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Knowing when to sell one investment and put your money in another is a deceptively simple problem. It can paralyze me. Perhaps you, too. Certainly, it often stumps even plenty of professionals.
That's why Business Week Online has developed a new tool to help guide you toward the right decision. "Hold, or Sell and Reinvest?" is an interactive calculator designed to clue you in: Which strategy will leave you better off, keeping a stock or fund you already have a gain on or, selling it and putting the proceeds in a new investment with better prospects?
As with every tool, it doesn't work in every situation. Michael Duffy, a vice-president in J.P. Morgan's Palm Beach, Fla., office and a member of the bank's Wealth Strategy Group, agreed to review the worksheet for me. He cautioned that the calculator doesn't address the needs of many investors who are driven more by the search for current income from
their investments than capital gains. He's right. It also misses some fine points, such as reckoning the taxes investors pay on dividends, along with close consideration of the commissions investors pay to buy and sell.
We sacrificed those important elements to bring you toward a relatively swift, yet reasoned, judgment. At the calculator's heart is the recognition that anyone who invests in a taxable account (and not such tax-deferred vehicles as 401(k)s and individual retirement accounts) must consider the capital-gains taxes that can dent your ability to
build wealth over the long term. Your goal is to wind up with the highest aftertax return for each bit of risk you take. Yet you shouldn't forego fresh investment opportunity simply to avoid paying a tax. Just as the private bankers at Morgan do, you simply need to do the math before you trade one stock or fund for another.
So, with all that, take a crack at the calculator. Play around with it. Let us know if it proves helpful, and also how we can improve it.
Editor's note: Starting next week, Robert Barker will post your letters at the new barker.online Forum. Bob hopes BW Online readers will join in to help one another, pointing out shortcuts and potholes they've spotted along the road through individual investor wonderland. He adds: "This is also a great place to comment on or criticize my points of view."
Barker covers personal finance in his weekly column, The Barker Portfolio, for Business Week from Melbourne Beach, Fla. And he appears every Friday on Business Week Online. Beginning Frid EDITED BY DOUGLAS HARBRECHT
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