Non-actionable headlines; tax impact of realizing capital gains
Call it click-bait or whatever you wish. Quite often headlines that are meant to grab your attention inadvertently cause you to act in a fashion that is contrary to your financial wellbeing. One recent headline that comes to mind is “The U. S. May Face A Recession In A Few Years – Even Without A Trade War, Says Closely Watched Investor.”
The title catches your attention by mentioning the words “recession” as well as “closely watched investor” suggesting an event that is a cause for concern for even the most astute. Your fear is heightened even more as the editor that most likely designed the title states that the recession may occur “even without a trade war” which had been your biggest fear. It’s like saying the boat may sink even if it doesn’t hit an iceberg!
Suffice it to say that there are many investors who would equate a recession with a bear market and, after reading the title and looking to respond proactively, reduce their stock exposure. We would disagree with this course of action as despite the attention grabbing title, there is not enough data to necessitate a response. We would thereby define the headline and article as non-actionable or one that would not cause a well-informed investor to act.
Let’s provide that con- text.
According to the National Bureau of Economic Research the last recession, defined as two consecutive quarters of negative economic growth, that began in December 2007 ended more than nine years ago, in June 2009. Since the end of World War II there has been twelve recessions that have resulted in an average contraction in economic growth as measured by Gross Domestic Product of 2.7% lasting over an average period of approximately nine months. Given the fact that since the end of WWII there has been a recession on average every five or six years, it should not come as a revelation to anyone that “The U. S. May Face A Recession In A Few Years.”
In addition to the data included in the preceding paragraph, it is also useful to note that on average, the year prior to the start of a recession stocks appreciate by more than five percent and fall an average less than five percent during a recession. In fact, it is more common to have a bear market during an economic expansion than during a recession.
We received a telephone call from a client the other day stating that he was uncomfortable with how Facebook was treating the issue of privacy and wanted to exit the stock. He was informed that the stock was purchased over a year ago and therefore subject to a Federal long-term capital gains tax rate of 15% and a New York State tax of 7%. Given the fact that the fifty shares we pur- chased on his behalf had appreciated by approximately $4,200 his tax bite would have been $924 or $18.48/share. He replied that he was “not that uncomfortable with how they were treating the privacy issue.” We held on to the stock.
Although we did retain Facebook in part due to the tax consequences of selling, please keep in mind that taxes are only part of the equation when determining what to buy or what to sell. The primary consideration is whether or not the fundamental and technical stories that compelled you to purchase the security initially are still intact. We often say that we do our best to buy perceived potential and sell a lack thereof.
Please note that all data is for general information purposes only and not meant as specific recommendations.
The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call (518) 279-1044.