Watch out! Taxes don't trump fundamentals
While Jim Cramer prepares for a new year, he's dusting off some of his old investment rules and sprucing them up to evolve with the ever-changing stock market.
Back in 2000, Cramer looked at the volume of trading and saw that most people had abandoned the market at the bottom, when it was too late. Many investors never came back from that.
If they had followed the simple strategy of taking gains, paying taxes, and then coming back at a more opportune time, perhaps they would have been able to survive the bottom.
It's a frequent conundrum that investors come across all the time. Should you cash out on your red hot stock and pay short-term capital gains tax, or take a chance and wait out the year to be eligible for long-term capital gains tax?
The difference is significant. It could be a difference of an ordinary income tax rate, which can be as much as 39.6 percent, or a long-term capital gains rate, 15 percent for most people.
"I say never consider taxes as a reason to hold a stock if the stock has gone up too fast and can head back down hard, as was the case in 2000, especially when the insiders were bailing out hand over fist," the "Mad Money" host said.
Active money management means revisiting a thesis for holding the stock on a regular basis. If for some reason that thesis is thrown out the window, then Cramer thinks it is better to sell the position than try to beat the big tax man.
Think about it — what if you held those hot biotechs and cloud based software stocks that were so popular at the end of 2013? If you held them for nine months of the year, and decided that the gains were so huge you would hang on to them for another couple of months and clear up your tax bill, the gains would have been crushed.
Even worse, depending on the stock, you could have lost your gains all together!
Nobody likes paying taxes, Cramer understands that. "But whether you like it or not the government is going to take its cut. That's just how it works," he said.
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And trying to game the government can cost you much more than its worth.
Therefore, Cramer follows this simple rule: Don't let tax considerations drive your investment decisions. If you do, it's a great way to visit poor house.
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