{"id":21126,"date":"2023-12-15T19:53:22","date_gmt":"2023-12-15T19:53:22","guid":{"rendered":"https:\/\/www.thinkadvisor.com\/2023\/12\/15\/8-tax-loss-harvesting-tips-for-2024\/"},"modified":"2023-12-15T19:53:22","modified_gmt":"2023-12-15T19:53:22","slug":"8-tax-loss-harvesting-tips-for-2024","status":"publish","type":"post","link":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/2023\/12\/15\/8-tax-loss-harvesting-tips-for-2024\/","title":{"rendered":"8 Tax-Loss Harvesting Tips for 2024"},"content":{"rendered":"<div class=\"media_block\"><a href=\"https:\/\/feeds.feedblitz.com\/-\/851727506\/0\/thinkadvisor\/\"><img decoding=\"async\" src=\"https:\/\/images.thinkadvisor.com\/contrib\/content\/uploads\/sites\/415\/2023\/12\/02_Tax_Coins_Rising_Adobe_640x640.jpg\" class=\"media_thumbnail\"><\/a><\/div>\n<p><button id=\"start-slideshow-top\" data-toggle=\"modal\" data-target=\"#slideshowModal\" class=\"start-slideshow carousel-control slideshow-btn financial-planning \">Start Slideshow <img decoding=\"async\" src=\"https:\/\/www.thinkadvisor.com\/assets\/master-template\/images\/market-images\/tasr\/rightarrow.svg\" class=\"prevbtn-img\"><\/button> <\/p>\n<p id=\"first-para\">While it will likely be hard for investors to harvest the same degree of losses in either 2023 or 2024 as they managed in 2022 (and that\u2019s a good thing for portfolios), tax-loss harvesting has nonetheless been an important consideration this year, and experts anticipate the same for 2024.<\/p>\n<p>In fact, as Hiren B. Patel, head of advisor solutions at 55ip, recently told ThinkAdvisor, loss harvesting benefits from an \u201calways-on mentality,\u201d so advisors should be ready to take potential action early next year if the market conditions are right \u2014 <a href=\"https:\/\/www.thinkadvisor.com\/2023\/02\/15\/bond-investors-could-score-major-tax-alpha-this-year\/\" target=\"_blank\" rel=\"noopener\">both on the stock and bond sides of the portfolio<\/a>.<\/p>\n<p>As Patel emphasized, the potential value advisors can bring to their clients via effective loss harvesting is hard to overstate, especially over the long time horizon of the typical retirement investor. While academic research suggests the average annual \u201csavings\u201d or \u201cexcess return\u201d is around 1% of a portfolio\u2019s value, that figure can range up to 250 to 300 basis points, depending on the methodology and the manager being considered.<\/p>\n<p>In dollar terms, that equates to as much as $650 billion in tax savings that could be realized by advisors and their clients&nbsp;each and every year, according to <a href=\"https:\/\/www.thinkadvisor.com\/2022\/10\/17\/advisors-tax-blindspots-leaves-billions-in-returns-on-the-table\/\" target=\"_blank\" rel=\"noopener\">estimates provided by Avantax<\/a>. It is a staggering amount of money that could be put back into the pockets of households across the U.S., Patel agreed, noting that advisors can now lean on firms like 55ip to do much of the heavy lifting of tax management on their behalf.<\/p>\n<p>While it does add another layer of complexity to client service, Patel said, the writing is now on the wall: advisors who deliver superior after-tax performance will stand out from the competition.<\/p>\n<p>In that spirit, see the slideshow for a rundown of&nbsp;eight top tax-loss harvesting tips for late 2023 and 2024.<\/p>\n<h2>1. Consider harvesting losses on a near-monthly basis.<\/h2>\n<p>In Patel\u2019s experience, many advisors and clients tend to think of tax-loss harvesting as a market-driven or end-of-year event.<\/p>\n<p>\u201cWhat we are doing today is much more proactive,\u201d Patel explained. \u201cWe are respecting the wash sale rules, of course, but we are loss harvesting every 31 days, so it\u2019s essentially happening on a month-by-month basis.\u201d<\/p>\n<p>Taking this approach gives investors opportunity to find potential harvesting value even when the markets are generally trending upward, because there are inevitably going to be interim periods of decline, either across the full portfolio or in particular asset classes or sectors.<\/p>\n<h2>2. Bond portfolios benefit from harvesting too.<\/h2>\n<p>Another common issue, in Patel\u2019s experience, is to see clients only thinking and talking about loss harvesting in the context of stock market investments.<\/p>\n<p>\u201cThe reality is that fixed income also presents an opportunity for harvesting or banking losses, especially when you are in an interest rate environment like this,\u201d Patel said. \u201cFor example, earlier this year, we harvested significant losses in the first two quarters as rates continued to rise.\u201d<\/p>\n<p>The focus then swung once again in the third quarter back toward large-cap equities, Patel explained.<\/p>\n<p>\u201cAs I said, it takes an always-on mentality that scrutinizes all the securities in the portfolio to deliver the full potential benefit of this type of tax management,\u201d Patel said.<\/p>\n<h2>3. Modest portfolio drift isn\u2019t really a bad thing.<\/h2>\n<p>As Patel recounted, one of the primary benefits of direct indexing from a tax management perspective is the ability to change \u2014 whether fundamentally or tactically \u2014 a client\u2019s portfolio at the security level while replicating an underlying index.<\/p>\n<p>By definition, however, any securities trading to realize tax losses introduces differences in composition from the underlying index. Thus, there is a potential for differences in risk and return, and therefore \u201ctracking error\u201d is introduced.