One of the things I appreciate about Rudy is his optimistic attitude – he always sees the dog dish as half full. His optimism shows when it comes to his favorite thing in the world: going on walks and hikes. Rudy knows approximately when those walks occur so of course he gets excited to go first thing in the morning and immediately after dinner. Optimistically, he also assumes that anytime anyone goes near the front door, they must be going on a walk, so he will run to the door and wag his tail expectantly. He thinks if we go into the garage, we must be getting in the car to drive to a trailhead. If Rudy is nearby, we must be careful about opening a car door for any other reason than to go for a drive. Otherwise, he will jump into the car, refuse to get out, and happily sit there, sometimes for hours, waiting for us to start driving.
I admire Rudy and his endless optimism, and I try to be an active optimist as well. When it comes to investing though, sometimes that is easier said than done. I think we are all painfully aware of the recent trend of volatility and down markets. How can investors be optimistic during times like this? What is the silver lining to down markets? One upside is using the down markets to sell investments at a loss, also known as tax loss harvesting. The benefit of tax loss harvesting is being able to use those losses to offset taxes on gains and income. Let's look at an example of how this works:
You invest $20,000 in an index fund on March 1st. On June 1, the market drops 20% and therefore, your investment is now worth $16,000. You could sell the investment and realize a $4,000 loss for tax purposes. At that point, you could purchase a different index fund or wait thirty days (per IRS rules) and purchase the original fund again.
The loss you realize in the above scenario can be used in a few ways:
As a client of mine, you may have noticed a bit of extra trading in your portfolio during February in your taxable accounts. That was because I was taking advantage of the recent downturn to recognize losses and position you for the eventual recovery. As always, we cannot control the markets, but we can control our reaction to them. In this case, harvesting the losses will position us to maximize your after-tax returns over time.
I know down markets can be disappointing and sometimes nerve-wracking. As I have said in the past, when investing for the long-term, we must weather some volatility and downward trends along the way. I would encourage you to take a page from Rudy's book and adopt an optimistic attitude when it comes to market downturns. If we all do that, hopefully we can find a silver lining along the way.
If you would like to discuss tax loss harvesting or other investment strategies with me, you can email me at
email@example.com or call (520) 204-1058.
You can also schedule a meeting directly with me using this link: Schedule with Matt
Matt Haertzen, CFA, CFP