By Solomon G. Teller, CFA, Chief Investment Strategist, Green Harvest Asset Management
With the S&P500 index already up 20% this year after gaining 18% in 2020, U.S. equity investors have been well rewarded. By focusing on tax alpha as well as investment alpha, investors could have increased their opportunities to perform even better than the market.
But a recent study by Dalbar revealed that the average equity mutual fund investor has been lagging the U.S. equity market by over 2% in the first half of 2021. According to Dalbar, many investors have lost out from their tendency to sell funds during market declines, only to then miss out on market rebounds. Their longer-term study states this was a major reason that the average equity fund investor underperformed the S&P500 by 1.81% annually over the first 20 years of the millennium – see chart.1
The good news is investors may be able to rise above the averages simply by adhering to a long term, after-tax investment plan. Make a plan or ask a financial advisor to help make you one.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when the portfolio is liquidated. Current performance may be higher or lower than that quoted. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index.
GHAM does not provide tax advice and does not employ a Certified Public Accountant on its staff. We work with outside accounting firms and tax counsel that provide guidance and updates on relevant tax law, and we have reviewed the tax treatment of our transaction structures with those professional advisors. Based on those reviews, GHAM is satisfied that our structures support the desired tax results, but we urge clients to consult their own legal and tax advisors regarding the tax treatment of the transactions effected in their GHAM account. Such transactions include ETFs. Federal, state and local tax laws are subject to change. GHAM is not responsible for providing clients updates on any changes in tax laws, rules or statutes. Clients remain fully responsible for their own tax positions. Although GHAM does not provide tax, legal or accounting advice, we stand ready to assist clients and their advisors in reviewing the relevant tax rules.
Reasons to harvest capital losses, sources of capital gains and the suggestion that mutual funds distribute capital gains are for illustrative purposes only. The availability of tax alpha is highly dependent upon the initial date and time of investment as well as market direction and security volatility during the investment period. Tax loss harvesting outcomes may vary greatly for clients who invest on different days, weeks, months and all other time periods. A client’s tax alpha will depend on the client’s individual circumstances, which are outside of GHAM’s knowledge and control. All performance and tax benefit capture figures are derived from data provided from multiple third-party sources. All estimates were created with the benefit of hindsight and may not be achieved in a live account. The data received by GHAM is unaudited and its reliability and accuracy is not guaranteed.
This material is not intended to be relied upon as legal, investment or tax advice in any form or for any specific client. The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person. All investments carry a certain degree of risk, and there is no assurance that an investment will perform as expected over any period of time.
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