If you have a taxable investment account and own mutual funds, you may have experienced paying taxes on “capital gains distributions” even though you never sold anything. This can happen even if the fund is down. You see, mutual funds are required by law to pass realized gains through to fund shareholders—there are no individual tax considerations. If there is high trading activity in the fund, or if many other investors redeem fund shares, you can wind up with a big tax bill even if you took no action. Now, if you are just getting started investing and building your wealth, this negative is likely offset by mutual funds’ instant diversification. But if your portfolio tops $500,000, capital gains distributions can be a significant drawback.
Fisher Investments’ private client portfolios are separately managed accounts with an emphasis on owning individual securities (and, occasionally, exchange-traded funds). This adds significant tax flexibility compared to a mutual fund. Also, having individual shares in non-retirement accounts gives us the ability to better manage clients’ potential tax exposure near the end of each calendar year via tax-loss harvesting, something a mutual fund owner simply cannot do.
Our clients’ accounts are held in their own name at widely recognizable, nationwide custodians (brokerage firms). These firms are responsible for tax reporting if and when applicable for your account. This includes documenting your withdrawals from qualified retirement accounts in addition to dividend, income, and realized gain and loss reporting in non-tax advantaged accounts.
While we do believe taxes should not dictate strategy, they are an important consideration. Tactically, our top-down portfolio management process aims to identify longer-term trends—those developing over the next 12-24 months. We aren’t looking to flip in and out of positions frequently, which could generate both increased costs and higher taxes.
The contents of this document should not be construed as tax advice. Please contact your tax professional.