Jacobo Taurel

Within fundamental analysis, two factors often influence the performance of a stock: the earnings a company generates and how investors value those earnings. One common way to gauge the value of a share is the price to earnings multiple, or P/E ratio. This guide explains how to read the price to earnings ratio and where its limits lie. In other words, it covers the components, the analysis, and the warning signs.

What are its components?

To calculate the P/E, an analyst divides the price of a share by the company’s annualized earnings per share. The trailing P/E uses the earnings reported over the last twelve months. In contrast, the forward P/E uses the earnings analysts expect for the next twelve months. Forward estimates can change. Optimism can drive an expansion in the P/E. For example, when perceptions about a company improve, investors may be willing to pay more for each unit of earnings. As a result, the multiple can rise even if earnings stay flat. When expectations turn negative, however, investors may pay less for each unit of earnings, and the P/E can contract.

How to read the price to earnings ratio in practice

First, observe whether the P/E looks high or low against the company’s own history. Many analysts call this absolute valuation. In practice, it means comparing the current P/E with its average over 10, 15 or 20 years. Next, compare the company’s P/E with that of similar companies in the same industry. Analysts call this relative valuation. Of course, the interpretation of the P/E can vary by sector. For instance, some industries carry above-average multiples because investors expect faster growth. Meanwhile, other sectors trade at lower multiples because their businesses are more mature or more cyclical. Historical averages may not repeat, so neither comparison offers a definitive answer.

Why earnings quality matters

The earnings figure in the denominator deserves the same scrutiny as the share price. For example, a one-time gain from an asset sale can inflate earnings for a single year. As a result, the P/E can look unusually low until that gain drops out of the trailing figure. In contrast, a large one-off charge can depress earnings and make the multiple look high. When a company reports a loss, the P/E has no meaningful value. Instead, analysts often turn to other measures in that situation. In practice, it helps to read the notes behind reported earnings. It also helps to check whether the result reflects the ongoing business. Fortunately, many companies disclose unusual items separately, which makes this check easier.

What deserves attention

No single P/E reading leads to an absolute conclusion. Instead, you first need to identify which component, the share price or the earnings, is driving the result. In our view, a high P/E deserves a check that solid fundamentals support it, rather than excessive optimism. In addition, companies with a low P/E call for care. A low multiple can look like an opportunity. In reality, it may reflect a lack of catalysts and little interest among investors.

The P/E multiple can reveal a great deal about how investors perceive a stock. It may help flag potential opportunities, in the form of a cheap valuation, or potential risks, in the form of an expensive one. However, it is only one data point, and a low or high reading does not predict future returns. Therefore, before making any investment decision, investors should pair this valuation analysis with a deep understanding of the business model and the financial situation. Finally, they should also weigh the growth strategy and the experience of the management team. Knowing how to read the price to earnings ratio is a starting point, not a complete analysis.

This article is for educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security.

In our opinion, there are four ways artificial intelligence could change healthcare, and this article outlines each one. Here, we turn to healthcare, where we believe innovation can be a strong force for change. For example, healthcare systems hold large amounts of data that analysts can use to generate insight. In addition, pharmaceutical companies keep looking for ways to shorten lengthy drug development timelines. In theory, AI could help match the right treatments, in adequate quantities, to the right patients. However, these potential benefits depend on data quality, privacy safeguards, and regulatory approval.

Four ways artificial intelligence could change healthcare

The list below reflects our view of where early applications may appear.

• Research and development. First, AI could help improve the success rates of medications in clinical trials. However, any such gains may take years to appear, and results may vary widely.
• Clinical trials. Next, AI tools applied to logistics could speed up the trial process and improve efficiency. For instance, they could help companies find faster-enrolling sites and flag underperforming ones. Of course, these tools rely on accurate site data, and poor inputs can lead to poor choices.
• Commercial development. In addition, AI could help companies identify physicians and specialists suited to support a new product launch. Meanwhile, it could point companies toward the events most likely to build awareness of a new medication. In practice, marketing rules and approval requirements still limit how companies promote any product.
• Complementing the human experience. Finally, every patient wants an accurate diagnosis, and this is where AI could make a meaningful difference. For example, AI tools may help a physician assess a patient’s uncommon symptoms. By using AI to support diagnostic accuracy, providers may reach better conclusions and potentially improve outcomes. Above all, we see AI as a support for clinical judgment, and it can produce errors or reflect bias.

