Why Making Portfolio Changes Now Can Help Reduce Taxes Later

If you’re considering significant changes to your portfolio, doing so early in the year may allow more time for tax-saving strategies through the rest of the year.

Equity Insights
Index Equity Strategy
Tax Advantaged Equity Strategy
Portfolio Construction

Key Points

What it is

When investors make significant changes to their portfolios, timing may matter to potentially optimize tax savings.

Why it matters

Taxes can significantly erode wealth over time, heightening the importance of thoughtful tax management.

Where it's going

Enacting portfolio changes near the beginning of the year may allow more time to implement tax-savings strategies for the rest of the year.

Investors review and adjust their investments periodically to align their portfolios with their objectives. Whether making strategic updates, tactical shifts, or changes to investment products or managers, investors have much to consider. This includes when to enact portfolio changes, and how those changes may impact tax costs. For taxable investors, we’ve found that updating portfolios at the beginning of the year gives them more time to offset taxable gains with investment losses, potentially lowering tax costs. Let’s take a closer look.

Some investors hold highly concentrated, somewhat risky portfolios that could benefit from a transition into a more diversified portfolio. An investment manager who specializes in tax-efficient strategies could transition the concentrated portfolio to separately managed accounts against diversified benchmarks. As the concentrated portfolios often consist of long-held equities, sales of these securities during the transition likely would incur significant taxable realized gains. However, the new diversified portfolio, preferably constructed at the beginning of the year, probably will hold equities that show losses as the year progresses. The investment manager can sell some of these losses, offsetting the capital gains from the initial transition and potentially reducing tax expenses.

Even in the best of years, we’ve found there are plenty of opportunities to sell in a diversified portfolio based on an equity index. In 2023, the S&P 500 Index returned a whopping 26%, but a third of the stocks in the index had losses. And three-quarters of the index constituents had a short-term decline of at least 5% at some point in time in the year. So far in 2024, uncertainty around inflation, interest rates, geopolitical risks, economic growth and earnings have already created ample volatility and opportunity for investors to begin offsetting taxable gains. In fact, though equity markets are again near record highs, dispersion of S&P 500 stocks is up approximately 15% since the end of last year, with more than half of constituents in negative territory.

With the year still relatively new, investors have the opportunity to their portfolios with tax efficiency in mind. Managers of tax-efficient strategies can play a key role in helping to optimally reposition portfolios through thoughtful portfolio construction, cost and risk management, daily portfolio monitoring and frequent tax-efficient trading.

Main Point

Timing Matters for Taxes

With the year still relatively new, investors have the opportunity to reposition their portfolios with tax efficiency in mind. Managers of tax-efficient strategies can play a key role in helping to optimally reposition portfolios through thoughtful portfolio construction, cost and risk management, daily portfolio monitoring and frequent tax-efficient trading.

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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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