Be the Hero – Let Us Be Your Guide

Avoid Making a Bad Year Worse

A sophisticated financial plan can be derailed by unsophisticated portfolio management—particularly during times of market volatility.

A look back:In the 2018 market cycle, many portfolios ended the year flat. But the outsized performance of a few stocks, like Microsoft and Nike, led to capital gains distributions for some holders of those securities, courtesy of their respective mutual funds. With that, financial advisors were forced to answer difficult questions about tax liabilities without portfolio appreciation.

Today:This year looks to be a much worse setup. Markets are down significantly, and fund managers are forced to turn portfolios to meet redemptions, adjust investments, and window dress.

Why this matters:A mutual fund is a pooled investment where investors share the cost basis of the underlying securities that were purchased in the fund. But because the cost basis they share is the cost basis of when the fund bought the security, not when the investor bought the fund, your client may end up owing taxes on growth that occurred long before they owned the fund.

For example: If the fund bought Apple twenty years ago, performance looks great. However, if your client buys the fund today, they inherit the cost basis of their percentage of Apple from twenty years ago, despite not participating in the capital appreciation. Should the fund sell Apple tomorrow, your client owes taxes on their piece of 20 years of growth, without realizing the benefits of that growth.

Be the Hero with tax loss harvesting: Owning individual stocks and bonds, on the other hand, allows a client to own their own cost basis. When investors own their own cost basis, they, with the help of their advisor or portfolio manager, can employ tax loss harvesting throughout the year.

In other words:Through tax loss harvesting, an investor can sell a security that has experienced a loss and replace it with a similar one to offset taxes on gains and income while maintaining an optimal asset allocation. As a result, your client will pay fewer taxes and increase long-term, compounded returns by staying invested. With the right market conditions, an annual goal should be to get this number as close to zero as possible.

Let us be your guide:If you aren’t comfortable selecting individual stock and bond investments, you can partner with a firm that is. Come tax time, your clients will thank you.