Evaluation and regulation may set the pace

In our view, these applications could be AI’s first steps into the sector. However, progress may take time. Researchers and regulators will likely keep evaluating whether these tools deliver better results and economic benefits. We believe these capabilities are here to stay. Nevertheless, adoption may be uneven, and some applications may not meet early expectations.

For instance, UnitedHealth Group has stated that AI could help reduce the time needed to turn data into information. According to the company, this may lead to a better understanding of the factors that affect a person’s health. In our opinion, strategic use of this technology may support better healthcare decisions and lower costs for companies. However, implementation costs, data privacy concerns, and integration challenges may offset some of these gains. Therefore, these four ways artificial intelligence could change healthcare remain possibilities rather than certainties.

How to read these possibilities

For investors, the key question is not whether AI sounds promising but whether it produces measurable results. First, it may help to look for evidence that a tool improves a specific task, such as trial enrollment or diagnostic support. Next, investors may want to consider who pays for the technology and who captures the savings. In other words, a tool that helps patients may not always help a company’s earnings. In addition, healthcare tends to move slowly because patient safety comes first. As a result, companies may test new tools in limited settings before wider use. Meanwhile, competition may reduce any early advantage.

Most importantly, we think a balanced view weighs potential gains against the risks noted above. Of course, the pace of change may differ across research, trials, marketing, and clinical care. Fortunately, investors do not need to predict every outcome to follow the trend. Instead, they can track progress over time and adjust their expectations as evidence builds.

This article is educational and is not investment advice or a recommendation regarding any security or company named.

Following our earlier comments on how artificial intelligence (AI) may support investment analysis, this article explores where artificial intelligence could reach healthcare first. In our view, innovation can drive meaningful change in healthcare. For example, healthcare systems hold large volumes of data that analysts can turn into useful information. In addition, pharmaceutical companies constantly look for ways to shorten long drug development timelines. Theoretically, AI could support more effective management across the industry. In other words, it may help deliver the right treatments, in the right quantities, to the right patients. However, AI adoption in healthcare remains early, and outcomes are uncertain.

Where artificial intelligence could reach healthcare first

• Research and development. AI could potentially help improve the success rates of medications in clinical trials. For example, researchers could use AI to screen candidate compounds before costly laboratory work begins. However, that process could take years, and results may vary.
• Clinical trials. Applying AI to logistics could speed up trials and improve efficiency. For instance, it could help companies find clinical sites able to enroll patients faster. It could also flag underperforming sites that need improvement.
• Commercial development. AI could help companies identify the physicians and specialists best placed to support a new product launch. As a result, it may reduce some obstacles to reaching the market. It could also help companies focus on the events most likely to build interest in a new medication. Of course, strict healthcare marketing rules still apply.
• Complementing human expertise. Every patient wants an accurate diagnosis, and AI may make a meaningful difference here. For example, AI assistance could help a physician assess a patient’s uncommon symptoms. In practice, providers may then reach better-informed conclusions. Even so, AI tools can make errors, so physician judgment remains essential.

Why progress may take time and face regulation

These areas could mark the first contact between AI and the sector. Even so, in our view the process will likely take time. Regulators, providers, and investors may evaluate progress continually to confirm whether AI delivers better results and economic benefits. Meanwhile, new rules could slow adoption or add costs. In our opinion, these capabilities appear likely to endure, although their pace and impact remain uncertain.

How to read early signals of adoption

Investors may find it useful to watch a few practical indicators. First, they can look for evidence in company results that AI tools shorten timelines or reduce costs. Next, they can follow how regulators respond to new tools and whether guidance becomes clearer over time. In addition, partnerships between technology firms and healthcare providers may show where demand is building. Above all, readers should treat early announcements with caution, because pilot projects do not always scale.

Data quality also matters. AI systems depend on the records they learn from, and incomplete or biased data can weaken results. Therefore, organizations may need to invest in better data management before they see benefits. Patient privacy adds another layer of responsibility. As a result, providers must protect sensitive information while they test new tools. In practice, this balance between innovation and privacy may shape how quickly each area develops.

