It has been a challenging year for investors as stocks and bonds are significantly down across all markets. At times like these, investors tend to feel the urge to “do something.” It’s a natural inclination, guided by the same impulse as the fight-or-flight response when we perceive danger. While it has helped humans survive the rough and tumble environs that we have faced for eons of evolution, “doing something” when markets are volatile tends to be counterproductive for investors…unless that thing is tax-loss harvesting.
Tax-loss harvesting is a strategy involving realizing capital losses from positions in a portfolio that have declined in value and using them to offset gains realized elsewhere in the portfolio (ex: profitable sales of other investments, capital gain distributions).
The benefit to investors of implementing an active tax-loss harvesting strategy is generating potentially higher net after-tax returns. Research suggests this strategy can add anywhere from 0.40% to over 4% per year to overall returns (depending on the market environment and individual's tax situation)
There are three basic steps in the tax-loss harvesting process:
Tax-loss harvesting can be valuable to your overall financial planning and investment strategy. However, pursuing tax savings should complement your overall investment goals, not derail them. Implementing a balanced and diversified strategy to ensure that your investments align with your objectives is the prudent approach.
Ultimately, tax-loss harvesting can be beneficial, but it can also be nuanced and complex. Therefore, before selling assets, talk with a financial and/or tax professional to determine a suitable strategy.
 Source: Derek Horstmeyer “Just How Valuable is Tax-Loss Harvesting” Wall Street Journal, 4 Dec 2021
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