It deeply hurts me to see so manyinvestors—including many physician-investors—putting taxesahead of wise investment decisions.This is hurtful to their pocketbooks,pure and simple. Always hasbeen; always will be. A few of themany examples I've noticed comeimmediately to mind, all with thesame end result—the investorsaved taxes but lost far moremoney than the savings in a badinvesting decision.
When General Electric (GE) wasat $54 in 2001, not a real value at 50times earnings, several investors I metwere advised to sell all shares and putthe money elsewhere, such as in realestate investment trusts (REITs)."Horrors," one said, "I couldn't dothat; I'd have such high capital gainsthat taxes would kill me."
Let's look at the folly of thatstatement. Sell GE at $54 with again of, let's say, $40 per share. Asa long-term holding, capital gainstax amounts to 18%, or $7.20.Then throw in state tax at 7%,which eats up another $2.80.That's a total tax of $10, leavingthe seller $44 to redeploy.
Reinvested in cash, that $44 wouldstill be earning a meager amount.Meanwhile, GE has dropped in value50% from $54 to $27. These investorslost $27 in principal—saving$10 in taxes—for an overall net lossof $17 (32%). REITs are upfor the most part since then, withsoaring dividends.
BETTER BOTTOM LINES
Another investor had large gainsin a handful of holdings that representeddisproportionate pieces oftheir portfolio. With the help of afinancial advisor, the investor wasable to reposition their portfolioand gradually pull from highly taxablepositions. Other investors,given enough time, may also makethe right decision for themselves.But many continue to hang ontoinferior positions that presentlyhave high gains, regardless of whatinvesting experts tell them. Restassured, these investors will end upin the worst shape.
As my 14-year-old son, Will,would say, "Well, Dad, what's thebottom line?" Fear and greed arethe enemies of all investors. Andwhen it comes to paying taxes,many investors, doctors in particular,let fear rule, even though theyknow instinctively they're making amistake. It seems they would rathersave a smaller amount of taxes andlose a larger amount of principalthan the other way around.
Be a wise investor and don't lettaxes get in the way of your makingthe finest investment decisionspossible. If you put taxes first andwise investing second, you'll endup a loser with your money. To be asuccessful investor, it has to be theother way around.
Bill Statonis chairman of Staton Financial Advisors LLC, a money management
firm whose accounts were up in 2001 and again in 2002. Join his free weekly "Dollar-Bill
Club" and get a no-obligation trial to Bill's weekly "E-Money Digest" by e-mailing him
at email@example.com. He welcomes questions or comments at 704-365-2122 or 704-365-1910 (fax),
or visit www.billstaton.com.