Good Moments in the Long Days

By Geoff Schaefer

Geoff is a Wealth Advisor with Intergy Private Wealth. He writes for The Steadfast Fiduciary to help people live with an abundant heart, open mind, and boundless generosity.

October 24, 2022

As parents of three young children, my wife and I often end a day feeling completely overwhelmed and sometimes just downright defeated.  I know this feeling is novel and no other parents have ever experienced it, so let me explain.  You woke up ready for the day, but your six year old decided today was the day he would pick constant fights with his sister. His three year old sister thought it would be a good day to ignore every request and direction given from her parents and have a bad attitude while doing it.  Their one year old brother, sensing the disturbance in the household, figured he’d skip the naps and watch all of this unfold while simultaneously crying and complaining because he is over tired. Bedtime cannot come fast enough. The kids get baths, read a story and whisked off to sleep.  Steph and I fall onto the couch in disbelief about the days experience. We have had plenty of these days we talk and are befuddled on the things that went wrong.  Recently we tried something new.  In the midst of debriefing on the days woes and all of our parenting failures, we highlighted a win.  Maybe Henry volunteered to clean up after dinner, or we walked into the room where Maddie was singing to her brother and comforting him after a little spill. Maybe they said “please” after every request that day or shared their toys willingly with one another.  Those little highlights help up realize, you know, this was a tough day, but maybe we are doing some things right. Those little wins can help us to refocus on the long term goal of not raising perfectly behaved children, but kids who are thoughtful and kind.  People who empathize with others and can use reasoning and love to help those around them.

This long winded analogy (and perhaps venting session) was all written to draw the parallels to the market.  We are having a very tough day (six months).  Stock valuations are all over the place, interest rates are pulling bond prices down, inflation is pressuring cash and real estate is experiencing an abrupt cooldown.  In a period of nothing really going right, it is easy to get down on what it is we are doing long term.  We have to refocus on the long term and maybe highlight a win, even if it is a small one that has taken place in the short term.

There are many actions we can take and they are all dependent on your situation.  A common one in this market environment is tax loss harvesting.  The title is overly dramatic in my opinion, but I have yet to come up with a better one. This process realizes losses on investments within a portfolio to cancel out capital gains. In a given year, it can cancel out all of the investment income a household would have experienced and possibly even offset a small amount of ordinary income.

Imagine you have a portfolio that has taxable gain of $50,000.  This gain has caused us to become slightly out of balance but income constraints limit the ability to easily recognize this gain and pay tax on it. Now imagine a six month period like we’ve just experienced- you don’t even have to imagine that hard.  We can review the portfolio and see if there is loss to realize that can help turn that $50,000 gain into a net gain of a couple thousand or even zero.  Now you say, “we never want to sell at a loss. The Intergy team is always saying that.”  True, we don’t, and we “technically” don’t have to.  If the loss is in large cap growth fund A, we can sell it all.  In the same moment, we buy large cap growth fund B that has similar holding and nearly identical risk and return characteristics. You get to then realize the full tax loss on fund A, but since we are now in fund B, we are still in the market participating in growth, dividends and gains.  We get to stay 100% on track with our investment plan while lowing our current year tax liability.

Here’s a quick example. A married household makes $350,000 of income and has $50,000 of capital gains.

By not tax loss harvesting, the market will eventually recover, and their taxable owed for the year will be $88,000.  By finding losses to harvests of $50,000 to offset the gain, we get to save $7,500 in taxes. If we realize $3,000 more in loss that can be used to offset their ordinary income, they save an extra $690. So a potential of $8,190 of less tax owed, all while still participating in the same market recovery that will ultimately occur in any scenario.  As these numbers get larger, the impact also gets more significant. The capital gains rate of 25% instead of 15% would increase the total tax savings to over $13,000. Tax loss harvesting is a way to defer taxes in a taxable account while staying 100% invested and aligned with your financial plan.

              Now sure, we’d love the market just to go up and that no political or economic instability to ever exist.  But much like in parenting, investing has a way of sometimes just punching you while you’re down.  Nothing we can do can cause those long tough days to end, but we can stay true to who we are and focused on the long term goal of the bigger picture.  Not the day to day portfolio numbers, but the real impact of our lives’ work and planning. On days it’s really tough, let’s cling to the one positive thing.  Maybe it’s not paying tax in your taxable account or maybe it’s your kids playing kingly with their Legos together. Either way, there’s good to be found today and tomorrow has a way of taking care of itself.

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