Dear Nancy Woods
I have a portfolio that generates enough income to meet my annual expenses and needs. I am planning on buying a new car in the next year or so. I want to know if it makes sense to sell my stocks that pay me an income or the ones that don’t. Most of my stocks have a capital gain so I am hesitant to sell as it would cause a tax bill for the gains. What should I do?
Bob
Dear Bob,
There are a couple of unknowns in your details so I will have to make some assumptions.
I have some questions that will hopefully make you think when coming up with your final decision.
What is the interest rate if you were to finance your new car? If it happens to be zero interest, then finance the car if your typical rate of return is higher.
Is there enough income to carry the additional expense?
When it comes to liquidating any investment, you can start by seeing if you need to rebalance your portfolio. Is there any one single stock holding that is over or near 10 per cent of the total? Are you heavily concentrated in one sector (for example, Technology)? Are there any investments that are no longer suitable for your portfolio - maybe ones that you expected growth, and they have not resulted in one? How would selling an income-paying stock affect your annual income total versus your expenses? Are any of these changes generating enough money to cover the cost?
Do you really need the new car, or would it be better if you repair your existing or find a less expensive used car? How would a new car impact your car insurance premium?
If your income now just meets your needs, be careful that you don’t sell the wrong things and lessen your income significantly. It may make sense to skim off some of your profit if there has been a sizable gain. Factor in the tax and hold that aside.
Finally, never let the tax decision rule the investment decision. Sometimes an investor may hold off selling an investment because they don’t want to crystalize the capital gain and trigger a large tax bill. If we experience a severe market correction, you could lose on paper because the value of that investment declines more than the tax bill you are fearing. Having to pay tax means you made money.
Nancy Woods is senior portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her blog, “Nancy’s Notes” at nancywoods.com or send her your question to asknancy@rbc.com