Dear Valued Client,
2008 has proven to be a difficult year given that investment markets have fallen as the economy has slipped into recession. Despite the negative total returns for the stock market this year, capital gains—some of them sizeable—will be distributed from some of the investments in your account to you. It probably goes without saying that paying capital gains taxes on these distributions in a year when account values have fallen does not help with holiday cheer.
Tax On Gains, What Gains?
Of course, the question that likely pops into your head is: with the market suffering losses, how can I possibly be taxed on gains? These gains are triggered by the portfolio managers of your investments having to sell securities in their portfolios at gains. Managers try to garner returns from buying low and selling high. When they do so, gains are realized and taxes must be paid on those gains. Of course, with the markets the way they have been this year, it does not feel like managers could possibly have done a lot of selling at highs. However, some of these securities managers have held for years so—relatively speaking—selling this year was at a higher price than they paid years ago. And, simply by the nature of your investments, these gains are passed on to you—the holder of the investment.
Why Sell In this Market?
Some of the selling this year has been because managers wanted to do so: they wanted to lock in some gains to help returns in this down market or they wanted to reposition their portfolios to take advantage of future market opportunities. However, some of the selling this year, and why these distributions are higher than normal, is because investors have been selling their investments. When investors want out, portfolio managers are forced to sell underlying holdings to amass enough cash to pay to these investors.
Implementing a Tax Strategy
While avoiding taxes is virtually impossible, if you would like to make changes to your portfolio we can come up with a prudent strategy to help minimize these impacts this year and going forward. However, in the midst of these difficult financial conditions, it is important to maintain a well-diversified portfolio like the one we have built for you. You may have questions in the face of these taxable events, and I encourage you to contact me.
Jeff Rose, CFP®
This letter was prepared for Jeff Rose, CFP®.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.