Making Lemonade out of Lemons – and Knowing When to Sip the Lemonade

Using Market Volatility to Harvest Losses and Take Gains on Highly Appreciated Securities

One of the most valuable yet sometimes overlooked investment strategies is tax loss harvesting in taxable accounts. Another prudent approach is trimming highly appreciated and over-weighted positions. Given the market volatility this year, investors may have had opportunities to harvest losses, while also considering reducing large gains in certain stocks following two great years in the stock market.

The Importance of Tax Loss Harvesting

Tax loss harvesting is particularly beneficial in non-qualified accounts because it allows you to offset gains either in the current year or in the future. By reducing your tax burden, you retain more capital to stay invested and compound returns over time. When applied strategically each year, this approach can have a powerful impact on long-term wealth accumulation.

For long-term investors who have held portfolios for many years, opportunities for tax loss harvesting may be limited—especially if they are no longer making new contributions or if turnover in their accounts is kept intentionally low. This is often the case for elderly or ill clients with significant unrealized capital gains, where a step-up in basis for beneficiaries is expected.

A common question we receive is: Why take a loss now—shouldn’t we wait to see if the security rebounds? The answer is that selling a security at a loss does not mean exiting the market altogether. We typically reinvest proceeds into a similar investment, preserving the opportunity for appreciation while capturing a tax benefit. Additionally, after31 days, we have the option to repurchase the original security while still retaining the realized tax loss.

Trimming Highly Appreciated Stocks: Managing Risk and Taxes

Another frequent concern is about selling stocks that have experienced tremendous growth. Why not let them continue to climb? The answer is twofold:

1. There is no guarantee they will continue rising.
2. As a stock’s value increases, it may become an outsized portion of your portfolio, exposing you to undue risk.
3. As a stock’s price increases, it may become expensive relative to its company’s earnings and become vulnerable to falling in price.

While selling appreciated stocks may generate capital gains taxes, the risk reduction typically outweighs the tax cost. Additionally, if we have harvested losses elsewhere, they can help offset the taxable gains, though this is not always guaranteed. Please note that if you requested us to send you money during the year for a renovation or a new car, for example, we were likely to sell stocks because the market had been up for a while. In this case we typically look to trim over-weighted positions as a source of part/all the needed funds.

The Bottom Line

At times, the actions we take in your portfolio may seem counterintuitive. However, every decision is rooted in sound financial principles that have been evaluated over time and proven to be prudent. By strategically harvesting losses and trimming gains, we help optimize after-tax returns, manage risk, and position your portfolio for long-term success.

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