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Ken Fisher Explains: Tax-Loss Harvesting. Is it Right for You? - YouTube
Channel: Fisher Investments
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Lately, with the year 2020,
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having had a lot of ups and downs and
wiggles in it in categories doing better
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in categories doing worse. I've had a
lot of people asking me about tax loss,
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harvesting, what is it? Is it right
for them now? Right. For them,
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it's always about them and
different than the thing itself.
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But tax loss harvesting is
when you're a taxable entity,
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as opposed to a tax-free
or a text for an entity,
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like a pension plan or something,
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or a 401k I'm
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looking at unrealized
losses that you have and
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selling them. So you've
got that as a capital loss,
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which you can use to offset against
capital gains in the past or in the future
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to reduce your tax bill
while replacing them
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with something that effectively
has been down as much
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and acts the same.
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So that if let's say you bought stock X,
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you bought it at a hundred, it felt a 60,
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you got a 40% loss. Uh,
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it's a fair amount of money to you.
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And you could sell that now
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lock in that capital loss,
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which you could use to offset other
gains you might have in the past
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this year,
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or we'll forward into future
years called a tax loss carry
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forward. But to do that,
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if you still liked that stock,
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when it was down at 60 and
thought it would go back up,
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you better buy a stock that replaces it,
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which would act exactly as well as
it. That's not always so easy to do.
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Sometimes you can do
it. Sometimes you can't.
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There's a traditional notion
in all kinds of things that you
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can use correlation,
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coefficients to measure how
closely two things move together.
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And what you want.
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If you're selling this stock
is to have another stock,
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probably have a very
similar category like to
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chemical stocks or to technology
stocks that correlate very highly.
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But beyond that correlation, doesn't
tell you causality correlation,
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just tell you what's happened in the past.
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And so you want to actually
understand why they wiggle together
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and that they then therefore will
wiggle together in the future.
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So this other one, the one you
would buy after you'd sold stock X,
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maybe we call it stock.
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Y will behave like stock X would have.
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So you get the upside that you expected.
Otherwise, if you were to sell it,
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you just sell it and be gone.
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So the real concept is to look at the
stocks that are down a fair amount
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when you're in a taxable
entity, like a normal person,
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and figure out if you can sell them to
lock in the loss and replace them with a
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stock that acts similarly,
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the problem that you have
is that pretty often,
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everyone else is playing the
same game at the same time,
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particularly right around year end,
which is what we're coming up on.
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And right around December 31st or
the last couple of weeks of December,
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people say, Oh my gosh, I
ought to be doing this now.
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And as they do this now
at the end of the year,
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they often pound those stocks down that
were already down even more because
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they're all trying to get out at
the same time. And to do that,
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you have to buy another stock.
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Similarly down often people don't
do that because those stocks
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scare them because
they've been down so much.
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And if you don't do that correctly,
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you're likely to get whipsawed
by having the stock that you
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buy do worse than the stock that you sold.
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The other thing that people
often do wrong is they
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sell the stock and then they
wait to buy it back later.
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And often, particularly if they
do it at year end, they find it.
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The stock is bounced back.
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Once you get past the end of the taxable
reporting season at the end of the year
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and in January, before
they can buy it back,
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30 days later has gone through
the roof and their net behind
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as a general rule in my thinking,
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you want to take your tax loss harvesting
to the extent that you do it before
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you ever get to December and optimally,
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maybe you do it in September or October
before anybody's thinking about tax
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loss harvesting.
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So you don't get all the noise of having
to do this against the backdrop of
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everyone else doing it at the
same time. So real answer is,
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is this right for you? Depends
on what your circumstances are,
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which is what you can say about
so many other things in investing,
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