Somewhere, there has to be a tombstone with the inscription, “It seemed like a good idea at the time.” If you have an investment idea that hasn’t panned out, you should send it off to the financial boneyard before the year ends.
For example, let’s say you’d decided back in January that oil stocks seemed awfully cheap. And they did! After all, oil had had fallen to $53,45 a barrel at the end of 2014 from $95.15 at the start.
Unfortunately, it often gets darker before it gets pitch black, as legendary investor Peter Lynch was fond of pointing out. Oil closed at $39.38 yesterday, thanks to overproduction and falling demand in China and Europe. Oil company earnings have fallen 66% this year, and the average energy fund has fallen 17.21%.
Is oil relatively cheap? Sure. Are oil companies screaming bargains? Maybe, if you can answer the question of where oil prices will be in the next few years. (Bear in mind that oil has been below $40 a barrel 62% of the time since 1986, and that the average price of oil since 1986 is $42.87 a barrel.)
Sure, you may just have been early. But on Wall Street, “early” is another word for “wrong.”
If you’re investing in a taxable account, selling now can at least make your losses a bit more palatable. Losses can reduce gains dollar-for-dollar, so if you’ve gotten an annoying capital gains distribution from your mutual fund, you can be slightly less annoyed. And if you’ve sold a stock or a fund for a gain, you can reduce your capital gains taxes.
If you have more losses than gains, you can deduct up to $3,000 from your income, which will also reduce your taxes. If you’ve really gotten smacked, you can carry over additional losses into the 2016 tax year.
If, after all this misery, you still feel positive about oil — or whatever mistake you’ve made — you can wait 30 days and reinvest in the same stock or fund. It’s unlikely oil will be back up to $80 by then.