What one industry participant has said

For instance, UnitedHealth Group has said that AI can help reduce the time needed to turn data into information. According to the company, this may allow a better understanding of the factors that affect a person’s health. When organizations implement it strategically, the technology may support better healthcare decisions and lower costs. However, implementation can be expensive, and benefits may not reach every organization. Finally, tracking where artificial intelligence could reach healthcare first may help readers follow how the sector evolves.

This article is for educational purposes only and is not investment advice or a recommendation regarding any security. Company references are illustrative, and the opinions expressed may not come to pass.

Activest is proud to mark another year supporting FUNDANA and orphaned children in Venezuela. This non-profit foundation exists to provide support and care to orphaned children in Venezuela. In practice, its work aims to give them love, education and an opportunity for a better future.

Every child deserves a safe place to grow, a caring adult to trust and the tools to build a future. However, many children in Venezuela face their early years without the support of a family. As a result, organizations like FUNDANA carry a heavy responsibility. They step in where family care is missing. They also offer stability during the most formative stage of life.

A night at the theater for FUNDANA

During the month, a theater performance took place to benefit the foundation. The play, called The Influencers, ran at the Colony Theatre in Miami. Fortunately, the theater was full, and the evening drew warm support from the audience.

Events like this one do more than benefit a cause on paper. For example, they bring people together around a shared purpose. In addition, they give the community a simple way to show that it cares. A full theater sends a clear message to the children and to the people who look after them: they are not alone.

Meanwhile, the play itself offered something valuable of its own. Theater invites an audience to sit together, to listen and to feel. Therefore, a benefit performance turns an ordinary night out into a small act of solidarity. We were glad to see so many people choose to spend their evening this way.

We also want to recognize everyone who helped make the evening possible, from the cast and crew to the audience that filled the seats. Their work and presence turned a good idea into a memorable night for a worthy cause.

Why another year supporting FUNDANA and orphaned children in Venezuela matters to us

Above all, we believe solidarity is a driving force behind a better society. This belief reflects the vision we share with FUNDANA. We are proud to support initiatives that aim to help those who need it most. In addition, we value the chance to participate actively in this work.

For us, supporting a cause is not a one-time gesture. Instead, we see it as a commitment that grows stronger over time. Marking another year supporting FUNDANA and orphaned children in Venezuela reminds us why consistency matters. Children need care that continues from one season to the next. In the same way, the organizations that serve them need partners who stay.

What love, education and opportunity mean in practice

FUNDANA’s mission rests on three ideas: love, education and opportunity for a better future. Each one matters on its own. However, they work best together.

First, love gives a child a sense of belonging and security. Next, education builds the knowledge and confidence a child needs to grow. Finally, opportunity opens the door to a future the child can shape. No single event or partner can provide all of this alone. Most importantly, it takes a community of people who keep showing up, year after year.

Looking ahead with gratitude

We would like to thank FUNDANA for allowing us to be part of this noble cause. Of course, we look forward to continuing our collaboration. Together, we hope to help make a meaningful difference in the lives of orphaned children. Finally, more information about their work and ways to collaborate is available at fundana.org.

We encourage everyone in our community to explore the foundation and consider how they might help. Even a small gesture, shared by many people, can change a child’s day. As a result, we will keep looking for ways to stand beside FUNDANA in the year ahead.

In late November 2023, Charles (Charlie) Munger, longtime partner of Warren Buffett, passed away at the age of 99. Munger served as vice chairman of Berkshire Hathaway for decades. In addition, many market commentators regard Buffett as one of the most influential investors of recent times. Together, they grew Berkshire from a small textile manufacturer into a large conglomerate. As of late 2023, public market data put its market capitalization at approximately US$775bn. This article looks at four investing principles Charlie Munger lived by, along with their limits.

Munger’s philosophy rested on multidisciplinary thinking. For example, he drew insight from diverse fields such as psychology, history and economics. He also stood out for a fundamentals-based approach to investment decisions. In other words, he evaluated the essential aspects of a company. These included its revenue sources, earnings potential, balance sheet health and market position.

The four investing principles Charlie Munger lived by

Munger promoted these ideas alongside Buffett.

