Vanguard Adds Automated Tax-Loss Harvesting to Robos

In a down year in the markets, there’s one solace investors can turn to: Tax-loss harvesting. And now even clients of Vanguard’s low-fee robo-advisory services will have access.

The firm began testing the feature this summer with its hybrid robo-adviser, Vanguard Personal Advisor Services, and plans to add it to its Digital Advisor service in the coming months. Other robo-advisers, including Wealthfront and Betterment, have long offered the feature.

Tax-loss harvesting is the process of selling positions in your portfolio which have declined in value and using the resulting losses to offset taxable long- or short-term capital gains in other assets, lowering the overall amount of taxes owed.

If you still want exposure to the particular sector or industry the sold position provided, you can use the principal remaining after the sale to purchase a similar asset to maintain your risk profile and diversification.

Investors must be careful about exactly what fund or stock they buy back into, however. A purchase of the same or a “substantially identical” security within 30 days after the sale is considered a prohibited “wash sale” under IRS rules, wiping out any tax benefit.

Those complexities have long meant that many investors seek financial advice before attempting to take advantage of tax-loss harvesting. At Adviser, we proactively review all client portfolios for tax efficiency and take advantage of tax-loss opportunities that arise.

Vanguard’s new service automates tax-loss harvesting by using an algorithm to execute trades. Funds are sold at a loss and replaced with Vanguard ETFs that seek to maintain the target asset allocation of the portfolio.

Inasmuch as automated tax-loss harvesting makes the strategy accessible to investors who otherwise wouldn’t get to take part in it, we think it’s a good move on Vanguard’s part.

But remember, there are limits to the benefits. Whether or not tax-loss harvesting is useful for a particular investor at a particular time depends on their tax situation. Algorithmic tax-loss harvesting generally triggers trades when losses pass a certain threshold—regardless of whether the strategy provides much oomph when it comes to reducing your individual tax bill. Investors who are in retirement or otherwise no longer making regular contributions to their portfolio tend to benefit less from tax-loss harvesting, as they have fewer short-term capital gains to offset and a lower overall cost basis on their holdings.

Further, the wash-sale rule mentioned above applies not only to the investor’s portfolio but also to their spouse’s—and if the investor and/or their spouse has assets at more than one brokerage, potential wash sales may not be flagged by the automated harvesting software, obviating the benefits of a sale.

Those are just two of the reasons we recommend talking to an adviser before attempting to take advantage of tax-loss harvesting. A financial adviser who is familiar with your overall tax situation and financial goals can provide valuable help in determining whether tax-loss harvesting is right for you.

Chart of the Week: Crypto Chaos, Not Contagion

 By Jeff DeMaso, Portfolio Manager

The noise from the cryptocurrency space this month has been deafening. FTX, the second-largest exchange, melted down and declared bankruptcy. FTX was led by Sam Bankman-Fried, an unlikely media star who made headlines just months ago by bailing out some failing crypto-related firms while bashing politicians and their suggestions that the crypto industry would benefit from regulatory oversight. The tables turned quickly for Bankman-Fried, FTX and his crypto-trading firm Alameda as well as a host of other crypto companies.

It sounds bad, but for investors who didn’t go overboard or simply ignored the crypto hype, the impact is minimal and self-contained. Cryptocurrencies do not pose the same systemic risk to the traditional banking or financial system as did, say, subprime mortgages in 2007. Less than 2% of the big banks’ “tier one capital” (core assets that fund business activities and are part of the calculation of the banks’ overall financial strength) is in cryptocurrencies.

We estimate that the total value of all cryptocurrencies is equal to just 2% of the U.S. stock market’s value. If all those coins went to zero overnight, it would be a bad day in the market but nothing close to a financial disaster for a diversified investor.

As our chart comparing bitcoin (a proxy for the crypto market) to past market bubbles makes clear, bitcoin is a gamble, not an investment. It could be a home run. It could be a zero. It could be both depending on your timing!

But it’s a speculative asset class at best, and you should size the position accordingly—which means don’t buy more of it than you are willing (and able) to lose.

Podcast: Wrap Up Your Year Right—With These Smart Money Moves

Don’t let the remaining few weeks of 2022 slip away without taking a close look at your financial plan. There are several steps you can take now that will get you well positioned for the new year. In this episode, Portfolio Manager Jeff DeMaso and Manager of Financial Planning Andrew Busa discuss the important considerations on your end-of-year financial checklist, including:

• Taking advantage of tax-loss harvesting
• Updating your portfolio allocation
• Whether to make a backdoor Roth conversion in 2022
• Reviewing your medical coverage, and more

When it comes to your financial plan—and the dreams and goals it’s built to help you achieve—a little maintenance goes a long way. Listen now to learn how end-of-year planning can help you stay on track.

Adviser’s Takeaways

In recent Takeaways, Wealth Adviser Diana Linn shared tips for navigating Medicare’s open enrollment period, while Senior Research Analyst Liz Laprade discussed the continuing fallout from the crypto exchange FTX’s collapse.

We hope you find these episodes engaging and accessible, and please let us know if there are any topics you’d like us to address by sending an email to info@adviserinvestments.com!

About Adviser

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.