Vertex Planning Partners / Investing, Planning, Tax Changes / December 9, 2019

Most investors are aware of the importance of diversification, and as a rule diversification across asset classes (stock & bonds) helps to reduce risk.  After years like 2019 it can be especially important to not let risky assets drift out of range (become a larger portion of a portfolio) since as a portfolio grows in dollar terms the same percentage pullback today has a larger dollar impact tomorrow.  This is simple and straightforward in accounts that do not have immediate tax ramifications, such as Individual Retirement Accounts, 401(k) and other qualified investments.  However, in trusts and individual accounts, it pays to understand the tax ramifications.

The simplest way to rebalance is looking at selling stocks that have the least impact, such as stocks that haven’t appreciated as much and therefore have a lower capital gain liability.  Although in the short term this can mitigate taxes owed, your portfolio might be less diversified (overweight higher risk technology stocks vs value stocks) and might impact future returns.  Another strategy is to spread the sales over multiple tax years (this is especially attractive later in the year).

A less obvious option might provide the greatest benefits to those who might be charitably inclined.  Instead of donating cash, look to fund donations from highly appreciated assets to help rebalance the portfolio.  This can provide a double tax benefit of charitable giving as well as removing higher tax liabilities from the portfolio.


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.