It's not what you make, it's what you keep

When Ben Franklin wrote so eloquently that "...in this world nothing can be said to be certain, except death and taxes," I'm sure he wasn't thinking about the after-tax performance of a broader S&P 500 ETF versus individual stock holdings.

As markets continue to hit new highs, it's hard to grasp that some stocks may be down so far this year. Although clients never like to see portfolio losses, now is the time to take a closer look at your portfolio and decide if a tax-loss harvesting strategy should be implemented.

When you can't always "buy low and sell high"

The idea of tax-loss harvesting is simple: sell a position (stock, bond, mutual fund, ETF, etc.) for less than what you paid to realize a capital loss...and then use that realized loss to offset a capital gain from another asset that you sold higher than where it was originally purchased. Your total portfolio value stays the same, but you now have potentially saved yourself from paying extra taxes, thus adding some additional return to your overall investments.

While the idea is simple, the execution can be more complicated, especially when loss harvesting is done at the broader market level using index ETF's. This becomes very challenging when your investments all go up at the same time during strong bull markets. (Like we are experiencing now...and have been the last few years).

Last year, the S&P 500 finished with a gain of approximately 26%, however, that increase was mostly driven by just seven stocks that gained ~76% for the year. The remaining companies collectively were "only" up about 14%, and 170 of those actually ended the year with a negative return. It’s possible to own numerous positions that are down, yet your overall portfolio can very well be higher.

A year-round investment strategy vs a year-end trade

Many investors wait until the end of the calendar year to consider loss harvesting, but the challenge with this approach is that the market often finishes the year with a positive return. (Think Santa Claus rally). In fact, 13 of the past 16 years, the S&P 500 has followed this pattern.

Contrary to what clients want to see on their statement, some of their individual stocks will most likely be trading at a loss at some point during the year, offering year-round opportunities to realize losses.

It's during these market "breathers" that you should be digging deeper to look at realized and unrealized gains and losses in your individual positions.

Make sure to look beyond stocks for your losers

As I posted in my last newsletter, the "higher for longer" FED interest rate strategy is most likely coming to an end as soon as this month. Up to this point, bond investors looking for price appreciation were sadly disappointed as rising rates meant falling bond values. (There is an inverse relationship between bond prices and rates...think of it as a seesaw.)

Those clients that own individual bonds (similarly to owning individual stocks) are probably holding positions that can be liquidated at a loss; and with rates still at historical highs, might be able to swap into something with a similar or even higher yield. This tax loss strategy with fixed income doesn't happen very often, so now is one of those rare opportunities to look across your entire portfolio.

Buy & hold with a little trimming around the edges

Tax-loss harvesting should not be confused with market timing or trading. Similar to a dollar cost averaging strategy of adding to your portfolio on a consistent basis, harvesting losses can simply be done every quarter by rebalancing to your original allocation. This strategy is especially simple if you own broader based ETF's and index funds.

However, with a little effort, you (or your advisor) should go through positions line by line at least quarterly, or whenever there is a significant market move, so you don't miss opportunities for harvesting. While some portfolio managers add a small cost to do this, my team includes tax strategies as part of our overall investment management practice. Regardless of which way you lean, remember that December will be here before you know it and there are probably plenty of gains and losses to look at it before it's too late.

-Jason

Any opinions are those of Jason Macaluso and not necessarily those of Raymond James.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation.