It's often psychologically difficult to part with a losing investment, because then you're officially admitting a mistake and acknowledging that the investment is unlikely to rebound.
Among those who decline to sell, "people tell themselves it’s only a paper loss," Terrance Odean, a finance professor at the University of California, Berkeley business school, told The Wall Street Journal. "It’s not a real loss until I sell."
But in reality, you are losing, he explains. "You’re postponing regret, hoping to avoid it altogether. It doesn’t improve your investment return, and it certainly doesn’t help your taxes."
As for taxes, you can use losses to offset capital gains. And many investors who hold stock mutual funds will be facing major capital gains hits this year, thanks to the market's strength.
Even if you don't have capital gains, capital losses can be deployed to offset up to $3,000 of ordinary taxable income. And if you exceed that limit, the losses can be carried over to future years.
Financial planner Kelly Campbell, founder of Campbell Wealth Management, offers several other year-end tax tips in U.S. News & World Report.
- Fully fund your retirement accounts to the extent that you can.
- If you have big bucks to hand out, you can make a gift of up to $14,000 tax-free.
- If you are self-employed, push up expenses to 2014 from 2015 if you can.
- If you own a home mortgage, make your January payment in December, and you can get your tax benefit this year.
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