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Commentary: Investment planning, tax planning go hand in hand

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David Jackson

David Jackson is managing partner in charge of investments for Southern Springs Capital Group, which is at 2555 Meridian Blvd. in Franklin. For more information on Southern Springs Capital Group, call 615-905-4819 or visit www.southernspringscapital.com.

Do your CPA and your financial adviser have a good working relationship? More often than not, they are going to be in agreement on many things that impact your financial situation. But this is the time of year when I get questions from CPAs about why someone sold something for a profit, and thus created a tax burden.

This is an important lesson for investors: There are times when keeping your taxes as low as possible and making smart investment decisions may involve trade-offs. Keeping your taxes low is not always the best thing for your investments.

Most investors are focused on rates of return, but a good financial adviser is always going to be conscious of how much risk is being taken with a portfolio. With any successful portfolio, there are going to be individual investments that do substantially better than others. Sometimes selling a portion of those can lead to capital gains taxes, and sometimes that is the best thing for your overall portfolio.

It can be difficult from a psychological standpoint to sell something that’s been doing well. It gets even harder when there are taxes involved. But if you get to the point where you have a substantial portion of your wealth invested in just one stock, it can add a substantial amount of risk to your financial situation. 

Everyone’s situation is different, but for the purposes of this article, let’s say having more than 20% of your wealth tied to one investment can create significant risk.

When I come across someone who has a substantial position in one security, one of the questions I usually ask is: If that stock were to triple in value, would it change your life?

Usually, the answer is no. I then ask: If that stock were to lose 75% of its value, would it change your life?

Usually, the answer to that one is yes. In these situations, you need to make sure tax avoidance isn’t your only consideration.

Just like it is important to make investment decisions while looking at your whole portfolio, it is also wise to consider your entire financial situation when making changes to your portfolio. An increased tax bill may be the right solution to an increasing amount of risk in your investments.

If you are a successful investor, you will very likely encounter this scenario at some point in your life. You need a tax professional who understands this, too, and financial advisers who are able to show you when you’re better off with the tax bill than without it. 

David Jackson is a managing partner at Southern Springs Capital Group, at 2555 Meridian Blvd. in Franklin. For more information, call 615-905-4819 or visit www.southernspringscapital.com.

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