How People Lose Money Trying to Save Money

Posted on: May 11th, 2010 by

Estate Planning - Financial Planning - CPA - Rockville, MDDeath and taxes are the two inevitabilities in life that induce strong feelings of loss that can take over our decision-making, especially with regard to money.  No one wants to hand over their hard earned money to a government that can often be wasteful, well more wasteful than they would be.  In their zeal to avoid such fate, investors often overlook the big picture, which is their net profits, rather than tax savings.  From this, mistakes are made.  A lot of investors will sell their investments that have taken a loss at the end of the year to offset a gain elsewhere.  While this is a good tax move, that should not ultimately drive your investment decisions. Those stocks have often shown to rebound.  Instead, you should sell holdings whose investment thesis you no longer believe in or stocks you were planning to sell anyhow.

On the flip side, people all too often  hold stocks way too long to avoid paying taxes on the gains.  If you believe a stock is at its peak or is high enough for you to be happy with the gains, you should sell, rather than wait for it to slowly decline.  What goes up, must come down.

Minimizing taxes is an important part of estate planning, but definitely not the only part.  In setting up a trust, it’s vital to make sure you can live with the terms.  A charitable remainder trust, for example, will provide tax-advantaged income in exchange for your charitable gift.  The downside, however, is that once you make the gift, you can’t undo it.  Make sure you explore all of your options with your estate planner before jumping to a decision.

After Congress extended the Worker, Homeownership, and Business Assistance Act of 2009, floods of people rushed to buy homes by April 30 just to receive the tax credit.  You really need to regard a credit just for what it is, a credit or added bonus, not a reason to act.  Instead, with the home credit, people bought homes they couldn’t afford, paid to much, or failed to undertake proper inspections.  This goes to the same theory that just because something is on sale doesn’t mean you need to buy it.

What have we learned?  Speak with a financial adviser if you have questions.  Don’t base your investment strategies entirely around taxes.  And don’t get mixed up by incentive traps.  Always take the time to research and think reasonably about what you are doing.



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