Welcome to the Real Retirement Financial Planning Podcast. This series covers the 21 Questions to Ask Your Financial Advisor. The list of questions was inspired by Jason Zweig of the Wall Street Journal, and his blog post: The 19 Questions to Ask Your Financial Adviser. Responses to Jason’s questions I read from other advisor websites lacked depth. “Yes,” or “no,” sometimes needs more context and a greater explanation into the whys. The goal of this series is to target the essence of what I think Jason is trying to protect you from, and help you make a better educated decision.
21 Questions to Ask Your Financial Advisor
15. How often do you trade?Jason is looking for: “As seldom as possible, ideally once or twice a year at most.”
At MARGIN, we trade based on what your Investment Policy Statement says; this document is crafted and driven by your financial plan. It defines how far asset classes can drift before they are rebalanced. We trade to harvest gains in low tax years, or, harvest losses when appropriate. Outside of risk and taxes, we don’t believe in being “tactical,” and we trade as little as possible because of explicit and implicit costs. Keeping risk in check by following an Investment Policy Statement is especially important in retirement when you are taking income from your portfolio. Being surprised by a large decline because your portfolio drifted is a difficult thing to stomach. Keeping your asset allocation in check takes discipline and process to follow.
Trading too muchTrading all the time, and being “tactical” is usually a great way to add “value,” right? No! Overtrading and pretending to know exactly what will happen based on the last CNBC ticker tape line, or talking head, is not a way to add consistent value. Over tilting toward sectors and/or over-rebalancing can hurt performance; these “strategies” can generate more taxable losses and risk in a feeble attempt to outperform.
Trading too littleLosses can offset gains at tax time, just remember, only $3,000 in net losses can be used to offset ordinary income in one year. The remaining net loss can be carried over for future tax years. Missing opportunities for tax-loss harvesting, or forgetting to take gains in years with low taxable income can be more common than you think, but not as hyped as some robo-advisors would lead you to believe.
Robo-advisor tax-loss harvesting bonanzaDon’t believe the hype. Wealthfront a popular robo-advisor touts you can add an additional 1.55% in “tax-loss harvesting” to the investment return.
Please read all the fine print… There are some serious assumptions needed to get to this conclusion. It doesn’t add up all the time. And. Remember. Sometimes you want to harvest gains too, not just losses.
It all depends on your situation.Do you trade too much, or too little?
Do you have a document in place that serves as a guide toward managing your investments?
How do you review selling major gains in your portfolio in low income tax years, and taking gains when your income is higher?