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Saturday, December 23, 2017

A Lesson On Tax Loss Harvesting: Case of GE

I'm not embarrassed to tell all of you when one of my investments, that I touted in an earlier post, doesn't pan out.  It's all about livin' and learnin' here at CCM.  So if you read my October 23rd post, A Lesson On Buying Stocks: Case of GE, you might be surprised to read that I have been systematically chucking the stock for some "tax-loss harvesting."  In case you don't know what it is, tax-loss harvesting is a strategy of selling stocks toward the end of the year in order to offset a capital gains tax liability.  All of my capital gains from trading stocks this year have been the short-term (held for less than a year) variety, meaning they'll be taxed as ordinary income.
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Why am I selling my shares of GE?  Well, first, as you possibly sensed from reading my earlier post, my enthusiasm for new CEO of GE, John Flannery, was perhaps a little too sanguine.  I still think he'll right the ship next year, and he certainly convinced me of that with his purchase of GE stock, but I made the mistake of thinking I could hold a loser stock more than 2 months.  I'd thought there would be a bigger bounce up in the stock from $21.  I thought at the time that $21 and change represented GE's floor.  I was wrong!  The stock fell 3 points more and now is trading in the high $17 range.  One bad trade was enough to wipe almost all of my gains this year.

Prior to GE, I had bought and sold 12 individual stocks and was up $572.  Not bad for having only $3K in cash to invest with in my Brokerage.  Thus far, I have realized a loss of $262.5 from the sale of GE shares leaving me with roughly $310 in short-term gains for 2017.  What didn't work?
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1.  Buying more shares of GE as the stock made new lows, i.e., dollar cost averaging.  Eventually I ran out of cash and could not catch this falling knife any longer.

2.  Putting all of my cash in one stock.  I waited about three weeks for GE to make a substantial move to the upside, with all of my cash on it, but it did nothing.  Yes, you read me right, I had all of my money in one stock (this $3K represents my "shoot for the sky" allocation).

So to get back in the game, I had to sell half my shares.  Now, I didn't do it all at once.  Whenever you sell a loser, you want to sell on an up day (of course) and when the stock is at an intraday high.  I sold my shares in two trades, 5 days apart, at $18 and $18.02.  I still hold 71 shares of GE and am more comfortable letting these go deep into 2018.  GE is officially a member of the Dogs of the Dow and there's always positive speculation about these lumps of coal becoming future diamonds

Should I feel bad about losing almost all of my stock investment gains with two months to go in the year?  No!  This is all part of stock market investing.  Sometimes you get some calls right, and sometimes you don't.  Provided you get more calls right than wrong, you can make money.

Many times investors keep a laggard stock because of the FOMO or Fear Of Missing Out.  Is there a chance that GE will make a run up within the next 30 days?  Sure.  What you can do in cases like this, where you fear that by selling shares of one of your losers you may miss the comeback, is buy a stock performing better within the sector.  This way you retain your diversification AND you won't miss a bounce within the entire sector.  Remember, buying back shares of your sold stock within a 30 day period would violate the wash-sale rule.

Final Thoughts

Are you holding shares of GE right now and have short-term capital gains you can potentially offset by realizing a loss?  What are you waiting for?  Pull the trigger.  Use that cash to invest in an Industrial ETF for the time being to remain fully diversified.  You only have a few more days left in the year to lower your tax liability for 2017, so consider the strategy of tax-loss harvesting seriously.

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