Cutting My Tax Bill

In 2002, as the dotcom bubble was going through its painful deflation, I took my first steps into stock investing, and what painful steps those were. After it was already down by about 50%, I bought a sizable stake in the NASDAQ index fund QQQ. I figured: how much more could it fall? Well, it turns out the a lot more. At the bottom, my position was worth a staggering 67% less than my original investment. Worse, we never recovered those losses. At its best point - in October 2007 - more than five years after the original investment, the position was still about 20% under water. After the crash of 2008, that position is now 56% down.

Well, I have decided to make some money on that miserable investment decision. Or at least, I have decided to cut my losses. Last week I sold off enough of that position to take advantage of the $3,000 ordinary income deduction for the 2008 tax year. We typically buy and hold for the long term, but I figure it's time to admit a mistake and at least harvest some of this loss. By the way, I did not remove this money from the market, I used the funds coming out of QQQ to beef up our REIT index fund which has been badly beaten down over the past year. Rebalancing.

There is another lesson hidden in this little fiasco: no matter how much you think the stock market is beaten down, it might surprise you and fall a lot more. This lesson is not lost on me, and the comparison to the current situation may be a good one. My mistake in making the QQQ investment was to place all our eggs into one basket - investing in technology stocks. My other mistake was moving into the market in one lump sum, rather than moving in gradually over time. I have tried to learn from that mistake and we are now broadly diversified. In addition, I am now very careful about moving money into the market gradually, over time, through monthly, fixed contributions. Still, it is possible that six or seven years from now I will be selling positions I am buying today to offset a looming tax bill. Let's hope not.

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