2021 proved fruitful for the investor but painful at the tax pump. What happened?
The simple answer is that there was not enough of a market downturn in 2021 to trade for losses.
It is this time of year when many investors realize that the purpose of their investing (to make money) was realized. As an advisor I always find it interesting that in our year-end tax planning with investors they seek losses. I frequently remind investors that growing the portfolio is the goal. Conversely, during times when the portfolio does provide losses the question is ‘why are there losses.’ We are fickle investors from time to time. The timing of market cycles is simply out of the control of investors and advisors alike.
In 2021, the momentum of the markets provided the results we all enjoy. In 2019 and 2020, markets provided opportunities to trade through the downturns to protect some of the gains. The tax efficiency of portfolios, with attractive gains, was well received. Okay, it wasn’t even noticed by many until 2022 when the 1099s for 2021 were received - or more aptly stated, when tax preparation was completed.
An important consideration of managing tax efficiency is tied to an investor’s risk tolerance. Understanding one’s risk tolerance helps stomach the volatility of markets during uncertainty. It interestingly feeds into one’s emotions regarding gains and losses in a portfolio, or more accurately losses. I have yet to run into anyone who dislikes gains. They dislike paying taxes on realized gains, but no one is unhappy with seeing their money grow … that I’ve met anyway!
Emotions are an interesting reflector of your values. Take a close look at what is important to you. Is it family? Wealth? Health? Do you see how your values might influence your behavior and your emotions? If wealth is important and your portfolio is correcting due to market volatility it may influence how you feel. How you feel will influence your behavior. Your portfolio should reflect your goals, values, and risk tolerance so that market cycles (ups and downs) align with your life vision. This may allow you to respond over a longer term for your life’s dreams rather than react to the news of the hour.
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