain" is the same thing as a "loss."
But this entire social media forum is about missing out on a potential higher gain that one would get with index funds because of their lower costs -- risk adjusted, of course.

When I no longer see a chart from PortfolioVisualizer, then I will know that things have changed.
But I don't think I have ever referred to relative underperformance as "losing money."
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Re: Brain Melt: Did She Make or Lose Money?

Post by dbr »

I think the question has been answered, but the one consideration that has not come up is gaining or losing value in real dollars after inflation. Whatever she thinks her current money obtained is, it should be divided by 1.19 to account for inflation from 2011 to 2021.
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