Hey folks,

Don’t miss out on the salve for our investment wounds!  Uncle Sam shares in our investment pain, by allowing us to tax-deduct our investment losses, but you must act in the next two days, you heard it, by 4pm EST on Wed., December 31st.

What’s all this clatter you ask?  Well, let’s say you have held your favorite (or even your not-so-favorite) stock, bond or mutual fund for a while and the value has dropped a lot.  You’ve been licking your wounds, whining to yourself or anyone who would listen, but hanging on “till it recovers”, right?  Well that could take some time so here’s an idea in the meantime.  Sell that investment (or investments) in the next 2 calendar days.  Buy a SIMILAR investment the minute your sale proceeds are available, since you don’t want to be “out of the market” these days…a substantial recovery could happen in 8 hours!  You can’t buy back the exact same security you sold because you would run afoul what’s called the “30-day wash sale rule”, which precludes one from selling a security at a loss, writing off that capital loss from their income tax, then buying back that same security within a period of 30 days.  (You CAN buy back the same security, yet you would forego your income tax deduction, which is the whole point.)

So, the trick is to find what I call a “sister” product/security to that which you’re selling, buy that and otherwise participate in the market’s performance in that substitute/sister security for the next 30 days.  After 30 days, you would have the option of either keeping that sister/substitute security, or selling it, and buying back your original security.

Ok…here’s an example.  You own Pepsi stock.  You sell Pepsi stock today, and in 3 days when it settles, buy Coke stock.  You hold Coke stock for 30 days, and if you really want your Pepsi stock back, sell Coke and buy Pepsi shares back.  (You will settle up with Uncle Sam/IRS on either a short term capital loss or gain on your Coke shares for that time, but generally this is not a deal-breaker.)  Alternatively, you may choose to keep your Coke shares if they seem to give you the exposure you wanted in the soft drink business.

Here’s another example.  You own ABC’s US large cap growth fund.  Sell that fund in the next 2 trading days and buy XYZ’s US large cap growth fund, or buy ABC’s US large cap blend fund…you get the point.  Either the substitute mutual fund can be from the same “family” or a different family.

If your original holding was bought at like $50. per share, and it’s now worth $20. and you owned 100 shares, you effectively sell the 100 shares, and write off the net difference of your purchase price of $5,000 less the current market value of $2,000.  or $3,000.  ($30 per share).  If you are in the 30% federal income tax bracket, you have just saved $900.  ($3,000 x .30)  Meanwhile, you bought the sister/substitute holding, which keeps you in the market to experience the recovery.

Now THAT’S great news!  You will be smiling come April 15th, 2009 when you complete your 2008 income tax return.  We always gripe when we have to fork over a portion of our capital gains to the IRS, now let’s take advantage of the other side of the code–allowing the government to share in our losses to the extent of our effective tax bracket, in the above example, to the tune of 30%.  Even if you are in the 15% tax bracket, it pays to get a break from Uncle Sam for a change, right?

So, DO something with the two trading days left in this year!  Take a look at your portfolio, and see where there are losses–see where the current price is lower than the price at which you bought the investment–and place your sell orders quick.  You’ll have a day or 3 for the proceeds to be available, and you can research your replacement/sister/substitute investments after a New Year’s toast.  I’m NOT advocating selling now and not buying back into the market!  You would be missing the recovery–however long it takes, it will occur.  History tells us that, for goodness sakes.

And for any of you who DID sell out a month or more ago, you’ve now waited the requisite 30-days, you can buy back into your original investments, if you still think they are worthy.  Remember that the smart investors use all angles of the tax code and this is the most obvious home run of all in a depressed market.  Let’s watch our financial dough rising by selling some losers and raking in additional dough, from Uncle Sam already!