Over the past several years strong performance in Financial Markets has been reflected through the growth of our investments. Certain areas of investor’s portfolios performed better than others resulting in higher percentages of riskier assets reflected in our portfolio’s. While taking taxable gains during a bull market just to reallocate toward more conservative investments does not seem to desirable… hindsight (or even current sight) helps to paint a clearer picture. The unprecedented effects of Covid-19 on markets has shown us that taking gains and paying taxes is better than having the market take away those gains tax free. Below are some strategies that we employ to help prevent the “Tax tail from wagging the investment dog”
Identify a comfortable baseline asset allocation
• An asset allocation targeting a specific mix of equities / bonds based on risk provides a baseline to which portfolios can be referenced against.
• This ensures our client’s investments are in line their risk budget and identify when adjustments need to be made to maintain that level of risk.
• Re-balancing allows us to sell high and buy low while maintaining our clients appropriate risk exposure.
• Following this process periodically prevents portfolios from deviating to far from their targets, allowing for minor adjustments to be made when necessary, and taxable gains to be taken in a manageable way.
Working with a Tax Accountant and Setting a Capital Gains Budget
• When making changes to investment accounts it is important to know how taxable gains can affect you in conjunction with other sources of income.
• In working with a tax accountant in conjunction with your Financial Advisor a “Capital Gains Budget” can be determined to find a happy medium between a reduced tax liability and ensuring portfolios are positioned for success.