Broker Check

How Tax Efficient is Your Portfolio?

How Tax Efficient is Your Portfolio?

| November 25, 2019

What of the purpose of investing your money? No, this is not a trick question. Of course, it is because you want to make money. The funny thing is there are two elements to investing that is often overlooked or forgotten—fees and taxes. We will leave the topic of fees for another time. I want to focus on taxes.

“Why?” You might be asking.

According to sources: “48% of mutual funds have announced capital gains estimates so far this year!” 1.

You might be thinking…why does that matter to me? I don’t plan to sell anything. The fact is that it doesn’t matter whether you plan to sell anything or not. If you own a mutual fund that realizes capital gains, you receive a capital gains distribution - which is a taxable event.

Mutual funds can wreak havoc on your tax liability if you aren’t careful. Just imagine you bought a mutual fund in August and the fund manager declares a capital gains distribution later in the year. This might be a gain that has been building for years. Even though you just bought the fund, you still pay taxes on the full gain realized from years of increase. Worse, you would pay this even if the value of your investment is less than what you paid for it.

This is how mutual funds work. It sounds awful, but to be fair, it can work to your advantage as well. Managers can carry over capital losses from prior years as well. Every time the mutual fund manager needs to liquidate in order to satisfy sellers of the fund or buy and sell assets for the fund, capital gains and losses are created. It is just how they work.

The problem is not with the structure. There are times that mutual funds make the most sense for a portfolio. The problem is that many investors overlook the tax implications in relation to their overall expected return. Taxes lower total returns. If I make a dollar, but I am taxed fifteen cents, then I really only made eighty-five cents.

 When you begin to look at “total return,” you might be surprised to learn some of your investments are underperforming. Taxes add up. Fees add up. These equate to real dollars. And every dollar counts.

So, what can you do about it? The good news is that you have options. Mutual funds aren’t the only investment vehicle that can help you accomplish your goals. 

Let us X-Ray your portfolio with the use of our Tax Estimator and learn how to make your portfolio tax-smart.


  1. BlackRock 11/11/2019