<\/p>\n<p>This \u201cerror\u201d term often causes confusion among advisors and clients, but the reality is that modest portfolio drift is not a bad thing in most contexts.<\/p>\n<p>The balance between managing portfolio differences from the index and the benefits of tax-loss harvesting can be constantly measured and effectively balanced, Patel said.<\/p>\n<h2>4. ETF holdings and model portfolios can also benefit from loss harvesting.<\/h2>\n<p>As Patel explains, the same general principles of loss harvesting within&nbsp;separately managed accounts using direct indexing also apply to the effort to utilize tax-loss harvesting in ETF and mutual fund model portfolios.<\/p>\n<p>Although tax-optimized model portfolios have less granular exposures for potential tax-loss harvesting, continual and automated evaluation of both opportunity and tracking error has the same potential to improve after-tax investor outcomes.<\/p>\n<h2>5. Significant dispersion exists even in a steady market.<\/h2>\n<p>According to Patel, the market\u2019s behavior so far in 2023 has shown clearly that significant performance dispersion can (and usually does) exist even when broad market indexes are climbing steadily on a monthly or quarterly basis.<\/p>\n<p>This is a principal reason why loss harvesting is not just useful in painful years like 2022.<\/p>\n<p>Patel points out that, by May of this year, the S&amp;P 500 was up 8%, even as the majority of stocks in the index were down, with the median return for the year at that point registering negative 0.2%.<\/p>\n<p>In July alone, the S&amp;P rose 3.1%, but the gap between the best and worst performers topped 55%.<\/p>\n<p>\u201cIt is the same story at the sector level,\u201d Patel adds. Year to date through July 31, the S&amp;P was up more than 20%. The technology sector was up 46.6%, and communications services jumped 45.7%, but utilities fell 3.4%.<\/p>\n<h2>6. Sometimes, patience is key when there are big embedded gains.<\/h2>\n<p>Until recently, many advisors have had concerns about the tax implications of transitioning their clients to a model portfolio approach, but that is quickly changing thanks to new technology and oversight techniques that allow advisors to utilize ongoing loss-harvesting as a means of offsetting the tax cost of a big portfolio transition with&nbsp;significant&nbsp;embedded gains.<\/p>\n<p>\u201cI would say this is actually there area where we are providing the most added value to our partnering advisors today,\u201d Patel said. \u201cIf the client is willing to be a little patient and allow a transition process to unfold over a period of time, we can substantially reduce the overall amount of taxes they will have to pay.\u201d<\/p>\n<h2>7. Strictly speaking, tax alpha and tax savings aren\u2019t the same thing.<\/h2>\n<p>As Patel explained \u2014 and as he has <a href=\"https:\/\/55-ip.com\/2023\/03\/28\/tax-alpha-vs-tax-savings\/\" target=\"_blank\" rel=\"noopener\">written about in detail<\/a> \u2014 it is common for casual observers to conflate the related but distinct concepts of \u201ctax savings\u201d and \u201ctax alpha.\u201d<\/p>\n<p>Simply put, tax savings is the difference in the tax bill a client realized for a portfolio that utilizes tax-loss harvesting versus another without tax-loss harvesting.<\/p>\n<p>Tax alpha, on the other hand, is the difference in investment performance between a client\u2019s portfolio that utilizes a tax strategy versus its benchmark.<\/p>\n<h2>8. Timing the market is an inferior approach to loss harvesting.<\/h2>\n<p>Patel observed that some advisors effectively try to \u201ctime the market\u201d with their tax-loss harvesting activities, waiting for big drops before they take action.<\/p>\n<p>While that can be effective to an extent, such advisors are likely missing out on opportunities that will be identified through the always-on approach.<\/p>\n<p>In 2021, for example, the S&amp;P 500 finished with significant positive returns, and some advisors may never have pulled the loss-harvesting lever, Patel said.<\/p>\n<p>However, nearly 52% of the positions in the S&amp;P 500 saw a 15% or greater drawdown at some point in the year \u2014 a big missed opportunity for those who weren\u2019t watching closely.<\/p>\n<p> <button data-toggle=\"modal\" data-target=\"#slideshowModal\" class=\"start-slideshow carousel-control slideshow-btn financial-planning\">Start Slideshow <img decoding=\"async\" src=\"https:\/\/www.thinkadvisor.com\/assets\/master-template\/images\/market-images\/tasr\/rightarrow.svg\" class=\"prevbtn-img\"><\/button><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Start Slideshow While it will likely be hard for investors to harvest the same degree of losses in either 2023 or 2024 as they managed in 2022 (and that\u2019s a good thing for portfolios),&#46;&#46;&#46;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[1],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/21126"}],"collection":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/comments?post=21126"}],"version-history":[{"count":0,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/21126\/revisions"}],"wp:attachment":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/media?parent=21126"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/categories?post=21126"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/tags?post=21126"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}