Tax-Loss Harvesting… All Year Round

The Crux of It

Tax-Loss Harvesting is a strategy performed by investors and advisors to manage taxes more effectively. The goal is to reduce the investor’s tax liability for the current year by realizing losses that can 1) offset realized capital gains, 2) reduce taxable income, and 3) offset future gains. While many resources provide detailed information regarding this process, we want to present our differentiated approach.

Missed Opportunity

Advisors often conduct tax-loss harvesting at the end of the calendar year, but this approach may only offer limited benefits to the client. Given that market volatility and drawdowns can occur throughout the year, it is essential to capture losses as they arise. Waiting until the end of the year can reduce the full potential of tax-loss harvesting.

The following chart highlights the monthly total return of the S&P 500 over a 15-year period. It shows numerous individual and consecutive monthly declines throughout this timeframe. This data indicates that investors had opportunities for tax-loss harvesting not only in November and December but throughout many months of the year.

Volatility Is Our Friend

When prices decline and volatility increases, we do not merely suggest that our clients stay the course or ride out the turbulence. Such advice overlooks the fact that market fluctuations present opportunities to add value in multiple ways. Instead, we embrace market volatility and view it as a chance to enhance value for our clients from a tax and investment perspective.

In recent years, markets have seen increased volatility as central banks worldwide embarked on an aggressive rate hiking cycle to combat rising inflation. These episodes of volatility opened doors for investors to engage in tax-loss harvesting. Furthermore, the resulting price dislocations offer us a chance to acquire undervalued securities.

Adding Value, All Year Round

Our tax-loss harvesting process is integrated with our active asset allocation framework to continuously add value from both a tax and investment standpoint. Rather than enduring volatility and waiting for prices to revert, we leverage the market’s drawdowns to harvest losses while simultaneously repositioning portfolios for better opportunities. We are not committed to any specific investments or products; our primary focus is on the clients’ best interests. Our approach is centered on investing rather than trading. However, if multiple instances arise throughout the year where we can add value for our clients using this process, we intend to capitalize on each of them.