A related approach is engaging in tax-loss harvesting with individual holdings that have lost value. This maneuver demonstrates more sophistication than non-tactical rebalancing but is still a standard practice across the industry. Still, clients will appreciate advisors who show the initiative to sell underperforming securities throughout the year, which could simultaneously provide more promising opportunities and offset their capital gains taxes.
On the other hand, advisors must be careful to remind clients that tax-loss harvesting should not dictate investment strategy as much as inform and complement it. In addition, advisors ought to work closely with each client’s accountant to ensure that pursuing a strategy like this won’t complicate their broader tax plan.
Unit Investment Trusts
UITs are another option, having the advantage of following a specific investment theme that is professionally selected by third-party asset managers. These vehicles have a finite lifespan of, on average, about 15 months, adjusting the weightings of their underlying holdings based on market conditions for each new series and only realizing capital gains if the client sees a profit when exiting.
However, advisors should use only those UITs with the most compelling investment themes and be open to swapping in different UITs once the old ones expire, based on market sentiment and the performance of the underlying securities. The best UITs allow advisors to focus their efforts in one area with almost laser-like efficiency, providing both diversification and targeted allocations of high conviction companies. What that looks like in practice is holding the most relevant security that drives, say, the e-commerce value chain or the production and flow of top-quality multimedia content.
Better Together
Some advisors are understandably concerned whether stocks can experience another wave of outsized gains in the wake of one of the longest bull markets in U.S. history. Others may just be in search of better investment performance for their clients. Either way, a good first step would be to replace outdated buy-and-hold portfolio management with something more suitable for today’s volatile markets.
Advisors can tailor buy-and-sell strategies for each client, based on their personal goals and financial situation. In many of those cases, advisors should strongly consider combining regularly scheduled rebalancing with tax-loss harvesting throughout the year, while bringing in UITs to round out some of the portfolio.
Dryden Pence is the chief investment officer of Pence Capital Management a leading Newport Beach, California-based third-party asset manager.