Monday, May 14, 2012

About the Importance of Gardening

"There's nothing more important than gardening and even that isn't so important" - Chinese proverb

If you have a garden - small or large - you need to take care of it or have someone do it for you. Otherwise it does not take long for that garden to loose its beauty. You need to walk there and observe. You need to pick up fallen tree branches, take out the weed that contend with those nice flowers you have planted and so on.

Managing stock portfolio is much like managing a garden. You should review your porfolio at least once a year if not more often. When I look at companies in our portfolio, I ask myself that would our money yield better somewhere else. Also, I take care that there is enough variety and number of different stocks (diversification).

Selling is much more harder than buying. It is actually good because excessive trading causes most likely just expenses. It try to keep our taxable profits at minimum because we have 30% tax for capital gains in Finland. Therefore, at year end it is good to review the situation and consider taking tactical losses if possible*. Having even net loss is not that bad because it can be used to offset gains in taxation for the next five years in Finland. This might sound strange, but my goal is really to keep the snowball rolling with minimum interference.

*Whether you can do this without it being interpreted as tax avoidance depends on where you live. In Finland there are certain rules that you should follow. For example, I have understood that to be on the safe side you should not buy back the stock the same day you sold it.

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