Broker Check

Tax Loss Harvesting in a Down Market

December 06, 2022

              After three very strong years for asset prices in 2019, 2020 and 2021, 2022 has been a bad year for investors. Not only has the S&P 500 Total Return Index dropped almost fifteen percent through December 5th, but the Bloomberg US Aggregate Bond Index (“Agg”) dropped a little over twelve percent. At their lowest points, the S&P 500 Total Return Index closed about 24.0% lower on October 12th, while the Agg closed down 16.8% on October 24th. Gold has held up relatively well compared to stocks and bonds. It has dropped 3.3% through December 5th after falling 11.2% through September 26th. The S&P 500 energy sector is up over fifty percent, while every other GICS sector is down year-to-date. Some of the prior bull market leaders have fallen twenty-five percent or more year-to-date.

               Fortunately, there is a positive aspect to the drop in asset prices for taxable investors. NPP has offset previously realized gains with losses where possible.  In addition, 2022 has been an unusual year. The rapid rise in interest rates has allowed NPP to generate tax losses in bonds and fixed income funds, a rare occurrence. NPP has been able to sell these investments and reinvest them in securities with similar characteristics. This has offset already realized gains in equities and allowed us to be nimbler in taxable portfolios. As long-time NPP clients know, we are not traders. We hold the average stock between four to five years in client accounts. However, over the course of the year, we found it prudent to trim some of our positions and in the process realize gains.  The drop in equity prices in 2022 has not reversed the gains our clients have in most stocks. NPP has also used a couple equity positions where there were losses to move into positions that we thought had similar or better risk and return potential. Nevertheless, most of the tax loss harvesting occurred in the fixed income portion of our portfolios. This isn’t to say that we want to experience more years like 2022. However, the silver lining is that the downside volatility allowed NPP to generate tax savings for clients and to reposition the portfolios more tax efficiently.

          If you have any questions on this topic or just want to chat about your portfolio, please reach out to us.