When it comes to trading would your advice be different for someone trading with their money in a brokerage account subject to short term capital gains taxes versus someone trading within an IRA account? (May 26, 2001)

  There is a misconception out there, and it is fostered by many of the larger brokerages and mutual funds that if you attempt to manage your trades yourself you are going to get burned on taxes. I suggest you look no further than your mutual fund statements where you lost money on the year but ended up owing capital gains taxes because of the decisions to sell certain stocks at a gain even though they had already let 70% of the value slip away. We would have preferred they sell higher and at least we would have some profit to show for it.

That said, we love to trade in our retirement accounts because the gains grow tax free until we start taking them out. That is always the preferable manner-gains without current taxes. Now, outside our retirement accounts we generate income to meet living expenses now, not some time in the future. We have longer term goals (stocks we would like to see continue to gain for months, even years) and shorter term goals on the same stocks either with stock or option trades. Our goal is to maximize the gain on the trade and to minimize losses. When I enter a trade I am not thinking that I am not putting tax considerations first; I am not entering and exiting trades based on tax considerations. If I do it right, I make money. That money is going to be taxed. If I don't make money, I won't be taxed, but I won't have any gain on that trade. If you enter trades or make decisions based solely or primarily on tax concerns, I suggest that the emphasis is not on the investment.

There are times we do consider tax ramifications such as wash sales (selling a stock for a loss and then repurchasing within 30 days; you cannot take the loss). But our overall goal has to be to maximize the gain on each investment and to limit losses. If we take a small loss on a stock because it pulls back on us more than we wanted when we thought it was breaking out, but then we see it make that second move out of a cup with handle on huge volume, the potential gain of 20%, 50%, 100% or more on a good breakout can more than justify the inability to take a much smaller loss on that first attempt. In our opinion, the focus has to be on what the stock is doing.


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