At City Different Investments, we engage in proactive tax planning and risk management for our clients. Using quarterly reports showing tax profit and loss, we’re able to work with clients and advisors to harvest losses throughout the year.
We approach tax loss harvesting as a multi-factor problem requiring deft management of various risk factors. Our portfolio managers are primarily focused on three risk factors when it comes to tax loss harvesting:
Tax loss harvesting should be done in tandem with maintaining the portfolio’s risk profile. Suppose, for example, that an investor spent the last 10 days harvesting losses in their portfolio without replacing the duration of the bonds they sold. In that scenario, the duration of their portfolio would be reduced. If the market then rallies and the bonds are not replaced, however, the ‘new’ portfolio will underperform the old. This shows why it’s important to replace the duration of the sold bonds carefully.
If an investor waits until the last month of the year to begin managing their tax losses, they most likely will run into year-end illiquidity issues. The investor would accomplish their goal of harvesting tax losses, but the prices they receive on those sales would probably reflect a much wider bid/ask spread and prove suboptimal in the long run.
At what cost is a tax loss worth harvesting? Just because a bond price drops below its amortized cost does not necessarily mean it’s worth selling the bond to capture the tax loss. To wit, the future return potential of a given security might not be worth the immediate satisfaction of booking a tax loss because wash sale rules preclude an investor from re-buying the sold security for 30 days.
Tax loss harvesting is a decision that involves a host of risk characteristics for a separately managed account. These risks should be addressed throughout the year by the manager and the advisor in tandem. City Different Investments prides itself on making our managers fully accessible to our clients. Our detailed, strategic reports can help you assess tax loss harvesting implications for your clients throughout the year.
IMPORTANT DISCLOSURES
The information and statistics contained in this communication have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or forecasts discussed herein are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, or any non-investment related content, made reference to directly or indirectly in this communication will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. No discussion or information contained herein serves as the provision of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal, tax, or accounting advice.