Erica Hubbard:

Awesome. We actually have a question now from the live room, and I think I’d like to start by asking Adam for his feedback on it. And then if anyone else, Jim or Larry, wants to add, that’s awesome too. Ching asks, “Larry and Adam have mentioned tax-loss harvesting on several occasions. The question is how can one find compatible funds for tax-loss harvesting?”

Adam Yofan:

Great question. It’s quite easy. A lot of the fund families we use such as Bridgeway or DFA or any of the others, they have very similar funds. I’ll give you a very specific answer. In March of 2020, we tax-loss harvested three or four times on the way down because we have tolerance bands. So, we don’t do it by calendar. We do it if you’re out of tolerance, say within 5%. And of course, in March of 2020, that happened a lot. So, we might sell, for example, the Bridgeway Small-Cap Value, which is a preferred fund of ours. We would sell the Bridgeway Small-Cap Value, we would buy the DFA Small-Cap Value. We had to do it again. We would maybe go into another either DFA tax-advantaged funds because they have some, or we might drop into AQR fund or a Vanguard fund. So, all of the different asset classes we have, there’s no shortage of funds that are so similar that we’re not sacrificing much. Larry?

Larry Swedroe:

Yeah. The only thing I would add is that you have to wait 31 days before you can swap back into the same fund. So, and typically you’re not going to get a big enough move for the market to cause you to rebalance twice or a tax-loss harvest twice in 31 days.

So, we’re typically moving between our two favorite funds, the one that’s most preferred and then we always want to have a second backup that we’re willing to hold for a very long time, because sometimes, much more frequently than people know, markets incur big moves. On average, markets move about 10% in a month, almost once a year. So, what can happen is you sell one fund and buy the other, as you’re harvesting losses, and then the market jumps 10% and you don’t want to sell that and take a short-term capital gain on a big gain like that. You want to make sure the fund that you buy is one you’re willing to hold for a very long time. That’s really important. That’s why we manage these things closely. There’s a small gain, we’ll move back to the preferred fund. If the gain is very large, we’re more likely to sit with the fund that’s a really close substitute.

Jim Lange:

And now Adam, I’m going to ask a question that you probably hate that you get from clients. So how much is this all going to save me in taxes?

Adam Yofan:

Yeah. Great question. And again, I’ll go back to 2020 because it’s fresh in my mind and I’m sure everybody else’s. If you had a million dollars in equity with us, say February 1st, April 1st you had about 700,000, maybe a little less. But we high-harvested all the way down. So, we got you $300,000 in tax deductions at 20%. Call that $60,000 in real savings. And I’ll use that question, Jim, to talk about the ROI, because many people ask about our fees on this. On that million dollars, you would’ve paid us $10,000 that year (1% on a million) right? So, we gave you a 6 x ROI, which to me makes it a no-brainer.