As the year comes to an end, we look back to see 2018 was full of twists-turns, ups-downs, and fierce volatility. As of today, the S&P 500 is down -14.63% and the MSCI EAFE Index (USD) is down -20.69% from previous highs. In these turbulent markets a common question asked is, “What should I be doing with my accounts?” Some react by attempting to guess where the market is headed, followed by a change in an investment strategy. We understand markets work for investors in the long-term. Academic research has shown attempting to time and predict future market direction results in worse long-term performance. Therefore, if we can’t predict future market direction, we focus our energy on year-end tax planning. As the old saying goes: when life gives you lemons, make lemonade!

During recent market declines, some investments have lost money. In taxable investment accounts, these investments can be temporarily sold (avoiding wash sales) to harvest capital losses, which can be used to offset realized capital gains and even be deducted on the investors tax return (limited to $3,000). Any unused capital losses can be carried forward indefinitely into future years for additional savings.

Additionally, towards the end of the year some mutual funds will distribute capital gains. In short, when a mutual fund sells an underlying investment during the year, it may be sold at a gain. Due to the structure of mutual funds, this gain is then passed on to the investor. During years of volatility, this can be especially difficult given the mutual fund performance may be down as whole and a taxable gain will still be distributed. By proactively researching the distribution date and amount, a sale can be made before the fund distribution, therefore avoiding the capital gain. Of course, analysis must be conducted if the mutual fund itself is already in a gain position as well as any transaction costs involved to execute the strategy.

While year-end tax planning certainly has long-term economic benefits, investment strategies should be coordinated with a financial plan. When there is confidence in the financial and investment strategy, market conditions and news outlets become white noise. Always consult with your tax advisor regarding specific tax strategies (which is why we work closely with our clients’ tax advisors).

Talk with us about your portfolio or financial plan here: Talk with an advisor

More Reading: Tune out the Noise

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