Tax Questions

[Fisher]

In addition to having diversification of your taxable, deferred-tax, and non-taxable accounts you should implement some tax strategies.

One strategy that is commonly used by financial advisors for their clients, or more sophisticated individuals is called "Tax Loss Harvesting". While rebalancing your portfolio between different asset classes you can harvest the tax loss of the portion of your portfolio that is performing poorly. An example is that you hold a diversified U.S. small-cap mutual fund XYZ that after six months is down 15%. You sell your XYZ fund to lock in the deductable tax loss and then purchase a relatively similar U.S. small-cap mutual fund from perhaps a different mutual fund family, but one that meets the asset class of the mutual fund that you sold to lock in the tax loss.

While rebalancing you can use this method and reduce your transaction costs by rebalancing while purchasing the new, but very similar mutual fund of that asset class.