• The big money is not in the buying and selling, but in the waiting. In practice, Munger was not active in day-to-day trading. Instead, he tried to identify positions he considered as safe as possible and hold them, often for several years. However, no investment is risk-free, and holding for years does not guarantee a gain.
• Buy wonderful businesses at fair prices. Munger avoided stocks that looked appealing only because they seemed cheap. Instead, he favored companies with strong fundamentals and reasonable valuations. In his view, the market would eventually recognize their intrinsic value over the long term. Of course, markets can take years to reflect value, and sometimes never do.
• Great opportunities are rare. Munger believed that life does not shower anyone with unlimited opportunities. As a result, he aimed to rule out as many weak or unsupported investment ideas as possible. He favored significant moves at those rare moments when a strong opportunity appeared, and only after thorough analysis. Therefore, his approach required patience and a willingness to sit out long stretches without acting. Meanwhile, concentrating on a few large bets can increase risk if one goes wrong.
• Good businesses are ethical businesses. One of Munger’s favorite tenets was that good business is ethical business. Conversely, he argued that a business model built on deception is headed for failure. Munger and Buffett built a reputation for closely analyzing the companies they considered. For instance, they looked for strong growth potential and models they viewed as fair, equitable and ethical.

How to read these ideas today

These principles describe a mindset more than a formula. For example, waiting patiently only helps if an investor first understands what they own. In addition, a fair price depends on careful research into a company’s fundamentals, not on a quick glance at its share price. Next, an investor who wants to wait for rare opportunities needs a clear view of their own goals and time horizon. Otherwise, it can be hard to tell discipline from simple inaction.

The ethical test also deserves attention. In practice, investors can review how a company treats customers, employees and shareholders. They can also read annual reports and compare management’s statements with actual results over time. However, none of these steps removes risk. Markets can fall, businesses can change, and even careful analysis can prove wrong. As a result, many investors spread their holdings across several assets rather than relying on a single idea.

A lesson beyond investing

Perhaps his most significant reflection was about life rather than investing. Above all, he said that the best thing a human being can do is help another human being know more. Finally, the four investing principles Charlie Munger lived by reflect one investor’s views and experience. They may not suit every investor’s goals, time horizon or risk tolerance.

Important information

This article is educational and is not individual investment advice. Past results do not guarantee future results. Consider speaking with a qualified financial professional about your own situation.

Charles (Charlie) Munger, Warren Buffett’s longtime partner, died in November 2023 at the age of 99. He served as vice chairman of Berkshire Hathaway, and many investors regard him as highly influential. Together, he and Buffett grew Berkshire from a small textile maker into a large conglomerate. In addition, Berkshire’s market capitalization stood at roughly US$775 billion at his death, according to publicly reported market data. This article looks at what Charlie Munger taught investors about patience and fundamentals.

Munger’s philosophy rested on multidisciplinary thinking. In other words, he drew insight from many fields, including psychology, history and economics. He also made decisions using a fundamentals-based approach. In practice, that meant evaluating the essential aspects of a business. For example, he studied revenue sources, earnings potential, balance sheet health and market position.

What Charlie Munger taught investors about patience and fundamentals: four ideas

• First, patience over activity. Commentators often paraphrase his view this way: value comes from patience, not from buying and selling. He did not trade actively day to day. Instead, he sought positions he considered as safe as possible and held them, often for years. Of course, long holding periods do not remove risk.
• Next, wonderful businesses at fair prices. He preferred companies with strong fundamentals and reasonable valuations over stocks that merely looked cheap. In his view, the market would eventually recognize their intrinsic value. However, that was his opinion, and markets can misprice a business for a long time.
• In addition, great opportunities are rare. Munger believed life does not offer unlimited opportunities. Therefore, he tried to discard as many bad or poorly supported ideas as possible. He favored significant moves in those rare moments when a strong opportunity appeared, and only after thorough analysis. In contrast to diversified strategies, concentrated bets can magnify losses.
• Finally, good businesses are ethical businesses. One of Munger’s favorite principles held that ethics and business quality go together. In his view, a business model that depends on deception tends to fail eventually. He and Buffett built a reputation for examining businesses closely. For instance, they looked for growth potential and for models they judged fair, equitable and ethical.

How to read a company’s fundamentals

Investors who want to apply a fundamentals-based approach can start with a few basic questions. First, where does the company’s revenue come from, and how dependable is it? Next, does the business earn consistent profits, or do its earnings swing sharply from year to year? In addition, a quick look at the balance sheet shows how much debt the company carries relative to its assets. Finally, investors can ask whether the company holds a durable position against competitors. None of these questions guarantees a good outcome. However, they encourage the kind of careful study Munger favored over quick reactions to price movements.

