Tips For Improving Results Include:
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While the type of investment strategy selected (value, growth or index-like) will impact TLH success, meaningful “alpha” can be added to taxable client portfolios through its use.
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The results associated with TLH are highly dependent upon market direction. For example, a melt-up rally will offer few prospects while a sideways or down market should provide ample opportunities—especially shortly after initial funding.
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As the direction of the stock market is typically upward, the “alpha” of tax-loss harvesting tends to be front-loaded (occurring in the early years) and heavily impacted by the timing of funding (or vintage).
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Active asset managers often find tax-loss harvesting an inconvenience. Many have been loath to harvest more than once a year (typically near year-end). Recent loss of market share to passive investing may have increased manager willingness to focus on client value-add opportunities like TLH.
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When tax-loss harvesting, advisors should avoid both wash sale (sec. 1091) as well as remaining in cash “or naked” throughout the wash-sale period. Wash sale negates the benefit of TLH while naked cash positions are a form of market timing. Purchase of similar yet not identical securities during the wash-sale window (30 days after the sale transaction) should minimize impact to the portfolio.
The unfortunate reality is that market-driven alpha, where it exists, is fleeting. Alternatively, tax alpha is a value-add discipline available to all high-net-worth investors (with taxable accounts) and may go a long way toward countering client “what have you done for me lately” debates. In today’s fully priced stock market rising volatility and an eventual bear market are likely. Similarly, the recent surprise election of President Trump promises elevated political risk and market uncertainty. Taxes alone should never drive investment decisions, yet a disciplined approach to tax-loss harvesting offers the potential for significantly improved client portfolio results.
TLH, especially in protracted loss-driven markets, is poorly understood and may be unsettling to clients who see loss-harvesting as simply “locking in” losses. Yet as it remains one of the best tools investment advisory professionals have to add value engaging clients to build support should be a priority. Maximizing client portfolio realized losses when available while minimizing gain realization, especially for retirees, should be a primary goal of all advisors. Clearly, TLH is one of the few more reliable forms of alpha (albeit tax-alpha) financial advisors can provide their clients.
Steve Riley and Rick Furmanski are high-net-worth portfolio managers at Clearview Wealth Solutions LLC in Lake Zurich, Ill.