A Conversation with EP Wealth Advisors Director of Portfolio Strategy - Adam Phillips, CFA®, CFP®
Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA®), a CERTIFIED FINANCIAL PLANNER™ (CFP®), and has been included on the Forbes Next Gen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.
A Tax-Loss Harvesting Example
Tax-loss harvesting is the practice of selling investments that currently are trading for less than you paid for them, then booking and harvesting that loss to offset a gain you may have taken, or expect to take, that year. Let’s say you bought a thousand shares of Company X a few years ago, and they’re now worth $5,000 less than you paid. If you sell those shares, you can use the $5,000 loss to pay no taxes on $5000 of capital gains that year. Up to $3,000 of a loss also can be used to offset taxes on ordinary income. And unused losses can be carried over from year to year.
Tax Harvesting is a Year-round Process
Our approach to tax-loss harvesting isn’t a December or 4th-quarter story. We do it throughout the year. And it may not involve permanently eliminating the shares we sell from a portfolio. For example, we may see in the 1st quarter that a position we hold has sold off for one reason or another. Our Investment Committee will discuss whether we should sell it and book that loss in anticipation of offsetting other gains we expect later in the year—but then repurchase the stock, because we think it still has upside potential. When using this strategy, though, we need to be aware that there are Internal Revenue Service rules that dictate how it can be done.
Tax-Loss Harvesting Rules
The IRS says you can sell an asset at a loss and harvest that loss, as long as you don’t buy the same asset back within 30 days. This is called the wash-sale rule, and it’s there to ensure people don’t game the system. By waiting at least 31 days to buy an asset back, you’re accepting some risk that the asset may go up in price while you’re not holding it. If you’re using this strategy for tax-reduction purposes, you need to be very thoughtful about that short-term risk, which is something our Investment Committee discusses. In some cases, we may decide the tax benefits aren’t worth the risk.
What is Tax Alpha?
There’s something we refer to as “tax alpha,” which means the value added by being more tax efficient. This potential varies from client to client, because their entry points for a given stock may be different. This causes the amount of unrealized loss they can harvest also to be different. We have tools that let us screen our clients’ portfolios, and identify groups of clients for whom harvesting losses may be worthwhile, and others for whom the added value is insufficient. This underscores how our firm’s big-picture portfolio strategy applies differently to individual portfolios. If we like a given mutual fund for a given asset class, for instance, every client will have the fund. It’s a very customized process beyond that—tailored at the portfolio level by our understanding of the ins and outs of each client’s unique circumstances.
How Can You Benefit from a Strategic Approach to Investing?
With a staff of professionals and access to sophisticated analytical tools, EP Wealth offers a comprehensive range of services to help you invest with greater insight, as well as develop a holistic wealth management strategy. To discuss your finances and investment goals, we invite you to contact one of our advisors.
This is #9 in the Informed Investor “How to Build Your Investment Portfolio” series. Other topics include Asset Allocation, Why We Diversify, How to Buy a Stock, How to Buy a Bond, Concentrated Positions, etc., etc. For more information on our investment process, check out our investment management page or ask for a Portfolio Review.
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