Covering Tax Loss Harvesting and the Tax Impact On Your Portfolios As The Year-End Approaches
December 13, 2022
Welcome to Wealth Enhancement & Preservation’s Market Minute, where we get to update you on everything that happened in the financial markets this week. My name is Darrin Cohen, and I am the CEO of Wealth E&P.
The markets had a rough week last week, because they were down between 3% and 4% across the three indices. However, at this time of year, it's much more important that we talk about tax impact on your portfolios. Jake Sanders talked about this last week and covered the impact of capital gains and dividend distributions on portfolio performance. In particular, he talked about the Fidelity Leveraged Company Stock Fund. Now, we're not picking on Fidelity; we could pick any mutual fund company on the planet. This just shows the difference between how mutual funds work versus ETF stocks and other investment strategies.
So, using that Fidelity example, while the portfolio is down about 21% this year, the tax impact of those capital gains and dividends is another 3% loss on top of that. Instead of just a 21% loss, it's actually a -24% loss net of taxes. This is a BIG difference.
Alternatively, at Wealth E&P we use individual stocks and ETFs. Even in our All-Weather strategy where we trade a fair amount, we've actually taken the opportunity to what we call “harvest” tax losses this year. Those losses that we've been able to recognize actually improve net performance after tax by 1%; that's a 4% difference between a mutual fund strategy and a non-mutual fund strategy.
A lot of people have reached out to us to ask questions about how this impacts their portfolio. Even more significantly, people have been reaching out to say: “You know what, I want to make a change to my portfolio, but I don't want to do it now while the portfolio and the market are down so much.” This is actually a reverse psychology of thinking in that it's better to recognize those losses in a down market and get yourself back into a great portfolio that can capture the gains going forward. However, from a tax perspective, it's better to recognize those losses before next year starts and before it rebounds.
If you have any questions about this topic, your portfolio, the economy, or if you want a risk profile or a retirement projection, please feel free to reach out, visit www.wealthep.com, or give us a call at (678)-739-0175. Otherwise, stay tuned for our Market Minute next week!
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