Broker Check


September 06, 2023

1. Tax-Loss Harvesting

Tax-loss harvesting is a strategic investment technique that minimizes tax liability and enhances overall portfolio returns in non-retirement accounts. This method involves selling investments that have experienced losses to offset capital gains and reduce the tax burden. By utilizing this strategy, investors can achieve two key goals simultaneously: optimizing their portfolio's performance and minimizing the impact of taxes.

Here's how Tax-Loss Harvesting works: When an investment experiences a decline in value, investors can choose to sell those assets at a loss. This loss is then used to offset capital gains from other investments in the same account. If an investor's capital losses exceed capital gains, the excess losses can offset up to $3,000 of ordinary income. Any remaining losses can be carried forward to offset gains or income in future tax years.

Example: Suppose an investor has two investments—Investment A and Investment B. Investment A has gained $5,000 in value, while Investment B has lost $3,000. Without Tax-Loss Harvesting, the investor would owe taxes on the $5,000 gain from Investment A. However, by selling Investment B at a loss, the investor can offset the gains from Investment A by $3,000, reducing the taxable gain to just $2,000. This results in lower tax liability.

By effectively implementing Tax-Loss Harvesting, investors can achieve better after-tax returns. This strategy is beneficial in volatile markets, where investment values fluctuate frequently. However, it's essential to follow tax regulations and avoid the "wash-sale" rule, which prohibits repurchasing the same or a substantially identical investment within 30 days of selling it at a loss.

Why do I like this strategy? It allows the investor to turn market losses into something positive!

2. Mortgage Dividend Strategy

This strategy is best described with an example.

Assume you start with $100,000 in your taxable brokerage account and contribute an additional $10,000 each year. Over the ten years, with a 12% average annual return. By the end of 10 years, your portfolio could have grown to approximately $407,953.

Now, let's consider your mortgage. Assume you have a 30-year fixed-rate mortgage of $300,000 with an interest rate of 4%. Your monthly mortgage payment would be around $1,432.

After ten years, your portfolio's dividend income might be around 2.5% of the portfolio value, based on historical dividend yields. This would translate to an annual dividend income of approximately $10,199 ($407,953 * 0.025).

You decide to use the dividend income to pay your mortgage. Instead of reinvesting all dividends, you allocate the income towards your monthly mortgage payment. This extra payment would reduce the mortgage principal faster and save you on interest costs over time.

It's important to consider potential variations in the market and dividend yields, as they can impact your actual portfolio growth and dividend income. Also, remember to account for taxes on dividend income and potential capital gains taxes when you sell investments to pay the mortgage.

Why do I like this strategy? This strategy allows you to build up investment savings and preserve your portfolio while using dividend income to pay your mortgage faster. The advantage of doing this is that you can pay down your mortgage without adversely impacting your portfolio by taking systematic withdrawals. Some may prefer to pay off their mortgage as fast as possible, but this strategy can be seen as a way to achieve the best of both worlds. 

In summary, building up investment savings in a taxable brokerage account and using dividend income to pay your mortgage is a strategy that, with prudent planning, can lead to accelerated mortgage payoff and potential interest savings. However, it requires careful monitoring, consideration of market fluctuations, and tax implications. Always consult with financial advisors before making significant financial decisions.

3. Dollar-Cost Averaging

Dollar-cost averaging (DCA) is an investment strategy that involves consistently investing a fixed amount of money at regular intervals, regardless of market conditions. This approach is designed to mitigate the impact of market volatility by spreading out the purchase of investments over time. By doing so, investors can reduce the risk of making significant investments at unfavorable market peaks and benefit from accumulating assets at varying prices.

For example, consider an investor who invests $500 in a particular stock every month. In the first month, the stock price is $50 per share, so the investor purchases ten shares. In the second month, the stock price drops to $40 per share, allowing the investor to acquire 12.5 shares. In the third month, the price rose to $45 per share, leading to the purchase of approximately 11.1 shares. Over time, the investor accumulates shares at different prices, lowering the average cost per share.

Dollar-cost averaging can be an effective strategy for several reasons. First, it eliminates the need to predict market highs and lows, which is challenging even for experienced investors. Second, it reduces the impact of market volatility on your portfolio. When prices are high, you buy fewer shares; when prices are low, you buy more shares, effectively lowering your average cost. Third, it encourages disciplined investing by consistently contributing to your portfolio despite short-term market fluctuations.

However, it's important to note that while dollar-cost averaging can provide benefits, it doesn't guarantee profits or protect against all losses. It's also essential to consider transaction costs and fees associated with regular investments.

Why do I like this strategy? Consistency is the key to success in almost any venture. Consistent investing reduces timing risk and gives you the advantage of buying additional shares when markets are low. Most investors do not have $100,000+ upfront, making this strategy more suitable for new investors looking to invest a fixed dollar amount regularly. 

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 
Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit or protect against loss in declining markets.
No strategy assures success or protects against loss.