If we’ve heard it once, we’ve heard it a thousand times: 2018 was an incredibly volatile year. But what you may not have heard is that because of that volatility, we at JNBA doubled down on one of our key approaches – active portfolio review and rebalancing – to do everything in our power to turn sour lemons into lemonade.
At the top of our list was tax-loss harvesting, selling a security at a loss to offset capital gains and reducing clients’ tax liability. Nobody likes to lose money, but we like it even less when that loss is compounded by having to pay taxes on the same portfolio. So, the team at JNBA increased our rate of reviewing and rebalancing client portfolios, especially during December. We shifted from a minimum of once every 10 business days to – in some cases – reviewing portfolios as often as daily to take advantage of market volatility. And throughout we remained keenly aware to ensure that we avoided the wash-sale rule, which negates a loss if you buy the same or similar security back within 31 days of selling it.
As volatile as this market has been, it’s an excellent reminder that negative returns can be used to your advantage, but only if investors and their financial and tax advisors are actively paying attention, and working together. Investors who aren’t working with advisors who engage in this type of thoughtful reallocation and trading may be missing the boat on potentially significant tax savings.
“It’s critical that everyone on your team is on the same page as far as looking at a portfolio’s real net return including when taxes are factored in.” says Michael Bilotta, Senior Advisor – Investment Strategist and member of the JNBA Investment Committee. “For example, we would prefer to have a rate of return of 8% and keep 7% after taxes, instead of a portfolio that appears to have done better but was tax inefficient with an absolute return of 10% but keeping only 6% after taxes were figured in. If people are investing themselves, they are often averse to selling underperforming assets for various reasons. However, every portfolio has a few losers within them and by holding onto them too long you lose the ability to harvest the tax-loss.”
It’s also a reminder to pay close attention 12 months a year. While 2018 was particularly volatile in the fourth quarter, at JNBA, we believe that tax implications of investing should be a year-round focus, not just a year-end exercise. If you’re disciplined about how you invest in the first place, and then thoughtfully and carefully pay attention to the portfolio all year long, you can mitigate your tax exposure.
Ultimately, tax-loss harvesting is an important tool in the JNBA Investment Committee’s toolbox that helps us work toward what should be everyone’s goal – keeping as much money in our clients’ pockets as we possibly can.
Please see important disclosure information at www.jnba.com/disclosures.