Even in this U.S. Equity Rally, Investors Can Find Losses to Reduce Taxes
Just a few stocks have driven the surge in U.S. equities this year, leaving plenty of opportunities for investors to realize losses and potentially reduce their tax burden.
- Tax Advantaged Equity
- Equity Insights
- Portfolio Construction
Key Points
What this is
We explain how investors are likely to find ways to reduce taxes through loss harvesting, even in up markets.
Why it matters
Annual tax expenses can be among the largest drags on wealth over time.
Where it's going
We have found that markets are always producing tax-reduction opportunities through loss harvesting, no matter the direction of the market.
Even in this U.S. Equity Rally, Investors Can Find Losses to Reduce Taxes
As the year draws to a close, investors have an opportunity to add after-tax performance in their portfolios by taking a closer look at portfolio holdings. If a number of holdings show losses, investors can sell those holdings to potentially reduce taxes for the calendar year by offsetting realized portfolio gains. This strategy is also known as tax loss harvesting. But with the rally in U.S. equities this year, investors may think the pickings are few for loss harvesting. In fact, there are still plenty of opportunities. Let’s take a closer look.
While the S&P 500 Index has risen 20% year-to-date, just seven stocks have accounted for the lion’s share of the gains. Of the remainder, almost half of the stocks in the index have declined, with more than 60 companies down greater than 20%. Further, four of the eleven sectors have fallen, including a 9% drop for utilities and a 3% slide in health care. to harvest losses in have appeared in nearly all markets] And the opportunities to sell losses amid a rally this year isn’t unique. If we look back to 2021, when the S&P 500 rose 18%, a third of the stocks fell more than 10% at some point throughout the year.
If you haven’t purposely realized losses to reduce the tax burden this year, we think now would be a good time to do so. But a good resolution for your investment plans in 2024 may be to more frequently. Our research shows that harvesting losses regularly, even monthly, makes a difference in tax savings. Investment managers with specialized skills in tax efficient portfolios, in particular with separately managed accounts, employ techniques such as selling the most advantageous and daily monitoring of a portfolio in an effort to optimize tax savings.
Historically, tax expenses over time have impacted after-tax wealth more than fees or trading costs. Investors who employ tax management strategies may receive benefits of investment returns coupled with after-tax outperformance. We think volatility can create opportunities in underlying securities in any given year.
Tax lots are records of securities purchased in a transaction, to track the date of purchase, cost and transaction size. They provide the cost information of a transaction in order to determine the amount of loss or gain when securities are sold.
Main Point
Investors Likely Can Uncover Tax Savings Opportunities in Any Market
Historically, tax expenses over time have impacted after-tax wealth more than fees or trading costs. Investors who employ tax management strategies may receive benefits of investment returns coupled with after-tax outperformance. We think volatility can create opportunities in underlying securities in any given year.
Insights
Mary Lukic, CFP
Head of Tax-Advantaged Equity
Mary Lukic heads the tax-advantaged equity portfolio management team, which is responsible for tax-managed, dividend, ESG (environmental, social and governance) and quantitative active strategies. She is also a senior portfolio manager on the global equities investment team. Mary has extensive experience providing custom equity solutions to high-net-worth families, nuclear decommissioning trusts, settlement trusts, insurance companies, and other taxable and tax-exempt investors.
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