By Lauren Sigman and Sean Powers
“In this world nothing can be said to be certain, except death and taxes.”
Depending on who you are talking to, and the size of their expected tax bill, these words from Ben Franklin leave some with a hard time deciding which one is worse.
Thinking long term when it comes to investments is generally a good idea, especially when it comes to maximizing after-tax returns. We believe that ”joy-sticking your portfolio” (an official saying of our CIO Stuart Katz), or moving your portfolio in and out of markets, is detrimental to your long-term financial health. Particularly with higher taxes on the horizon.
However, it is also important not to let taxes be the sole driver behind holding a position. There is a natural tension between managing risk and realizing a tax bill. However, just because you do not realize taxes, it does not mean your tax liability magically disappears. It is merely deferred.
In addition, those gains are not necessarily “safe”, particularly if they are locked up in volatile securities. It is important to compare the size of the capital gain to the volatility of the securities that you own. One downdraft could easily erase most of your gain, sometimes overnight! On the other hand, you could also be leaving opportunity on the table by not making a change.
Large gains can paralyze investors into inaction. Whether it is a concentrated stock position, an inherited portfolio, and/or the low basis shares of a long-term hold, it is important not to hold a position just for the sake of avoiding taxes. It is critical to compare the opportunity cost of taking the tax hit versus the opportunity gained on the other side of making a change.
At Robertson Stephens we have a process to unpack these decisions. It is all about risk versus reward. Ask yourself the following questions:
- Do you hold a stock in your portfolio with a large capital gain? Is that stock a significant share of your liquid assets?
- Are you interested in making a change in a portfolio that has large unrealized capital gains?
- Are you interested in making a move from passive to active portfolio management now that you are getting ready to retire?
At this moment, and over the coming months, we anticipate that this topic will become more important with the Biden tax plan unveiling. Contact us today to discuss further.
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Questions
How Does Robertson Stephens Manage Investments?
We build personalized portfolios based on your specific situation, including your risk tolerance, tax sensitivity, liquidity needs, and values. We use a disciplined approach that balances long-term growth strategies with short-term opportunities when they make sense. We continuously monitor your investments and adjust as needed, drawing on institutional-quality research and due diligence.
What Is Robertson Stephens’ Investment Philosophy?
Our investment philosophy focuses on protecting and growing your wealth through a disciplined, diversified approach that’s tailored to your specific situation — your risk tolerance, tax needs, and values. We blend long-term strategic investing with tactical opportunities when they make sense, using both public and private markets where appropriate.
Is Robertson Stephens Fee-Only, Fee-Based, or Commission-Based?
We work on a fee-based model, which means our compensation is tied to the assets we manage for you rather than commissions on products we sell. This aligns our interests with yours — when your portfolio grows, we do better too. The specific fee structure varies by client based on your situation and needs.
