Buy and hold never existed. Loss aversion.

We thought it would be beneficial for the readers to change up the column a bit to address more of the broader issues impacting the financial markets and investors. With the format below, it is possible to provide information and insight on a more timely fashion with the intent of helping you reach more informed decisions regarding your financial future. That said, we welcome your comments at www.faganasset.com.

Shareholders of General Electric are painfully aware of the fact that taxes are a secondary consideration when deciding whether or not a particular holding should be sold.

After investors ceased believing that G.E. was a proxy for the broader equity markets, some listeners to our radio show stated that they nonetheless felt trapped in the stock as the tax on the gain, if realized, wasn’t worth it. In hindsight and despite the potential tax on the capital gain that would have accompanied the sale of G.E., investors would have been wise to have sold at almost any time over the past decade as opposed to riding it down from an alltime split adjusted high of around $60/share to where it currently trades at approximately $12/ share.

We could have used as an example IBM, Eastman Kodak or any number of former blue chip companies that may still produce quality products, but whose stock price has languished due to factors within or outside their control. Buy and hold is dead because it never really existed. We strongly prefer buy and monitor, that is to say prudent investors keep a wary eye on all of their investments, regardless of the perceived quality.

They have a plan in case that particular investment does not initially work out in their favor or as with General Electric, does perform for decades but then at some point in time begins to underperform relative to its competitors as well as the overall stock market.

Given the impact of taxes upon your net investment return, investors should work closely with their advisors regarding investment tax planning. Investors who are managing their own accounts should be able to calculate the impact of a capital gain/loss on their tax return.

The recently legislated tax reform specifies that long-term transactions, defined as those in which the underlying security has been held for one year or longer are generally taxed at zero percent for those taxpayers filing jointly with taxable income of $78,750 or less; at fifteen percent for those with taxable income between $78,750 and $488,850 and at 20% for those fortunate enough to have taxable incomes above $488,850.

Short-term transactions, those which the security has been held for less than one year are taxed as ordinary income and subject to the same tax rate as your wages or dividend income. For most taxpayers, the rate is between twenty-two and thirtytwo percent for the Federal Government. In both instances, for taxpayers in New York State, longterm and short-term capital gains are taxed as ordinary income.

The bottom line – have a plan that includes the impact of taxes, but do not make the avoidance of taxes paramount in the decision making process.

In today’s environment with the advent of social media along with “editorialized” news, it is no wonder that many investors are skittish. It is for this reason that we spend a substantial amount of time on helping our clients deal with the behavioral side of investing, specifically the concept of loss aversion. Consider this fact.

Despite the nearly nine percent average annual return of the stock market over the past fifty years, stocks decline nearly as many days as it advances. It is with this in mind that investors must be cognizant of the fact that, according to behavioraleconomics.com, “the pain of losing is psychologically about twice as powerful as the pleasure of gaining,” a theory first put forth by Kahneman & Tversky in 1979.

It is no wonder that, without a disciplined approach to investing, it is difficult to be successful.