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Why investors should be fearless in managing their portfolios at year-end

6 Minute Read

It is often said that investing is a bit of a science and a bit of an art. This applies to asset allocation, stock selection and managing risk. But the truth is, most investors often overlook one of the key elements in making sure their portfolio is running efficiently. That element is taxes.

Can a focus on taxes really impact a portfolio? The short answer is yes, it can have a large impact on the portfolio and the entire investment experience. Tax management is a high priority for high-net-worth portfolios, improving the overall return. After the banner years of market performance we have recently had, it’s especially important.

Asset allocation is the strategy devised through back testing historical market returns and determining what mix of asset classes one should be invested in. Allocation should be proactively managed, but many investors today, when comparing their target allocation to their actual allocation, will likely find that their equities are exceeding target.

Here are three ways to enhance portfolio efficiency.

Don’t Be Fearful of Booking Gains

Investors are often overly cautious when it comes to booking capital gains because they are concerned about the tax liability.  Keep in mind that when you book a gain, you make money (which is great) and this has been a phenomenal market to make money in.

We have had three incredibly strong years in the market; investors are surrounded by gains. For 2019, 2020 and 2021, portfolios have been in positive territory. In fact, through October 31, 2021, the S&P 500 has returned 24% year to date. In 2020, it returned 18.4%. Prior to the pandemic, the 2019 returns were also in double digit range of 31.49%. And even though we had a large pullback in March of 2020, most investors rode it through – and some even bought.

Many portfolios are stuck with embedded gains and probably with an asset allocation that is off target. From a technical perspective, investors need to trim positions and reallocate. If possible, investors should look for losses in their portfolio to offset their gains. If that is not possible, booking a gain might be necessary.

Investors really need to work with their tax professional to determine how much gain they are willing to absorb. Depending on tax brackets as well as any carryforward losses from previous years, there might be opportunities to mitigate the hit. Alternatively, investors can just simply book the gain, and chalk it up as a win.

Have a Mandate

Further, investors should consider their Investment Policy Statement (IPS) as a useful tool in tax efficiency. An IPS is the portfolio mandate for the overarching strategy. Within that mandate, it is helpful to have an agreed upon amount of capital gains the portfolio is willing to recognize in a given year. Depending on the size of the portfolio, this could range from a small dollar amount to a large one. Your tax professional should be able to help.

Use Donor Advised Funds When Appropriate

But sometimes recognizing gain is anathema to investors, in which case it might make sense to talk to your tax professional about other options. One option that has grown in popularity is the use of donor advised funds (DAF).

A DAF is a giving account that an investor can open an account under the umbrella of a public charity. It allows an investor to have a charitable fund without all the administration of a foundation.

The investor can transfer appreciated securities they have held at least a year to the fund, resulting in a two-part tax benefit. First, they get a charitable deduction when they donate the shares to the donor advised fund. Second, since the DAF will sell the holdings upon receipt to create a diversified portfolio, the donor avoids having to recognize that capital gain. The donor then can make grants from the fund in any year.

Investors should discuss this tool with a tax professional as it’s best-suited for investors who itemize their deductions. Due to the Tax Cuts and Jobs Act of 2017 (TCJA), quite a few taxpayers no longer itemize and it would be pointless to fund a DAF and then not reap the benefit.

Stick to Your Knitting

The market has had a great run, but failing to work through the tax efficiency of your portfolio will impact the overall efficiency and performance of your investments. Given that, investors should partner with their tax professional to maintain the balance of their target asset allocation. Setting a limit on the amount of capital gains that are booked (even in the absence of offsetting losses), and utilizing tools like donor advised funds, investors can ensure that their portfolio is well-positioned to flourish and grow.


This article was written by Megan Gorman from Forbes and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to


The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.


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