Tom Sedoric and Casey Snyde
During volatile down periods in the market such as we saw in December, we were busy for many reasons. We worked with our clients to educate them about what was happening (markets go up and down) but also to perform constructive triage via Tax Loss Harvesting - an important element of a wise investment strategy meant to help save investors’ money over time.
What is Tax Loss Harvesting? The easy answer: during a down market, sell securities (stocks, mutual funds) at a loss and use the loss to offset future capital gains and income taxes. At the same time, invest remaining money from the sale in another or similar security. The IRS doesn’t allow you to buy the same security you’ve just divested from for 30 days. Converting calculated present losses into future use is a high value strategy that is often under appreciated by the public.
In formula terms for our purposes: you bought $50,000 in stock or mutual fund XYZ more than a year ago (for lower long-term capital gain rates) but a downturn leaves this asset at $45,000. If you sell the asset at that price, you have accrued a $5,000 loss which you can use up to $3,000 per year (for couples, $1,500 for single filers) and carry the rest into future years. As income taxes are higher than capital gains taxes, Tax Loss Harvesting can also help mitigate future income tax liabilities.
As for the $45,000 from the sale of XYZ, reinvest the money in a stock or mutual fund that you feel comfortable with. It may be similar to XYZ or totally different, but, as referenced above, it can’t be the same as XYZ for 30 days from the day the loss is realized (this is also known as a “wash sale”). Ideally, if this asset grows to $50,000 or $55,000, you have avoided capital gains from original sale for a loss, increased your portfolio balance while locking in the earlier loss for future tax purposes.
December was also unique for our clients for similar strategy of bond swapping for tax purposes, one that our practice had not used much of for more than two decades. No one thinks investment losses are a sustainable strategy, but most portfolios have some losing assets in the short term. It’s not quite putting perfume or lipstick on a pig but it helps create value while pushing forward during periods of uncertain political and economic turmoil. As Yale Endowment Fund Manager David Swensen put it in a 2005 book: “In an industry guilty of many crimes against investors, ignoring the tax consequences of portfolio transactions ranks among the most grievous.”
So much of the public and media fixate on macro level concerns as global markets threaten to become as volatile as the global climate change trends. But equally critical is how we manage the micro expectations and strategies for clients. While it is true that riding out market volatility is a wise choice for the long term, being intentionally passive as a strategy is as risky and selfdefeating as buying when the market is at a peak and selling when it hits bottom. In the words of professional poker players, you must know when to hold ‘em and know when to fold ‘em. We believe that helping clients strategically ride the waves of volatility, use them to their advantage, and reduce our largest lifetime expense (taxes) is what separates an engaged, proactive fiduciary from the typical financial advisor.
This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. The views expressed are those of Tom Sedoric – Partner, Executive Managing Director and Wealth Manager and D. Casey Snyder, CFP® - Partner, Senior Vice President and Wealth Manager and are not necessarily those of Raymond James. Steward Partners Global Advisory LLC and The Sedoric Group maintain a separate professional business relationship with, and our registered professionals offer securities through, Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Steward Partners Investment Advisory LLC. 2985754