How to manage your portfolio at tax time

How to manage your portfolio at tax time

If you have shares, one of the things you ought to have an understanding of is the sharemarket calendar.

There are important periods on this calendar that every investor needs to be mindful of, as it is during these times that you are likely to see the greatest impact on the prices of your shares.

One of these times is now, as the clock ticks towards June 30.

At this time the financial industry are out in force encouraging you, the investor, to clear the decks and move underperforming stocks out of your portfolios in preparation for tax time.

This creates transactions for the brokering houses and allows the institutions and short-term traders to profit from short selling, which is based on making a profit from falling share prices.

It is vitally important to remember that your broker is not your tax adviser, so if it is tax advice you are after you should see your accountant and be prepared to pay for good advice.

Investors need to be aware that when there is a sell off before 30 June, the impact on their portfolios is for lower prices and increased risk of further falls. That said there is some merit in both selling stocks that are falling and in short selling, however, to sell stocks based on tax reasons is, in my opinion, not a sound investment approach.

If you are paying more tax, it usually means you are making more money. That said, it is wise to do your own research and then seek advice in terms of how you might best structure your financial affairs.

A general rule of thumb, when it comes to the sharemarket, is that one-third of stocks will be going up, one-third down and one-third sideways.

When you think about it, the one-third going down are pulling down your overall portfolio return. So if all you did was implement a strategy to sell the stocks that were going down then you will see a dramatic effect on portfolio performance in that your money will be safe during the biggest declines.

To do this requires that you understand how to set a simple stop loss. Typically your stop loss will be a percentage below your buy price (we use 15%).

Rather than getting caught up in the emotional rush of the sharemarket calendar before June 30 and selling at a loss to offset a profit, or in an attempt to reduce your tax bill, use good risk management to alert you when it is time to sell.

Finally, tax time is an opportunity to investigate the market sectors that are most at risk and those more likely to be defensive for the coming year. Some of the sectors that stand out as being more defensive at this time are Financials, like the big banks, and Diversified Financials in the area of insurance, like Suncorp and QBE.

Healthcare is also another defensive area, with CSL and Sonic Healthcare being quality stocks. On the risk side Energy, Materials and Utilities sectors are showing further potential downside for the 2013-14 financial year, and therefore a portfolio heavily weighted this way will be feeling the pinch into the second half of 2013. That said, these sectors will be the ones to watch in 2014.

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