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Taxes, Don't Let Them Get You Down

Tax filing deadline is fast approaching and many people have been asking me if they should have created short-term losses last year to get tax deductions, realized investment gains to net off losses (loss harvesting), and so forth.

Well, firstly it is probably too late now for 2009 taxes. Another bad news is I am not a tax CPA and thus wouldn’t be the right person to give you the appropriate tax advice based on your financial situation.

The good news is most likely the above does not matter as much as you think. Tax consideration is important and people should continue to work with their tax CPAs to reduce their tax liabilities; but for serious investors, taxes should only be considered to the extent that they will affect your after tax return and thus your long-term wealth.

Taxes are only one of the many variables that will determine your ultimate wealth. What is far more important is how good your investment holdings are. If you currently own a stock that you believe is deeply undervalued and will do very well going forward, it would not make sense to sell it just for tax reasons, right?

It is less painful to pay huge taxes on investments that made you money than to have your assets wiped out by some bad investments. For example, many people were reluctant to sell their high priced dot com stocks in the late 90s despite being warned of a possible reversal of their holdings because they did not want to pay a huge tax bill. Well, they continued to save themselves more taxes for many years to come when technology stocks crumbled not long after.

The fact is investors need to have a longer time horizon perspective when managing their wealth. But just keep in mind that oftentimes minimizing your short-term tax liability does not translate into long-term wealth maximization.

Successful investors like Warren Buffett and Bill Gross undoubtedly have great tax strategies. But that is definitely not what makes them who they are.


Disclosure: No positions