We often hear about the "Rule of 5" when it comes to investing. This
is the concept that, for each 5 stocks you invest in, one will do
better than you predicted, one will do worse and the rest will do
just about what you thought. This has come true in the Model Club I
am in. We started only about a year ago and we've had one stock,
Chipotle (CMG) which has run way up and another American Public
Education Co. (APEI) which fell off a cliff recently.

Our other stocks are basically plugging along as expected.

For various reasons, we'd like to keep CMG and APEI in our portfolio.
 This opens up an opportunity to make some portfolio sell decisions
based on tax optimization. If we sell our CMG now, we will capture
an approximate $314.90 (63%) short term gain. If we sell our APEI
now, we will have a $235.30 (34%) short term loss. Short term gains
and losses are netted out against each other at tax time. At todays
prices, that would leave us with a small net gain.

If we'd like to keep CMG, we can purchase it again the next day at
what will probably be a similar price. We will have captured the
gain we've achieved and stepped up our basis. If the stock continues
to climb, this should help us optimize our taxes in the future.

If we'd like to keep APEI, we can't repurchase it for 30 days or our
loss will be disallowed. While we do think it might ultimately go
higher and we would like to own it, with the uncertainty hanging over
the for profit education companies, the chances of that rise
occurring in the time we have to wait are probably pretty small.

You might find it interesting to take a look at your portfolio and see
whether the "Rule of 5" is going on. If it is, do you still want to
keep both the stocks which have performed the best so far as well as
the stocks that have performed the worst? If you do, you might want
to think through some tax optimization selling strategies like this.
Make sure to run the actual numbers and take brokerage commissions and
short versus long term holdings into account.

If you'd like for us to help you work through your thoughts, feel free
to bring up the discussion here and we can all learn from it.

--
Laurie Frederiksen
Invest with your friends!
www.bivio.com

Follow us on twitter!  www.twitter.com/bivio

> Short term gains and losses are netted out
> against each other at tax time.

But that doesn't happen on the club's partnership tax return. It happens on
each club member's personal tax return. The true tax effect for each club
member is more complicated than just losses offset gains.

For example, losses in excess of gains (up to $3,000 per year) offset
ordinary income (on personal tax returns). So it could actually be better
(tax-wise) to realize a small loss and *not* realize an offsetting gain.


> This opens up an opportunity to make some portfolio
> sell decisions based on tax optimization.
> If we sell our CMG now, we will capture an approximate
> $314.90 (63%) short term gain.
> If we sell our APEI now, we will have a $235.30 (34%)
> short term loss.
> ... At todays pices, that would leave us with a small net gain.

Each person in the club has a unique personal tax situation. The tax effect
of such club actions may well be different for different members. For some
members, a loss may provide more personal tax benefit *without* an
offsetting gain so the loss can offset ordinary income. You may not be able
to equally "optimize" the tax effect for all members.

-Jim Thomas