Your last investment move of 2022

It's not too late to implement a few key tax strategies before year-end

As we (thankfully) turn the page on the 2022 market calendar, my team has been spending the last few weeks laser focused on an important year-end investment strategy for our clients: tax loss harvesting. Many portfolio managers have used this year to trim back positions that have had a tremendous run over the last few years. (Think tech stocks over the last decade). The sectors that had the strength to lead this last bull run might not necessarily be the leaders going forward; especially in a higher interest rate environment.

As managers reallocate their portfolios for the next 12-18 months, their investment decisions could look vastly different based on the current economic outlook, so they will need to position themselves accordingly. If they haven't done so yet, the next few weeks leading into year-end could see them making some big moves, and this is the problem. Clients are potentially facing capital gains, even if they haven't had the need to liquidate their portfolio at any time this year.

The point of active investment management is to make certain that a clients' asset allocation stays in the line with their goals, and changes are made accordingly. This is where a careful review of realized gains & dividends can prevent an uncomfortable conversation come April 15 of next year. When we build a financial plan for clients, we don't just look at investment performance as the primary tool to meet their goals: we focus on what the client actually returns AFTER fees and taxes.

When left with constructing a portfolio on their own, often there is little consideration of taxes, so investors may have unachievable or unrealistic return expectations. Conversely, attempting to construct a portfolio simply to minimize taxes can also result in opportunity costs that can leave investors less likely to achieve their goals. We feel that building the portfolio primarily based on each specific life goal - retirement, education, vacation, etc. - makes the most sense and is the most realistic.

Tax loss harvesting is designed to help defer paying taxes until later, but it is possible that the strategy will help you avoid paying capital gains taxes altogether.

In the 瑞银集团 article Tax loss harvesting: Reasons, tips, and strategies (5/12/22), the Chief Investment Office looks at reasons to harvest losses, as well as strategies to utilize all year. By avoiding costly taxes, especially with clients in the highest income brackets, your after-tax return can be enhanced.

Their top-3 reasons to harvest capital losses are:

1. To lower your taxes this year.
2. To keep your “tax dollars” growing.
3. To avoid capital gains taxes altogether.

Remember, this strategy doesn't have to occur only in December - by implementing some of these tactics throughout the year, you can take better control of your tax liability early enough so you're not scrambling come year-end.

-Jason

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