be considerably better than the other at
tax-efficiently managing its holdings on
your behalf.
It’s easy for fund managers and investors
alike to ignore this important detail,
because not all dollars lost to a fund’s tax
inefficiencies show up in its published
returns. Some of them may show up as
annual capital gains distributed to fund
shareholders (i.e., you), who must pay
taxes on the gains at their individual tax
rate – whether or not the share value of the
fund itself has gone up, down or sideways.
In his article, “After a Bad Year for Funds
Prepare for a Tax Hit,” Wall Street Journal
columnist Jason Zweig reports this particular “gotcha.” When a fund that has dramatically plummeted in value is forced to
sell highly appreciated holdings to meet
shareholder redemptions, all shareholders
must then share the burden of paying taxes
on those realized gains, even if the fund
value itself has declined. Ouch.
To minimize such scenarios and otherwise
soften the blow of your fund’s taxable trading activities, it’s worth seeking out managers who exhibit best tax-management
practices, especially for funds that you plan
to hold in your taxable accounts. Following
are some traits to seek.
Avoid actively trading funds in favor
of evidence-based investing. Just as
you should minimize your own hyperactive
trading, your fund managers should do the
same by heeding the academic evidence on
how markets operate. Most managers try
to “beat” the market by actively picking
individual stocks or forecasting when to be
in or out of it. Instead, look for mangers
who are seeking to build lasting value by
patiently participating in the long-term
growth expected from the return factors
being targeted. Evidence-based investing is
not only a more sensible overall approach,
it also is typically more tax-efficient.
Avoid hyperactive shareholders. As
implied above, it’s best to invest in funds in
which your fellow shareholders are less
likely to panic-sell during bear markets.
Undisciplined investors may force a fund
manager to liquidate appreciated holdings
to fund their flight, incurring distributed
capital gains that you, as a fellow shareholder, must shoulder along with them.
Investors who form personal investment
plans, adopt an evidence-based strategy
and choose like-minded fund managers to
help them implement their plans should be
better at retaining their resolve, even during volatile markets. This was evidenced
during the 2007–2008 financial crisis;
even as countless investors were fleeing
the frightening markets to sit on the sidelines, evidence-based fund manager
Dimensional Fund Advisors enjoyed
investment inflows – people buying into
their funds – throughout.
Seek out tax-managed funds for
your taxable accounts. Some fund
families (including Dimensional) offer versions of their evidence-based funds that are
deliberately tilted toward favoring taxfriendly trading over maximizing gross
returns with no regard to the taxable
consequences. Tax-friendly trading can
include practices such as avoiding incurring short-term (more costly) capital gains,
and more aggressively realizing available
capital losses to offset gains. For additional
insights, we recommend reading [financial
author/BAM ALLIANCE Director of
Research] Larry Swedroe’s article, “Start
Paying Attention To Tax Efficiency,”
which describes a study that quantifies
some of the costs and benefits of taxefficient management.
Next Up: Tax-Efficient
Portfolios, Tax-Efficient
Teamwork
Beyond the best practices you can adopt
within your personal investing and fund
manager selection, there are a few more
strategies for ensuring excellence in your
year-round tax-wise wealth practices. We’ll
cover these in the second half of our taxwise investment series. In the meantime,
let us know today if we can assist you with
your own tax-wise investing.
20 NORTH TEXAS DENTISTRY | www.northtexasdentistry.com
John Garvey, Jr., CPA/PFS
Chief Executive Officer
Joining Bland Garvey, PC in 1991, John is
the firm’s Managing Partner and shareholder in charge of tax and consulting service engagement. As investment advisor he
also managers our affiliated Bland Garvey
Wealth Advisors, LLC. He has been instrumental within our affiliated firms’ mission to
provide integrated accounting and wealth
management partnerships for each of
our clients.
His decades-long background in general
accounting and his hands-on expertise in various facets of dental practice and business
planning have provided an excellent base
from which to develop Bland Garvey, as well
as to assist clients with their own business
and practice wealth-related planning.
John is a family man, an active local commun ] HY[X