Are You Farming Your Portfolio Correctly?

Losses can be profitable … if you know how to “harvest” those losses to maximum effect. Most investors don’t do so correctly, and Vanguard, among others, is pushing an automated strategy to correct for it. I think caution is warranted.

What got me thinking about this was an article Vanguard recently posted touting the benefits of automated tax-loss harvesting. I applaud Vanguard for turning to a foundational component of investment management (using losses to offset gains) during a period of volatility.

But tax-loss harvesting isn’t the slam dunk it is often held out be.

How To Harvest Losses

Tax-loss harvesting involves selling a security at a loss and buying a substantially similar holding in its place—so you might swap, say, Total Stock Market Index (VTSAX) for 500 Index (VFIAX). You get the tax benefits of booking a loss and get to stay invested in the market. It’s a win-win, right?

Not so fast.