Harvest Your Losses to Build Up Cash

NEW YORK (MainStreet) – With the stock market sinking, cash looks awfully appealing – even though interest earnings are below stingy. But if you want to build up cash in a hurry, where’s it going to come from?

You can shift your investment strategy, putting new savings into secure bank holdings instead of stock-owning mutual funds. Still, it could take ages to build your cash holdings large enough to mitigate the effects of a stock-market downturn.

Happily, there’s another alternative that can work quite nicely in this post-Labor Day period. You can harvest investment losses as part of a double-headed strategy of cutting tax bills and shoring up a cash reserve. For good measure, you could get a jump on the portfolio rebalancing many people do at the start of the new year.

The concept is simple: sell stocks, bonds or mutual funds that have lost money. Then, instead of buying better ones, keep the proceeds as cash in bank savings or some other safe, liquid holding.

If you have a net loss on these sales, it can be used to offset gains on other investments sold during the year. When losses exceed gains, up to $3,000 of the excess can be used to offset ordinary income, thus reducing income taxes. And if losses are even bigger, they can be “carried forward” to reduce taxes on income or capital gains in the future.

Many investors procrastinate on selling losers, hoping beyond hope for a rebound. But you can help make the decision to sell by first asking the same question of every money-losing holding: Regardless of how it has performed in the past, would you buy that investment today, at today’s price?

If the answer is yes, it must be because you think the investment is poised for a recovery, and you might well keep the investment despite the loss to date. If the answer is no, the holding is a good candidate for a tax sale. In looking over your portfolio, keep several tips in mind:

Sell just part of a holding. If you accumulated shares in a single stock or fund at various prices over time, some shares may be profitable at today’s prices, while others may be losers. If you tell your broker or mutual fund company exactly which shares to sell, you can unload just the losers, capturing a tax loss.

Keep in mind that once you select this approach, you must continue using it for that holding rather than an alternative, such as basing capital gains and losses on the average price paid for all your shares.