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Tax Loss Harvest Your Bonds

Tax Loss Harvest Your Bonds

Tax Loss Harvest Your Bonds

As of September 30, 2022, the current year is the worst start for bonds since 1926 as the overall U.S. bond market is down nearly 15%. While this is disappointing, it also creates a unique, once in a generation, tax loss harvesting opportunity. This strategy can reduce current and future taxes. Tax loss harvesting is […]

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Define the Problem: the purchasing power on your cash is being destroyed

Define the Problem: Financial Repression

Do you have high, excess cash in your business cash account earning close to 0% interest while inflation is recently greater than 6%? Do you find traditional alternatives such as CDs or money market accounts similarly unattractive given interest rates 1% to 2% and long commitment periods greater than 1 year? Do you understand your […]

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Inflation: Portfolios are Not Positioned for this Environment

Inflation: Secular Analysis

Which investment solutions that you own will perform well in an inflationary environment? At Essential Partners, we build portfolios for all types of economic environments, including rising inflation. Despite inflation being littered across the news and social media daily, the past 40 years have conditioned individual and institutional investors to not worry about inflation. This […]

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Core Four Economic Environments: Portfolios Lack True Diversification

Core Four Economic Environments: Portfolios Lack True Diversification

What is your compass to traverse global financial markets and how does that translate to your portfolio? Do you own investments that perform well in all four economic environments? There are two core marcroeconomic variables that drive financial market changes; GROWTH and INFLATION. Consider a simple micro example as it relates to equities/stocks: Sales growth […]

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Business Sale or Liquidity Event Transitions

Business Sale or Liquidity Event Transitions

Have you considered the mindset and thought process differences between operating a business for personal cash flow vs. earning an investment return? Have you performed a comprehensive financial forecast for you and your family considering your financial situation post-sale? Do you understand your investment options and a range of investment returns? Is your nest egg […]

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Gold: Portfolio Insurance and Purchasing Power Protection

Gold: Portfolio Insurance and Purchasing Power Protection

Do you know that in 2 of the last 5 decades, stocks produced negative real returns vs. cash? What assets do you own that perform best in the decades when stocks perform worst? Do you own any assets that will perform well when inflation is high but economic growth is low?   “Gold is money, […]

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Tax Loss Harvesting

Tax Loss Harvesting

Investment portfolios that are balanced to various economic and inflationary environments will at times contain certain holdings with unrealized capital losses. Tax loss harvesting is a tactical portfolio strategy to sell these holdings to capture the capital losses, which can then be used to offset the capital gains realized elsewhere in the portfolio. Further, the […]

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Aligned Incentives

Aligned Incentives

Do you know the true cost of your investment holdings? Does your salesperson/broker receive commissions? Does your salesperson’s firm capture any special distribution or marketing fees at your expense? Does your salesperson have sufficient training? Does your “robo-advisor” force you to hold too much cash? Warren Buffett’s partner Charlie Munger is famously outspoken regarding the […]

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Investment Policy Statement: Institutional Discipline for all Client Partners

Investment Policy Statement: Institutional Discipline

Do you have a disciplined process and documentation for your investment strategy? Does your salesperson/broker provide an Investment Policy Statement to set clear investment objectives, guidelines, and expectations? “Successful investment takes time, discipline and patience.” – Warren Buffett In our experience, no serious pension or endowment would invest without first creating an Investment Policy Statement.  […]

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How can we help? We are not constrained by Wall Street.

We Are Not Constrained

Will your salesperson/financial advisor analyze investments they do not bring to you where they cannot earn fees or commissions? Has your salesperson/financial advisor ever thought your investment idea was a great idea if it meant you would be pulling the money from their control and fee structure? Has your investment advisor ever analyzed a company’s […]

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As of September 30, 2022, the current year is the worst start for bonds since 1926 as the overall U.S. bond market is down nearly 15%. While this is disappointing, it also creates a unique, once in a generation, tax loss harvesting opportunity. This strategy can reduce current and future taxes.

Tax loss harvesting is a tactical portfolio strategy to sell holdings to capture the capital losses, which can then be used to offset current or future capital gains. Further, the losses can be used to offset ordinary income up to $3,000 if there is an overall capital loss for the year.

Once the holding is sold for a loss, the money can then be reinvested in a holding that has similar overall characteristics but is not “substantially identical.” A substantially identical holding would violate the wash sale rule which states that if you sell a holding for a loss and buy the same or substantially identical holding within 30 days before or after the sale, the loss is typically disallowed for current tax purposes.

While stocks, ETFs and mutual funds can be tax loss harvested in the current year, bonds present a compelling opportunity given their characteristics.

Consider the following example:

  • The bond was purchased at $120 but has declined to $100
  • The bond is sold, recognizing a $20 loss for tax purposes
  • A new bond is purchased at $100, which is equal to the par value of $100 at maturity
  • If you hold to maturity, you never pay capital gains on this bond but were able to recognize a capital loss on your former bond to offset current or future capital gains
  • If the example above was executed on a $10 million bond portfolio, the result would be over $1.6 million of future capital gains tax-free which is up to a $600,000 cash tax benefit in high tax states

The example above also applies to bond funds or a combination of individual bonds and bond funds. At Essential Partners, we manage each unique situation to effectively mitigate taxes over the long-term using the custom tools at our disposal.

In “normal” times, Essential Partners utilizes a leading technology platform for monitoring and trading client partners’ accounts to actively tax loss harvest. For instance, the technology application results in automated, proactive monitoring and recommendations for tax loss harvesting opportunities. The recommendations are provided to Essential Partners daily, who then applies a human, analytical lens to ensure the action is warranted given each client partner’s unique situation. This technology is used in coordination with Essential Partner’s investment allocations to designate alternative holdings to purchase as tax loss harvesting is executed.

Essential Partners is an investment advisor registered with the SEC.
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