Let’s imagine that Cinderella’s fairy godmother did not clothe her in a beautiful jeweled gown and delicate glass slippers, did not turn a pumpkin into a golden carriage and mice into horses, and did not send her off to a fancy ball sponsored by a handsome prince in search of a wife. Instead, her fairy godmother gives her a sum of money and dispatches her to the stock market to build a portfolio—but with a warning to sell before the market tumbles, lest she revert to her previous penurious state.
The Cinderella of the fairy tale has a clock to warn her of the latest moment by which she must exit the ball. However, as Warren Buffett has noted, when it comes to investing there are no clocks on the wall, and investors persuade themselves that they still have time before the party ends.
History has taught us that market corrections periodically occur, that darling companies can suffer reverses, that a particular stock may be overbought and the current price not supported by the asset’s underlying financial position, and, above all, that it is difficult to time these events. That is why most savvy investors take a long view, select a diversified portfolio, and periodically adjust it to adhere to asset-allocation and diversification goals.
Unfortunately, these adjustments can be costly, particularly now that the capital-gain tax rate on appreciated securities can be as high as 23.8 percent. That tax bite, even more than optimism about the market, leads some investors to cling to the status quo.
If you are deterred from adjusting your portfolio because part of your profit would be taxed away, and if you would like to make a gift to our institution, consider one of these strategies:
- Make an outright gift with an appreciated stock that you might sell except for the tax you would incur. You will receive an income-tax charitable deduction for the full fair-market value, and you will not be taxed on the gain.
- Contribute the stock to a charitable remainder trust. This is a great way to reposition part of your portfolio without current taxation of capital gain and without loss of income. Since the trust is tax-exempt, the contributed stock can be sold and the entire proceeds—undiminished by tax—can be invested in whatever portfolio seems appropriate at the time. You, or you and another person, receive income from the trust for life or a term of years. An additional benefit is an income-tax charitable deduction that can reduce your current taxes.
When the clock strikes 12, Cinderella is left destitute with nothing but one glass slipper—and then is rescued by her fairy tale prince and lives happily ever after. In the reality of the stock market, timely strategic planning can help ensure that all of your profit continues to serve your objectives.