One Thing Bank of America Is Good For

Back on Dec. 3, 2008, it looked like the world was coming to an end.

The Dow Jones Industrial Average opened that day at 8,400 – 25 percent lower than it is now. The stock of Bank of America, along with virtually every other big bank, was getting creamed. Prior to the onset of the Great Recession, Bank of America was worth well north of 50 bucks a share. But thanks to the banking crisis, by that Dec. 3, it was trading at 14. So I bought it, using this very simple logic: BoA is one of our nation’s largest banks, and there’s no way it’s going bust. So what did I have to lose?

As it happens, exactly $3,708. That’s how much I lost when I sold my 400 shares of Bank of America on Wednesday. Despite an overall market that had improved by 25 percent between December 2008 and November 2011, the shares of one of the nation’s largest banks had declined by more than 60 percent over the same period. I paid $14, I sold at $5.

The reasons behind the rout in Bank of America shares are simple enough. In fact, I laid them out back in June in a post called Investors Take Warning: Storm Clouds Gathering. They included the European debt crisis, a Congress unwilling to tackle the U.S. debt problem, a slowing economy, and a horrific housing market.

Five months have passed since I wrote that, and not much has improved. However, in the same post, I also said that I was holding onto my stocks. Here was my advice…

If you don’t own stocks, stock mutual funds, or ETFs, is now the time to buy? And if you were lucky (or smart) enough to have bought back in 2009, is it time to sell and protect your profits and/or your principal?

The answer to both questions is no. Back on March 11, in this Ask Stacy column, I said the market wasn’t looking good and that I’d be reluctant to buy in the immediate future. But I also believe that the economy will continue to recover, so there’s no reason to bail either. In short, this is one of those times when the long-term investor adjusts their expectations – but not their portfolio.

Until Nov. 23, I remained true to my word. Despite the fact that my predictions of a sour market were correct, I hadn’t sold a share. So why did I convert my unrealized loss on Bank of America into a real one? See if you can guess…

A. I think it’s going to zero, and I wanted to at least walk away with something.
B. I can take a loss now, reduce my income taxes, and buy it back later.
C. I can more productively use that money in a stock that doesn’t suck.

This is kind of a trick question, because both B and C are correct. But the real reason I sold was to take a loss for tax purposes. You’re allowed to use investment losses to either offset any investment gains you’ve taken (I haven’t taken any this year) or to offset up to $3,000 of regular income. Since my loss is $3,708, I’ll use it to reduce my taxable income by $3,000 this year. The extra $708 I can carry over to use against my 2012 income.

For the record, while I don’t think Bank of America is going back up any time soon, I do think it’s going back up eventually. So I may buy it back. But the IRS says that if I buy it back within 31 days, they won’t let me take the loss. So I’ll keep an eye on it, wait a month, then decide whether to go back in.

As you’ll note if you follow my online portfolio, despite being hammered by Bank of America, I’m still doing quite well. And it’s nice to know that sometimes you can find a silver lining in an otherwise dark cloud by using losses to reduce your taxes.

For those of you banking with BoA, look at the bright side: While they may be dinging you with fees, at least they haven’t cost you $3,708.