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The upside of losses

Ask the Fool

Published: December 3, 2020

Q. If I have a big loss when I sell some stock, I can deduct it on my tax return, right? -- D.B., Evergreen, Colorado
A. Yup. No one likes money-losing investments, but at least they can shrink your tax bill. Here's how it works: You first offset any capital gains from stock sales with your capital loss(es). Any remaining loss can be deducted from your income -- up to $3,000 per year. Amounts exceeding that $3,000 can be carried over to the following year.
If you're in, say, the 24% bracket and you deduct $3,000 from your income, that amount is excluded from taxation. So you save 24% of $3,000, or $720. Spend a little more time learning about tax rules and strategies, and you can probably save even more money. Start at IRS.gov or Fool.com/taxes.
Q. How much personal liability insurance should I have? -- T.W., Morgantown, West Virginia
A. It depends on how much you have to lose if you're sued. You want to prevent a lawsuit from causing you a financial catastrophe. Total the value of your home, belongings and financial assets. Add more for legal costs, though insurers sometimes cover those. Then check the liability coverage on your home and auto policies.
If your assets are considerable, consider getting an "umbrella" policy (from another insurance company, if necessary). Umbrella policies generally offer much more liability coverage -- typically $1 million or more -- and charge much lower premiums than homeowner's and automobile insurance policies do.
Insurance may be boring, but it's really important, protecting you from potential financial losses. You can keep insurance costs down by bundling policies with the same insurer and shopping around for the best prices every year or two.
Fool's School
Investment Accounts for Kids
Investing shouldn't only be done by, or for, adults. Kids can benefit from investing, too -- and getting them interested in it while they're young can pay off handsomely by starting them on the road to financial security. After all, kids have decades in which to invest, and small sums can grow powerfully over long periods, helping pay for educational expenses and more.
At a minimum, learn more about 529 plans, which are designed to let you, and others, contribute to a tax-advantaged account to be used for someone's educational expenses. (There are no annual contribution limits, but contributions exceeding IRS per-person gift limits will be taxed.) Each state has a plan, some better than others, and you can use any state's plan. Learn more at SavingforCollege.com.
Coverdell ESAs (Education Savings Accounts) are another option; they're similar to 529 plans, but are offered by brokerages. Contributions are limited to $2,000 per year, but you can invest in just about any stock, ETF or mutual fund.
While minors can't open brokerage accounts on their own, they can do so with your help. You can open an account in their name, and you can park dollars to invest in it, too. There are custodial versions of regular, taxable brokerage accounts, and there are also custodial IRAs that kids with earned income (not allowance or gift money) can save money in. Note that while IRAs are retirement savings accounts, young people are allowed to withdraw money for qualified college expenses without penalty.
There are more details about each kind of plan, so read up on them. Try to involve the kids in your life in your investing -- and theirs. Pick promising companies in which they're interested, such as Starbucks, Netflix, Apple or Nike. Discuss business stories in the news. Kids can also learn more about investing with "The Motley Fool Investment Guide for Teens: 8 Steps to Having More Money Than Your Parents Ever Dreamed Of" by David and Tom Gardner with Selena Maranjian (Touchstone, $17).
My Dumbest Investment
A 'Smart Dumb' Investment
My dumbest investment was buying shares of Amazon back in 2002 -- only to sell them in 2015. Yes, when I sold the shares, they had grown to eight times what I'd paid for them -- but more recently, the shares are trading for about 10 times my purchase price! Lesson learned: When you have a winner, stay with it as long as you can. -- H., online
The Fool responds: This was a very "smart dumb" investment, since you got a 700% gain. How dumb it actually was depends on your thinking when you sold the shares. If you simply thought that a 700% gain was good enough, that's fair, though you might have asked yourself how much more you thought Amazon would grow. If you thought that Amazon's future was no longer promising, then selling was definitely the right thing to do. Amazon had many unprofitable years, but that wasn't due to a poor business model; the company was just plowing every available dollar into furthering its growth. Now it's one of the world's biggest companies, recently valued near $1.6 trillion.
It's generally a good idea to hang on to your winners for decades, if possible, as long as their futures still seem rosy. They may not grow a lot every year, but over time, a 700% gain can become a 1,500% gain, which can become a 3,000% gain, and so on.
Foolish Trivia
Name That Company
I trace my roots back to 1901, when Lynde Bradley invented the compression rheostat: a way to control the speed of electric motors. He teamed up with Stanton Allen in 1903, forming me. World War I contracts and the spread of radio helped me grow in my early years. My products were used in World War II in walkie-talkies, radar and fighter planes, and they served in the early UNIVAC computer and in NASA's space shuttles. Today, based in Milwaukee, my market value was recently near $28 billion. I'm a leader in industrial automation and digital transformation, employing about 23,000 people. Who am I?
Last Week's Trivia Answer
I trace my roots back to 1927, when a talent agent created a radio broadcasting system for his clients to perform on. I soon merged with Columbia Phonograph and Records, and later entered television. (Westinghouse Electric bought me in 1995.) My current name reflects a big media merger that closed in December 2019, reuniting two businesses that used to be under one roof. I'm part of the National Amusements holding company. My portfolio boasts Showtime Networks, Paramount Pictures, Nickelodeon, MTV, Comedy Central, BET, Pluto TV and Simon & Schuster. I reach more than 4.3 billion subscribers globally. Who am I? (Answer: ViacomCBS)
The Motley Fool Take
Pharmacy on Sale
Pharmacy giant Walgreens Boots Alliance (Nasdaq: WBA) is on sale. Even after its better-than-expected fiscal fourth-quarter operating results, Walgreens stock was 32% below its 52-week high as of mid-November, and its dividend yield was recently over 4.3%.
The issue for Walgreens is that the pharmacy chain operating model is built on low margins and high volume. That volume dried up big-time when the pandemic hit, crushing front-end retail sales and hurting clinic revenue. On an adjusted basis, the coronavirus reduced earnings per share by $1.06 in fiscal 2020.
However, Walgreens Boots Alliance is undergoing a transformation that's already beginning to pay off. The company is on track to recognize $2 billion in annual cost savings by fiscal 2022, while sparing no expense boosting its omnichannel presence. In the fiscal fourth quarter, online sales at Boots.com and Walgreens.com rose by 155% and 39%, respectively, from the prior-year period. The company has also increased the number of items that can be ordered online and picked up via drive-thru.
Perhaps the most exciting development is Walgreens' partnership with VillageMD to develop up to 700 on-site, full-service health care clinics that'll pair with Walgreens' pharmacies for an integrated medical experience. The strategy is to reach out to patients with chronic conditions, making Walgreens a one-stop shop for their basic medical needs.
Long-term investors should give Walgreens Boots Alliance a closer look.