Coach’s Corner

No one likes to hear the word "loss" when discussing their investment portfolio. Many advisors have expressed concerns that prospective clients stop listening as soon as they mention the words "tax loss." How can you explain the concept of tax-loss harvesting to prospective clients in a way that will help them see the benefits?*

It helps to keep your explanation simple by using two hypothetical stocks: ABC and XYZ—both are similar in industry, outlook and liquidity. Neither pays a dividend, and because their primary difference is share price, they tend to move similarly over time.

Now, imagine a tax-aware investor who invests $10,000 at the start of the year to buy 100 shares of ABC stock. They notice at midyear that both ABC and XYZ have experienced comparable price drops. Upon selling the original positions in ABC, the investor captured a $3,000 tax loss and then immediately reinvested the proceeds in XYZ stock.

At year-end, the investor's shares of XYZ rebounded and are valued at $12,500—a 25% pretax return. They can now use the $3,000 tax loss from selling ABC shares to offset gains elsewhere in their portfolio.

The After-Tax Advisor^® helps provide perspective when it comes to helping clients think of "tax losses" as a discount from the IRS that can offset the impact of capital gains taxes.

Bottom line: Tax-loss harvesting can help turn client losses into wins when framed and used properly.