Why patience is hard in practice

Holding a position for years sounds simple, but many investors find it difficult. Market headlines change daily, and falling prices can trigger fear. As a result, some investors sell at poor moments or chase popular stocks. Munger’s interest in psychology offers a useful lens here. For example, recognizing common biases, such as following the crowd, can help an investor pause before acting. Of course, patience does not mean ignoring new information. Instead, it means separating meaningful changes in a business from short-term market noise.

Where these ideas fit for investors today

This article paraphrases the principles above, since his wording varied across interviews and shareholder meetings. Past performance does not guarantee future results, and adopting his principles cannot replicate his outcomes. Most importantly, this article offers general education, not individual investment advice. Investors should consider their own goals, time horizon and risk tolerance. Even so, understanding what Charlie Munger taught investors about patience and fundamentals may help frame long-term thinking.

Meanwhile, his most memorable reflection may have concerned how to live, not investing. As he put it: “the best thing a human being can do is to help another human being know more.”

Tax planning often matters most before year end. This article explains how a donor advised fund lowers your tax bill while you give, and where it may fall short.

A donor advised fund, or DAF, is a charitable account at a sponsoring organization that lets you recommend grants over time. For example, you may be able to donate appreciated securities and avoid capital gains tax on the growth. In addition, you may still claim an itemized deduction, provided you itemize. As a result, some families contribute in a high income year and then spread grants over the years that follow. However, contributions are irrevocable, and the sponsor has final legal control over grants.

How a donor advised fund lowers your tax bill while you give: a hypothetical

Consider this illustration. Suppose you bought shares for $100,000, held them over a year, and they are now worth $400,000. Donating them to a DAF may let you deduct the full $400,000 market value. However, the 30% of AGI limit below means you would need high income to use it all in one year. At a hypothetical 35% tax rate, a fully usable deduction could reduce income tax by up to $140,000. In addition, you would owe no capital gains tax on the $300,000 gain. At a hypothetical 20% rate, that avoids about $60,000. In other words, the hypothetical savings total about $200,000 combined. Of course, you have still given away $400,000, so the gift costs more than it saves. Therefore, treat these figures as illustrative only, since actual tax rates and state rules vary.

Convenience and record keeping

A DAF can also centralize giving, grants, and records in one place. At tax time, you may receive one summary of your contributions, which can simplify preparation. Meanwhile, sponsors typically charge administrative and investment fees, so compare providers before you open an account. Next, review each sponsor’s minimum contribution and grant rules.

Income limits to keep in mind

First, cash gifts to a DAF are generally deductible up to 60% of adjusted gross income (AGI). Next, appreciated securities held more than one year are generally deductible up to 30% of AGI. In addition, if your gifts exceed these limits, you can generally carry the excess forward for up to five years. Finally, recent federal law changes may reduce deduction values for some taxpayers from 2026.

Growth inside the fund

The sponsor may invest your balance, and growth generally avoids tax while it stays in the fund. However, investments can also lose value, and you receive no extra deduction for growth. For instance, a market decline could shrink the balance available for future grants. In practice, the flexibility to give later comes with market risk.

Where a DAF fits

In our opinion, giving can help others and support a broader wealth plan. Fortunately, several providers now offer DAFs, so access is broader than it once was. Above all, a DAF works best when it matches your giving goals, your time horizon, and your broader tax picture. Ask a tax professional whether and how a donor advised fund lowers your tax bill while you give.

Main benefits and trade-offs

• No capital gains tax on long-term appreciated securities you donate to the fund.
• Tax free growth inside the fund, along with the risk of investment losses.
• Flexibility to time grants, although contributions are irrevocable.
• Fees and AGI limits that can reduce the net benefit.

This content is for informational and educational purposes only. It describes hypothetical tax benefits and limitations that may not apply to your situation. Activest Wealth Management, LLC does not provide legal or tax advice. Please consult your tax professional about your specific circumstances.

As the year end approaches, many families review ways to reduce the impact of taxes. For example, using a donor advised fund before the year ends may help charitably minded investors.

In our view, a donor advised fund can be a convenient way to support favorite charities while managing taxes. You can donate appreciated securities and generally avoid capital gains tax on them. In addition, donors who itemize may deduct the fair market value of securities held over one year, within income limits. As a result, you can contribute in a high income year and recommend grants over later years. However, gifts are irrevocable, and the sponsor has final control over grants.

