Capital Gains Taxes | Retirement | Wealth Management

Capital Gains, Taxes and Knowing When to Sell Your Stocks

August 19, 2019

Though the data says we’re not yet in recession, it’s certainly true that recent headlines have been far from comforting. But does that mean now’s the time to get out of the stock market?

Since we don’t think it’s possible to accurately time the market, our position has always been that spending time in the market, rather than timing it, is the key to long-term investment profits.

That said, even the most stalwart investors may at times consider selling and booking profits when fears overwhelm them.

If this sounds like you, here are a couple of points worth considering before making such a move.

First, the stock market regularly goes through periods of volatility, and uncertainty waxes and wanes with the news cycle. On average, the stock market tumbles 14% intra-year. If 2019 proves to be an average year, then you could see the S&P fall to about 2,600—an additional 8.5% decline from Thursday’s close—and that would be entirely, totally, completely average.

Second, selling equities after a 10-year bull run means you’re almost certainly going to be selling at a gain, which means you’ll owe taxes on those profits. After paying your taxes, you’ll have less money than you did before you sold—and when conditions stabilize and you’re looking to reinvest, you’ll have a lot of ground to make up.

One question you need to answer is: What’s the gain you’ll need to earn to return to where you started? The chart below shows the impact of deducting capital gains taxes for a range of returns.

Note: Chart assumes 20% capital gains tax rate and no state or local taxes. Source: Adviser Investments.


Let’s say you invest $100 and it grows by 50% to $150. If you cash out the $50 you’ve gained and pay a 20% capital gains tax rate, you’ll be left with $140: $40 in cash and $100 in the account. Once you reinvest, you’ll need a 7.1% return on the $140 to get back to where you were before you traded. If you sold your holdings at a 100% gain, meaning you doubled your money, you’ll need an 11.1% gain.

The bigger the gains you have now, the bigger the return you’ll need to recover those IRS payments. And remember, these figures ignore any state or local taxes you’ll owe, making the recovery of profits needed even greater than the chart suggests.

At Adviser Investments, we understand that every investor’s risk tolerance is different. Please contact us if you have any questions about how your individual investments are positioned to handle a downturn. We’re happy to conduct a complimentary portfolio review, walk you through the numbers and discuss what options may suit you.

Please note: This update was prepared on Friday, August 16, 2019, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions expressed should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be seen as a recommendation to buy, sell or hold any of them.

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