The effects of taxes on an investor’s portfolio over the long term are substantial and fairly predictable. Given today’s low-return environment, the productive value of each dollar invested must be considered. Within the context of a well-diversified portfolio, even the savviest of investors will suffer losses in core holdings from time to time. And as we near the end of fiscal year 2011, investors should consider how to make the most efficient use of those losses through tax-loss harvesting.

Investors can always add value by booking or harvesting losses but may find that some moments are more opportune than others. These can include instances of portfolio rebalancing or perhaps moving from an active to a passive strategy providing similar exposure. In general, tax-loss harvesting can be used to capitalize on opportunities that your existing exposures have provided in the short run.

However, tax-avoidance strategies should not dominate your overall investing approach. We recommend that investors build out sound long-term portfolio allocations and use tax-loss harvesting strategies to add incremental value.

The Mechanics 

Let’s consider scenario one. You’ve been holding fund XYZ for some time, and to your dismay, the market hasn’t gone your way. In the first scenario, you decide to hold on for the ride, and the market comes back so that you’re even on the position. You haven’t lost any money, and you don’t have a taxable gain to report.In scenario two…to continue reading go to Tax-Loss Harvesting