Should You Harvest a Loss in Your Bond Fund or ETF?
With bond performance this bad, it could be a good time to turn a bad situation into a power move. There’s something to be said for the flexibility it could give you with your portfolio later this year.
Like most things in 2022, the world of investing has been turned upside down.
For decades fixed income assets (bonds) have acted as a hedge to stocks. In times of uncertainty, when investors fled stocks, they would seek refuge in the safety of bonds. Thus, a portfolio diversified between the two asset classes has traditionally cushioned drawdowns and smoothed out returns.
Enter the year 2022 (cue the music). The first quarter of this year saw a sizable pullback in stocks, with the Nasdaq 100 plunging by as much as 21%, but instead of acting as a hedge, bonds declined as well. In less than a year the Bloomberg Aggregate Bond Index fell 9.3% from its high.* Fixed income just had its worst quarter since 1973, according to The Wall Street Journal.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Make the Most Out of a Bad Bond Situation
Instead of trying to make heads or tails of this situation and figure out whether bonds are undervalued or overvalued, why not just look at it from a tax-efficiency angle? In a taxable account, you might have the opportunity to harvest a loss in a bond fund or ETF quite early in the year, leaving you the next nine months to harvest a winner to offset it.
Perhaps, come December, you own a stock that has gone on a prolific run and you feel is overvalued. Normally, you might hesitate to sell and realize a taxable gain, but having that loss to offset it gives you flexibility. If you are not fortunate enough to book a gain later in the year, you can claim up to a $3,000 loss to offset other income on your tax return. Any amount over that can be carried forward to subsequent years. But keep reading, as there is another key to execution here.
Don’t Bail Out of Bonds Entirely
What could make 2022 more tragic than it already is? If you sold your bond fund, only to watch it rise in price the rest of the year. In such a case, you might have trouble facing yourself in the mirror. For that reason, investors executing this strategy should consider laterally transitioning the fixed income proceeds into another bond fund or ETF. That move will keep your bond exposure in the portfolio while still having realized the loss. Just be sure that when switching between products, they are dissimilar enough to avoid a “wash sale.”
A wash sale occurs when you sell a security at a loss, then buy back the same or a substantially similar security within 30 days. There is no penalty for doing so other than the inability to claim the loss. In this case, to avoid being tripped up by the wash sale rule, after selling your losing bond fund you could switch to a product with slightly different duration or credit quality and achieve similar results. Consult a tax professional or reference IRS Publication 550 to be sure your loss is not disallowed.
The Bottom Line
2022 has already been a wild ride, and we’re just getting started. But in volatile times one often finds opportunity. Harvesting a loss won’t make the world right, but it might be a small victory for the tax efficiency of your portfolio.
* Per iShares Aggregate Bond Market ETF 8/4/2021 - 4/5/2022 and QQQ 1/3/2022 - 3/14/2022
Disclaimer
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax adviser. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Disclaimer
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Securities and advisory services offered through LPL Financial, a registered investment adviser. Member FINRA/SIPC.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Brian Murphy is a Market Strategist and Investment Manager at Frazier Investment Management in Southern Rhode Island. Before joining the Frazier team, he served in the U.S. Navy for 11 years as a carrier jet pilot. Brian has experience managing several different strategies and products, including equity, fixed income, long/short portfolios and options. He believes that managing risk is the key to successful outcomes and works with clients nationwide to achieve their investing goals.
-
Is a Phased Retirement Right for You?
Want to keep working, just not as hard? A phased retirement may just be the answer.
By Kimberly Lankford Published
-
Four Tips to Make Your Sales Presentation a Winner
Being prepared and not being boring can go a long way toward persuading a potential customer to buy into what you’re offering.
By H. Dennis Beaver, Esq. Published
-
Four Tips to Make Your Sales Presentation a Winner
Being prepared and not being boring can go a long way toward persuading a potential customer to buy into what you’re offering.
By H. Dennis Beaver, Esq. Published
-
Pros and Cons of Waiting Until 70 to Claim Social Security
Waiting until 70 to file for Social Security benefits comes with a higher check, but there could be financial consequences to consider for you and your family.
By Patrick M. Simasko, J.D. Published
-
Now Could Be Time for Private Investors to Make Their Mark
The venture capital crunch may be easing, but it isn't over yet. That means there could be direct investment opportunities for private deal investors.
By Thomas Ruggie, ChFC®, CFP® Published
-
How to Stop Boredom From Ruining Your Happy Retirement
Retirees who explore new interests and have an active social life are more likely to find joy — and even greatness — in the newfound freedom of retirement.
By Richard P. Himmer, PhD Published
-
The Life-or-Death Answers We Owe Our Loved Ones
How our life ends isn’t always up to us, but that question too often must be answered by loved ones and health care workers who don’t know what we would want.
By Joel Theisen, RN Published
-
Hot Tips for Home Buyers and Sellers Right Now
Real estate looks to be especially hopping this spring, thanks to pent-up demand and buyers adjusting to higher mortgage rates. Here’s how you can prepare.
By Pam Krueger Published
-
Is 100 the New 70?
Eating well, exercising, getting plenty of sleep and managing chronic stress can help make you a SuperAger. Funding that long life requires longevity literacy.
By Phil Wright, Certified Fund Specialist Published
-
Nine Lessons to Be Learned From the Hilton Family Trust Contest
Disclaimers, good communication, post-marital agreements and more could help avoid conflict in a family after the owners of a wealthy estate pass away.
By John M. Goralka Published