What is the point of investing if you’re not going to sell at a gain? You’d be surprised at how often investors need reminding that to grow their money for their future; eventually, they will have to sell and pay taxes on the growth. While most investors are pleased with the performance of their portfolio, occasionally, I come across an investor who questions every action or recommendation their adviser provides.
I recently met with an investor who was looking for a second opinion. He held a large position in a stock that his adviser recommended he sell. While the company had done very well for him in the past, the current market was not the right environment for the company. His adviser had recommended selling the stock about two months ago, but he only acquiesced to sell half of his position last week. He was upset because the stock was sold on a day it was down and because the investor still had significant gains for which he now owed taxes.
He asked me to take a second look at his situation. Indeed, he did have a large gain; however, I noticed that the position was sold on a day when it was down 10 percent, but the market was only down 3 percent. This prompted me to look back, noting that from the date he received the recommendation to sell and his actual sell date, the stock was down nearly 25 percent. I pointed out that his decision cost him 25 percent of his gain—much more than what he was paying in capital gains taxes.
Part of managing a portfolio is repositioning the portfolio for the current economic environment. That could mean taxes on your gains or taking losses. Currently, the general advice is to rebalance your portfolio, take defensive positions, and look for losses to offset your gains. Every year investors and their advisers need to look at the plan and modify it to accommodate the changes in circumstances and the economic environment.
Since 2010, growth stocks have outperformed every other investment class. It is hard not to expect that to continue. However, what allowed growth stocks to flourish was low interest rates. Now that interest rates are rising, growth stocks are expected to slow down. Still, investors get anchored to specific strategies and do not want to change what has worked in the past. When investors become emotionally tied to a stock or investment style, they stop considering rebalancing their portfolio as an option. They want their portfolio to increase, but do not want to pay the taxes.
It is important to understand that everyone does what they do well. When you hire an adviser, you must trust that the adviser is doing their job and considering all options when recommending changes that will incur taxes. You need to understand and believe in the investment philosophy your adviser follows.
This investor spent all his time second-guessing every decision his advisor made. I asked him if he was upset with the adviser’s decisions or if he was upset because he was losing more by deviating from the plan his adviser laid out for him. Ultimately, this investor and adviser were not a good fit, and my recommendation was for him to seek an adviser who matched his risk appetite.