As markets rise and fall, investment portfolios naturally drift away from their original allocation. That is why many investors use portfolio rebalancing to help keep their investments aligned with their long-term financial goals. While rebalancing can be an important part of maintaining a disciplined investment strategy, it can also create tax implications that should not be overlooked.
Understanding how capital gains and losses work can help you make more informed decisions while preserving more of your wealth.
What Are Capital Gains and Losses?
A capital gain occurs when you sell an investment for more than you originally paid for it. A capital loss occurs when you sell an investment for less than its purchase price.
How long you have owned an investment also matters.
- Short-term capital gains generally apply to investments held for one year or less and are taxed as ordinary income.
- Long-term capital gains generally apply to investments held for more than one year and often qualify for more favorable tax rates.
Knowing the difference can have a meaningful impact on your overall tax picture.
Rebalancing Is More Than Moving Investments
Portfolio rebalancing helps maintain the investment strategy that was designed to support your financial goals. Over time, strong market performance may cause one asset class to become a much larger portion of your portfolio than originally intended.
Bringing those investments back into balance may require selling appreciated assets, which could trigger capital gains taxes.
That is why rebalancing should be viewed through both an investment and tax planning lens.
Looking at the Bigger Picture
Investment decisions should not be made based solely on taxes, but taxes should never be ignored.
A coordinated strategy may include:
- Reviewing investments with significant unrealized gains.
- Using capital losses to help offset gains when appropriate.
- Evaluating which accounts are best suited for certain investments.
- Coordinating investment decisions with your overall retirement income and tax strategy.
Taking a thoughtful approach can help you keep more of your investment returns while staying focused on your long-term objectives.
A Comprehensive Financial Strategy
Capital gains and losses are only one component of a comprehensive financial plan, but they can influence retirement income, charitable giving, estate planning, and the legacy you hope to leave.
When investment management, tax planning, and financial planning work together, you are often better positioned to make informed decisions that support both your current lifestyle and your future goals.
Planning Ahead
Markets will continue to change, and your portfolio will continue to evolve. Regularly reviewing your investments and understanding the tax implications of portfolio changes can help you remain disciplined and avoid unexpected surprises.
A proactive review today can help ensure your investment strategy remains aligned with your financial goals while helping you preserve more of the wealth you have worked so hard to build.
Managing investments is about more than earning returns. It is about making informed decisions that support your long-term financial goals. If you would like a second opinion on your portfolio and tax strategy, we would be happy to show you how a coordinated financial plan can help you keep more of what you have earned.
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BCA is a Securities and Exchange Commission registered investment advisor. The advisory services of BCA Private Wealth are not made available in any jurisdiction in which BCA Private Wealth is not registered or is otherwise exempt from registration.
Please review BCA Private Wealth Disclosure Brochure for a complete explanation of fees. Investing involves risks. Investments are not guaranteed and may lose value.
This material is prepared by BCA Private Wealth for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation or any particular security, strategy, or investment product.
No representation is being made that any account will or is likely to achieve future profits or losses similar to those shown. You should not assume that investment decisions we make in the future will be profitable or equal the investment performance of the past. Past performance does not indicate future results.
Sources
Investor.gov: Asset Allocation, Diversification, and Rebalancing
Investor.gov: Rebalancing
IRS Publication 550: Investment Income and Expenses
