A year ago today, I published a long article postal The advantage of direct indexing through Tax Loss Harvest (TLH). It became one of the most read works I wrote last year; RWM Advisors have found it to be a useful explanation for those who manage capital gains on low-cost stocks (ESOPs, founder shares, estates, etc.). The folks at Vanguard, Franklin Templeton, and VC shared it with me, and it circulated internally.

It’s incredibly comforting.

The reason anyone puts their ideas in pixel form is to share ideas and influence the thinking of peers, clients and colleagues.If you haven’t read Access loss via direct indexingSkip and give it a few minutes of attention.

Because tomorrow is tax day, it may be too late for you to do a lot of tax planning in 2021. But it’s not too late to start thinking about your (or your clients’) taxes this year (’22). This is especially true given how this year’s weak markets started and the opportunity to capture losses.¹

Base case: Market performance in 2022 is unlikely to match 2021 or even 2020. Rising rates, inflation risks and a clear reversion to the old mean suggest a double-digit high this year is unlikely; my more likely guess is a flat plus or minus single digits. The silver lining in this market scenario is that there will be a good chance for direct index clients to offset capital gains with technical losses.

quick review:

A typical tax loss harvest involves a portfolio of mutual funds or ETFs in which you sell portfolio positions to cover losses, replacing each position with a nearly identical substitute.this accomplish These losses can offset gains in the portfolio.² Done right, it can reduce tax costs for clients through a sizeable capital gain. Given the 34% decline and rapid rebound, 2020 is unique, so the savings are substantial. The TLH produced in most years is well below the 400-500bps produced by unique cases; the target is more in the range of 25-75bps.

Before you get away with a few basis points, realize that this is found money, basically risk-free cash.For clients who have been slowly closing their positions, usually for diversification or access to liquidity, this can speed up the process by year.

Consider a family sitting in a stock portfolio at a very low cost. These large gains could make them their largest asset, and are usually a concentrated position and therefore riskier. Accounts with stocks like Apple or Amazon bought in the 2000s now dominate — not just portfolios, but their entire net worth. The holder may be retiring, making a major purchase, or just wanting more money. Even if liquidity is not required, it is prudent to diversify this concentrated position into a wider range of risky assets.

Typically, these investors decide how much liquidity they want and how much long-term capital gains tax they expect to pay each year. It’s a balance, and we can make a plan to do it for any period (3 years, 5 years, 10 years, etc.). There are a number of tradeoffs: risk versus reward, concentration versus diversification, capital gains tax versus liquidity. The timing, the amount, the whole process is highly dependent on personal preference.

if this is if only Regarding maximizing gain, there is an optimal mathematical way to perform this function.

But rarely only the dollar is involved. Often, there are a lot of personal factors at play. Long-term holdings can have an emotional impact on them. regret minimization is a key part of this framework. Selling stock is a complicated decision after years of investing and planning. The most effective way is for investors to achieve what they want with the most comfort and the least amount of stress.

Done right, the tax-loss harvest can accelerate the process for years—at no additional cost and without increased risk.

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If you want to learn more about central management Stock positions and need help creating an efficient way to manage your capital gains, we can help. contact us here.

Before:
Access loss via direct indexing (April 14, 2021)

Regret Minimization: Strategies for Deciding When to Sell (December 20, 2017)

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1. For the record, I don’t like the term “Tax Alpha” but am at a loss for a better title…

2. In whole or in part, as the case may be.