My Money Mistakes: Holding Onto a Bad Stock for Tax Reasons

While I hope to fill this blog with tips and tricks I’ve learned from my successes in achieving my goals, I know that I will inevitably make mistakes along the way. My hope is that by telling you about them, I can learn from them and hopefully help you to avoid them in your own journey to financial independence and early retirement.

“A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them.” – John C. Maxwell

After my grandfather and father passed away, I took over managing my grandmother’s investments. It’s not a large amount, and frankly she doesn’t even really need it. Somehow, she manages to SAVE money from her social security checks and a small pension she gets for being a school teacher. But all the same, the money is there for if/when she needs more extensive care.

My Big Mistake

One of her investments was a sizeable position in GE that had been purchased around 2010, which over the following 6-7 years, left her with some significant investment gains (~+90%) that were pretty much in line with the rest of the S&P500. While I wanted to move the money into an index fund, I decided to leave it instead of taking the tax hit.

Source: finance.google.com

 

However, since 2016, the S&P500 and GE has diverged quite a bit.

Source: finance.google.com

 

I began noticing the divergence early in the year, but was afraid to sell it. I didn’t want to take the tax hit on selling the GE stock.  Boy, was that the wrong decision. GE continued to decline, while the overall stock market continued to climb. I would have gained more in stock market returns over the last 6-7 months than I would have had to pay in taxes!

Last week, I accepted the fallacy in my logic and pulled the trigger. I sold the GE stock and put the proceeds into an S&P500 Index Fund.

Lessons Learned

  • If you make or discover a mistake, don’t take your time fixing it. Had I switched the investments 6 months ago, (or better yet 6 years ago) the value of that investment would be ~30% higher!
  • If you invest in individual stocks, you’d better know A LOT about the company. One of the primary reasons I invest in index funds is because I don’t have the time I would need to spend to really know a company/stock. Long-term, set-it-and-forget-it strategies work best when underlying forces specific to one specific company aren’t at play. I don’t know what happened to GE starting at the end of 2016 that would drive the wide gap in performance, and I would prefer not to have to spend my time watching out for those idiosyncratic things.
  • Never use taxes as a reason to buy or sell. Decisions around buying and selling stocks or index funds should always be made with your goals and investment philosophy in mind. Taxes are just a symptom of success and should never be used to justify an investment decision.

Related Post: Index Funds: The Gold Standard of Stock Market Investing

 

Have you made any investment or personal finance mistakes recently that you have learned from?

 

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