As we continue to monitor the extreme gyrations of the stock and bond markets over the last few weeks and months, we thought it would be appropriate to revisit a concept we believe to be very important during volatile markets.
Losing money is not anyone’s idea of a long-term investment plan, but a well-diversified portfolio will usually contain some investments that have indeed lost value, at least over the short-term. Sometimes an investment that has lost value can still do some good. If you have losses in a taxable account, you can sell stocks, bonds, mutual funds, or other investments that have lost value, to reduce federal taxes on capital gains from winning investments—or you could get a federal tax deduction. It’s called tax-loss harvesting.
The key to an effective tax-loss harvesting strategy is to evaluate what you own and why you own it, identify investments that have lost value, and then consider the sale of some portion of those holdings to offset realized gains, expected future gains, or even income. And do this while being careful not to stray from your target investment mix and diversification strategy. Evaluating and managing the tax consequences of your investment decisions can be tricky, so we work with our clients and their tax professionals to achieve as low of a tax bill as possible.
We continue to emphasis diversification in up and down markets. Stay disciplined and keep a focus on your longer-term plans. We thought the following quote by Ron Chernow to be appropriate during these volatile times.
“Stock market corrections, although painful at the time, are actually a very healthy part of the whole mechanism, because there are always speculative excesses that develop, particularly during the long bull market.”
The Creekside Team
Andy, Teresa and Mike