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November 29, 2011

Do not wait till the last minute to harvest your investment losses.

Some of my prior posts stessed the importance of not waitng to December 31 to do your 2011 tax planning.  Smart.com November 29th post discusses why tax losses should be realized now.
Investment losses can offset investment gains.  The tax advantage is greater if you have short-term gains rather than long-term gains.  The 2011 tax rate for long-term capital gains are capped at 15%, whereas short-term gains can be taxed at the top marginal income tax rate of 35%.  Capital losses of $3,000 in excess of capital gains can be deducted from ordinary income.
Because most people try to avoid losses they hold losers too long.  They think they will sell once the stock price goes back to what they paid for the security.  If the stock is not performing and it has been identified as a loser, it is unlikely that there is an economic benefit to holding the stock.  If the period for the security to recover is in the distant future, it may be advantageous to sell for a loss, wait more than 30 days and buy it back.  If the stock is repurchased within 30 days the loss from the sale of the stock will not be currently deductible (wash sale).  Alternatively an index fund or exchange traded fund could be a better investment than the individual stock. 
If you think the stock should be sold, others may also.  If you wait to sell you may find there is mores selling preassure.  This could result in a lower stock price than now.
Year-end planning is also a good time to re-balance your portfolio.  You  have more control by implementing the changes now rather than waiting.  It is very difficult to know the future.  There are times when people have been correct in anticipating future events.  Very few if any, have been consistently correct in knowing the future. 
If you consistently know the future you have probably already completed your year-end planning.  
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