Adams Financial Concepts,  Financial Planning,  Return on Investment,  The Investment Industry

Cutting Your Taxes In Half or More

Choosing the right portfolio structure can reduce your taxes by 50% or more. That is a hidden benefit of building tax efficient portfolios. My passion is to create and maintain wealth for our clients, and one way to do so is pick superior stocks to get superior returns. In addition to that, at AFC our focus is to build wealth in ways which also keep taxes low.

Ordinary income rates are almost twice of what long-term capital gain rates are for those in the higher tax brackets. A portfolio that moves in and out of stocks over a shorter-term time frame will generate short-term gains which result in marginal tax rates of 32% to 37% for most of the readers of this newsletter.

Contrast that with tax rates of 15% to 20% for long-term gains when stocks are held for two to five years on the average. That is one of the strategies we use at Adams Financial Concepts.

Those tax savings never show up in the performance numbers. They are a hidden but real benefit of a longer-term strategy when compared to moving in and out of the market. In order to match an after-tax strategy, shorter-term traders have to produce returns that are almost twice what AFC’s returns are.

But there is more.

Not all stock picks work out. Some do over the longer-term of several years, but in the first year after purchasing, the stocks may be down. Peter Lynch said: “If you can’t convince yourself “When I’m down 25 percent, I’m a buyer” and banish forever the fatal thought “When I’m down 25 percent, I’m a seller,” then you’ll never make a decent profit in stocks.”[1]

I believe it is important to evaluate the probability that a stock will recover from a down day and go on to meet the higher price targets. Some stocks are simply a mistake. Those should simply be sold. But sometimes stocks get sold off and go on to recover.

When stocks are down 10% or more in portfolios, if we feel the stock will recover and go on to bigger and better prices, we will buy again at the lower price and then sell the original shares 30+1 days or so later.[2] This is especially true if the original shares had been purchased less than a year earlier. The loss on the original shares is at higher ordinary income tax loss rates. If we are correct and hold the second purchase for over one year, which is our goal, the gains are at the lower capital gains rate.

Once again, this is a benefit to our clients that never translates to the performance numbers. But the tax savings are real and not insignificant.

Now, this only applies to taxable accounts. These strategies do nothing for tax deferred accounts like IRAs. But they certainly do make a difference for taxable accounts.

It is just one more way in which Adams Financial Concepts is passionate about creating and maintaining wealth.

[1] Peter Lynch & John Rothchild, One Up on Wall Street, Second Edition (New York, New York: Simon and Schuster, 2000).

[2] To avoid the “wash sale rule” cannot buy and sell a stock within 30 days.