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July 9, 2024

Understanding Realised Losses in Investing: Your NuWealth Guide

Realised Loss Explained

Investing can feel like a roller coaster. One moment you're on a high with gains, and the next, you're facing the lows of losses. At NuWealth, we want to ensure you grasp the concepts of realised and unrealised gains and losses so you can make informed decisions about your investments. Let’s dive into these key terms and explore how they impact your financial journey.

The Basics: Gains and Losses

Before we delve into the nitty-gritty, let’s clarify what gains and losses mean in the investing world. A gain occurs when the value of your investment rises above the amount you originally paid for it. Conversely, a loss happens when the value falls below your purchase price. Simple, right?

Realised vs. Unrealised: What’s the Difference?

Unrealised Gain/Loss: Think of this as a ‘paper’ gain or loss. It's the increase or decrease in value of your investment while you still own it. 

For instance, if you bought a share for £20 and its current market value is £40, you have an unrealised gain of £20. This gain remains unrealised because you haven’t sold the share yet. Similarly, if the share's price drops to £3, you’re facing an unrealised loss of £17 per share.

Realised Gain/Loss: These become 'real' when you sell the investment. Using the above example, if you sell your share at £40, your unrealised gain becomes a realised gain of £20. If you need to sell at £3 instead, your unrealised loss turns into a realised loss of £17.

The Inevitable Nature of Investing: Embracing Gains and Losses

Every investor dreams of gains, but losses are part and parcel of the investing landscape. This is where the phrase "Your capital is at risk" comes into play. It’s a crucial reminder that any money you put into investments is not guaranteed to grow and could even diminish due to market volatility and other factors.

Understanding Realised Losses: When They Happen and Why

A realised loss occurs when you sell an investment for less than what you paid for it. For example, if you purchased a stock at £50 and sold it for £30, you’ve realised a loss of £20. This shift from an unrealised to a realised loss means you’re locking in that loss, which can have both financial and emotional implications.

Reasons you might realise a Loss:

1. Emergency Expenses: Sometimes, life throws curveballs, and you might need to liquidate assets quickly to cover unexpected costs.

2. Job Loss or Economic Downturns: In tough economic times, selling off investments at a loss may be necessary to maintain financial stability.

3. Delisting from an Exchange: If a stock is delisted, selling might be the best option to recover some value.

4. Rebalancing Your Portfolio: Shedding underperforming assets to reinvest in better opportunities is a strategic move.

5. Cutting Your Losses: Sometimes, it's wiser to accept a loss and move on, especially if the asset has little chance of recovery.

The Silver Lining: How Realised Losses Can Be Beneficial

While realising a loss can feel like a setback, it’s not all doom and gloom. There are silver linings to consider:

Tax Benefits

Offsetting Gains: In many tax systems, realised losses can offset realised gains, reducing your overall tax liability. For example, if you have a capital gain of £8,000 and a realised loss of £4,000, you might only pay taxes on the net gain of £4,000, minus any allowances.

Carrying Losses Forward: If your losses exceed gains, you can often carry them forward to future years, potentially reducing your tax bill down the road. Remember, tax treatment depends on your individual circumstances and may be subject to change. 

Portfolio Management

Rebalancing: Realising losses allows you to rebalance your portfolio, selling off underperforming assets and reallocating funds into more promising investments.

Risk Management: By selling assets that are unlikely to recover, you can reduce your risk exposure.

Psychological Relief: Sometimes, letting go of a lagging investment can provide a mental reset, freeing you to focus on more profitable opportunities.

Key Takeaways

1. Unrealised Gains and Losses: These are changes in the value of your investments while you still own them. They can swing up or down based on market conditions.

2. Realised Gains and Losses: These are the profits or losses you actually record when you sell an investment.

3. Risks are Inherent: Remember, "Your capital is at risk." Investing always carries the possibility of both gains and losses.

4. Tax Implications: Realised losses can offer tax benefits by offsetting gains and reducing taxable income. 

Investing is a journey full of ups and downs. At NuWealth, we're here to help you navigate these twists and turns with confidence. Embrace the knowledge, manage your risks, and keep your eyes on the long-term horizon. 

Your capital is at risk when you invest. Tax treatment depends on your individual circumstances and may be subject to change.

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Remember when investing, your capital is at risk.
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