With the presidential election just a few days away, the country is living in a state of heightened uncertainty, unsure of the outcome and the ripple effect it may have on the already fragile U.S. markets and economy. A major consideration in overall financial stability for investors is tax planning, and this election is a battle between two candidates for the White House with starkly different views on tax policy, and two parties vying to control Congress and the ability to make those views a reality. As investors try to navigate the implications of the election and myriad other sources of uncertainty, tax management could take on greater significance than ever before, and advisors have a key opportunity to potentially add value to client portfolios—and to differentiate their practice—by navigating this turmoil with tax-smart investment strategies. Many advisors dread calls from their clients when markets are volatile, and the most they can offer is helping to avoid panic. Tax-smart management is an opportunity to show proactivity and build confidence among clients that there’s an actionable silver lining to market volatility.
Turning volatility into opportunity
While the election may not be decided on election day and could be a source of volatility for days, weeks, or months, it will be decided by late January. However, the legislative implications—including those related to tax policy—could continue to cause uncertainty far beyond January. Even more top-of-mind is the pandemic and its forward-looking economic implications. When will we return to “normal?” Will there be more stimulus payments and industry aid packages? What will happen with global trade tensions? All these factors will continue to impact markets and the economy well beyond the election.
We don’t know the future, but it’s hard to imagine that market volatility is not here to stay for a sustained period. If that proves true, then this may be an opportune time to implement tax-smart investment strategies, particularly for investors in the higher tax brackets.
The cornerstone tool of tax management is tax-loss harvesting. Advisors frequently recommend a buy-and-hold approach to riding out market turmoil. However, market turmoil can provide opportunities to take advantage of the U.S. tax code and enhance after-tax returns beyond a simple buy-and-hold approach, while still preserving the investment benefits of riding out the storm. By recognizing tax losses and substituting similar positions to maintain portfolio integrity, investors have the opportunity to use market declines to generate tax savings and increase after-tax returns in their portfolios.
Not only does tax-loss harvesting allow investors to preserve their desired portfolio exposures while potentially creating incremental value, it may also provide an opportunity to mitigate the impact of steep market declines. For investors in the top federal tax bracket, 40.8% of harvested short-term losses and 23.8% of harvested long-term losses get converted to tax savings, which more accurately become tax deferrals that can potentially accrue additional benefit for years to come. That’s a significant cushion during such market declines. Investors get the portfolio they want—and the potential to add incremental returns.
The most wonderful time of the year
Traditionally, Q4 is the time to implement tax-loss harvesting because the tax year is winding down and advisors typically do this only once a year since many perform the calculations manually. In addition to being time-consuming, it’s coincidental—meaning it only pinpoints positions that happen to be at a loss at that particular moment in time. Typically, one would expect significantly more fruitful harvesting if the portfolio were monitored for opportunities to capture losses throughout the year. Now, advisors can utilize intelligent automation, such as 55ip’s ActiveTax Technology®, to take advantage of harvesting opportunities year-round and seize on opportunities presented by market volatility whenever they happen.
To learn more about partnering with 55ip and how our investment model adoption platform empowers advisors and helps to improve outcomes for their clients, contact our Advisor Success Team at (617) 960-9559 or at firstname.lastname@example.org.