I typically wait until well into the fourth
quarter before I write about tax planning. But, you can never plan too early
and some investors may have sold some or all of their stocks during the recent
market decline. There may be a few stocks you sold that you still have
conviction about for the long term and you may be thinking about buying them
back.

If you realized a capital loss on stocks you
sold, my advice to you is to wait at least 31 days before buying them back. The
IRS requires this delay or it will not allow you to use the loss on your tax
return. They call it a “wash sale”, meaning you “wash out” the use of the
loss.

Of course, if you want to stay in the market,
you can simply buy other stocks. So, for example, let’s say you took a loss in
Pfizer, but want to maintain exposure in Healthcare; you can buy Eli Lilly in
its place the very same day you sold Pfizer. The wash sale doesn’t kick in if
you buy another security or even one that is something similar but different.
But be careful with what is similar but different because the IRS will not let
you take the loss if you sell a Vanguard index fund and buy a Fidelity index
fund in its place within 30 days.

Also, remember that the wash sale rules don’t
apply to retirement accounts. You can trade to your heart’s content without
capital gain or loss consequences.

My recommendation, though, in these trying
times, is to hold onto your strongest stocks - the ones that are global with
high profit margins and little debt, have lots of cash, and pay decent
dividends.

Over the last few weeks, the markets were
reacting to so much bad news and the news hasn’t gotten any better, so expect
more volatility around the corner. It is tempting to feel as though this time
is different with no improvement in sight. Perhaps things will get even worse
before they get better, but I assure you this will pass.

A few things to remember:

1. Stocks always look worst at the bottom of
a bear market (when everyone is despondent) and they always looks best at the
top of a bull market (when everyone is euphoric).

2. The public is generally wrong and they
move according to their emotions. Try to keep emotions out and fundamentals in.

3. As long as the stocks and funds you own
have strong growth prospects, excellent balance sheets, and wise management,
they will regain higher market values in due time.

4. The market occasionally develops fads for
certain industries and the rush to buy the fads pushes them to unwarranted
price levels. Buying at the height of popularity almost guarantees paying
prices that have disconnected from true value. Gold is the latest fad.

Use the downturns to weed out your weakest
positions and build up the strongest ones. The important thing to
remember is to remain focused on your long-term investment objectives.

Have a good labor day weekend everyone!

* Ellen Le is the
founder and president of Ascend Investment Management (www.ascendinvmgt.com).
She has been a financial planner and investment adviser for more than 20 years.
I look forward to receiving your questions
about anything related to investments, retirement planning, or the economy.
Send them to: ellen@ascendinvmgt.com and write “Chadds Ford Live” in the
subject line.