How Does Tax-Loss Harvesting Work?

No one invests with the express purpose of taking a loss. But for well-diversified investors—such as those with passive allocations to a chosen benchmark—losses are inevitable. Even in periods when the broad market indexes show a gain, many individual stocks experience a drop.

What separates many passive investors from the pack is their ability to harvest those losses to their advantage using a tactic called tax-loss harvesting. This is a key benefit of direct indexing, and this short video explains how it works—and why it’s so central to Parametric’s Custom Core^® portfolios.

There is no assurance that a separately managed account (SMA) will achieve its investment objective. SMAs are subject to market risk, which is the possibility that the market values of the securities in an account will decline and that the value of the securities may therefore be less than what you paid for them. Market values can change daily due to economic and other events (such as natural disasters, health crises, terrorism, conflicts, and social unrest) that affect markets, countries, companies, or governments. It is difficult to predict the timing, duration, and potential adverse effects (such as portfolio liquidity) of events. Accordingly, you can lose money investing in an SMA.

Investment strategies that seek to enhance after-tax performance may be unable to fully realize strategic gains or harvest losses due to various factors. Market conditions may limit the ability to generate tax losses. Tax-loss harvesting involves the risks that the new investment could perform worse than the original investment and that transaction costs could offset the tax benefit. Also, a tax-managed strategy may cause a client portfolio to hold a security in order to achieve more favorable tax treatment or to sell a security in order to create tax losses. Prospective investors should consult with a tax or legal advisor before making any investment decision.