Ask Colin

How do you factor capital gains tax into your thinking?

This is not an easy question for me to answer for you for a number of reasons. I have no expert knowledge in this field. I am not qualified or licensed to advise you. I am therefore not legally able to give you any advice in this area. The incidence of capital gains tax can be different, depending upon how your tax affairs are structured. I have no knowledge of your situation, so I would not have enough information to give you any advice in this area, even if I was allowed to.

My own investment plan is set out in my book Building Wealth in the Stock Market. I have devised my approach based on two ideas:

First, it is better to be taxed on a capital gain than on a profit. I therefore try to select investments that have the potential to be held for more than 12 months.

Second, it is better to pay capital gains tax than incur a loss by holding a failing investment. I therefore always sell out of any share that violates one of my three sell signals. This may seem a bad policy if you are shaken out of something and the trend reasserts itself. That is called evaluating the quality of an investment decision with hindsight and is a good way to screw up your mind. I am a trend investor. If a trend fails, I therefore get out. Investing is about minimising losses first and foremost. If I am sold out of something and the trend reasserts itself, I consider buying it back.

My general philosophy is to maximise the total return, but being an investor rather than a speculator, I try to pay tax on half the capital gain rather than all of a profit made within 12 months.

The only time that hindsight is useful is when you sit down to analyse your investment performance. Then, you might ponder how you might change your investment plan to improve your results. Having come up with something that would have given a better outcome on some of your investments, you have to be very careful that you are not fitting the rules to only a small number of situations. You need to see what would have happened across all of your past investments and also test the new rules across many years for many stocks and include both bull and bear markets. If it proves up OK, you might then change your plan.

It is most important that you realise much of what I have said above applies to my circumstances and may not apply to yours. You should seek advice on your situation from someone with the expertise and a licence to advise you on taxation matters. You should also be aware that the law is being changed with respect to taxation of superannuation.