ETFs, Investing, Stocks, Taxes
December 16, 2021
For years I have been telling every woman they can (and should!) be confident investors.
And now we have some proof that women have what it takes. A new analysis by Fidelity finds that over a 10-year stretch through 2020, the investment portfolios of female clients did better than the average performance of male clients. Yep, the ladies rocked it. And these weren’t workplace retirement accounts, but rather normal taxable accounts where women have the world of individual stocks, ETFs, and mutual funds to choose from.
It seems women are getting more comfortable with investing on their own outside of retirement accounts. Fidelity reports that two-thirds of women surveyed said they are investing on their own, up from 44% a few years ago. Yet I was so frustrated to see that few women think they have what it takes to be a good investor. Just one in three women said they are confident in their ability to make investment decisions. And the same percentage are confident they are making the right moves with their investments outside of retirement.
Okay, now. Ladies, enough with the self-doubt. You are more than capable.
I have a few tips to help boost your investing confidence.
Commit to Core Diversification
Many women are investing in individual stocks in their non-retirement accounts. I am all for that, but only if the bulk of your assets are invested in diversified low-cost index mutual funds or ETFs. That’s likely the case if the majority of your invested money is in workplace retirement accounts.
Don’t Be a Crowd Chaser
If you are going to invest in individual stocks, or dip your toes into cryptocurrency, you need to do your homework. If you can’t explain to yourself why you own something, and why you think it is a good value, that should be a yellow light about to turn red. For a stock you already own, a simple gut-check is to ask yourself if you would buy more shares at its current price. If the answer is no, I would suggest that might be a stock or fund you should consider selling shares of.
Don’t Fall into the Anchor Trap
Successful investing is in large part a test of how well you steer clear of psychological missteps. A very common one is when we become so attached to a specific share price.
For example, you buy a stock at $10 a share. It falls to $7 a share and you tell yourself you will sell the minute it gets back to $10. You’re anchored to that $10 just because it is what you paid. But what you paid is sort of irrelevant. Do you have any reason to expect it will rebound soon? Do you still think that money is best left sitting in that stock, rather than selling and investing in something with a better outlook?
The same problem can work with a winning investment. You bought at $10 a share. The stock now trades at $18 a share. You are thrilled, and tell yourself, you’ll sell when it reaches $20-you’re anchored to getting a doubling of your money. Again, your anchor has nothing to do with the investment case for that stock. If you can’t make a sound investing argument for continuing to hold it, you are letting your anchoring bias get the better of you.
Pay Attention to the Tax Bill
Regular investment accounts (unlike 401ks and IRAs) trigger a tax bill every time you sell an investment. If you sell for more than you paid, your profit will be taxed as a capital gain. If you sell an investment for less than you paid for it, you will be eligible to take a capital loss on your tax return.
And how long you hold an investment impacts what tax rate will be applied to your sale. Any investment owned for less than one year is taxed at whatever your income tax rate is. Any investment owned for at least one year will be taxed at the capital gains rate. That can be 0% or 15% for most people. (Very high-income investors have a higher capital gains tax rate.)
What’s really good to know is that if you sell a stock (or fund, or ETF) at a loss, you can use your capital loss to offset any capital gains tax you might owe on winning stocks you sold in the same year. This tax-loss harvesting strategy should make it even easier to overcome anchoring bias for a stock with a loss. Sell it now if you don’t like its prospects, and you can use it to reduce the tax bill on your winners.
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