A hypothetical example

Suppose an investor bought shares of one stock for $100,000, and they are now worth $400,000. Donating the shares to a donor advised fund may support a $400,000 deduction. However, the 30% of AGI limit may spread that deduction over several years. At an assumed 35% tax rate, the deduction could cut income taxes by about $140,000. In addition, avoiding a 20% tax on the $300,000 gain could save about $60,000, or roughly $200,000 in total. Of course, the investor still gives away $400,000 of assets. This illustration ignores state taxes, the 3.8% net investment income tax, and personal circumstances.

Convenience and efficiency

A donor advised fund lets you centralize charitable giving. For instance, you can contribute, recommend grants, and track giving in one account. At tax time, you typically receive one statement, which may simplify preparation. Keep in mind that most sponsors charge fees, and investment options vary.

Income limits

Cash gifts to a donor advised fund are generally deductible up to 60% of adjusted gross income (AGI). In contrast, appreciated securities are generally deductible up to 30% of AGI. You can carry any excess forward for up to five years. Finally, recent legislation changes some deduction rules starting in 2026, so confirm current limits with your tax professional.

Tax free growth

The sponsor can invest the fund’s assets, and any growth is tax free. In other words, more money may be available for future grants. However, investments can lose value, and growth does not add to your deduction.

Timing tips for using a donor advised fund before the year ends

Most importantly, gifts generally must be complete by December 31 to count for that tax year. Securities transfers can take several days. Therefore, if you are using a donor advised fund before the year ends, start early and confirm the sponsor’s cutoff.

Before you transfer shares, review your cost basis with your advisor. For example, lots held over one year with the largest gains may offer the most benefit, because you avoid more capital gains tax. Meanwhile, shares that have lost value may work better if you sell them first, since a sale may let you claim the loss. Your tax professional can help you weigh these choices.

Questions to ask a sponsor

First, ask about the minimum initial contribution, since requirements differ widely among sponsors. Next, review the fee schedule and the investment menu. Some sponsors also set a minimum grant size, so check that amount before you plan smaller gifts. In addition, confirm which assets the sponsor accepts. Many sponsors accept cash and publicly traded securities, while fewer accept complex assets. Finally, ask whether you can name successor advisors to continue your giving plan.

Main benefits and limitations

• No capital gains tax on appreciated securities you donate.
• Potential tax free growth, though values can fall.
• Flexibility to contribute now and recommend grants later.
• Irrevocable gifts, sponsor fees, and sponsor approval of grants.

This content is for informational and educational purposes only. It discusses hypothetical tax benefits and limitations that may not apply to your situation. Activest Wealth Management, LLC does not provide legal or tax advice. Please consult your tax professional regarding your specific situation.

At Activest, looking for ways to improve after tax outcomes is part of our wealth management and family office services. This article explains tax harvesting and the IRS rules that shape it, for educational purposes only.

Tax harvesting is a common strategy that US tax law permits for managing taxes on investment gains. However, it does not suit every investor, and results depend on individual circumstances.

How the arithmetic works

In accounting terms, the goal is for the following formula to produce a net loss:

Net gain or net loss = (long term capital gains less long term capital losses) + (short term capital gains less short term capital losses).

In other words, an adviser may sell positions at a loss to offset gains realized during the year. As a result, the investor may reduce or eliminate the tax owed on those gains. Those gains can come from sales of positions or from mutual fund distributions passed through to the portfolio.

Of course, harvesting often defers tax rather than eliminating it. For example, a lower cost basis on the replacement can mean a larger taxable gain at a later sale.

In addition, taxpayers may deduct up to $3,000 of net capital losses against ordinary income (IRS Topic No. 409). The limit is $1,500 for married taxpayers filing separately.

Carryover losses

If losses exceed gains and the deduction limit in a given year, the unused amount carries forward. Individuals can generally use these carryover losses against future gains. Meanwhile, tax on realized gains is due for the year of the sale. In practice, tracking these carryovers each year helps the investor use them fully.

A widely reported example involves Donald Trump. According to The New York Times (2016), his 1995 tax return showed a loss of about $916 million. That loss reportedly stemmed from casinos, an airline business and Manhattan real estate. The Times said the loss could have offset income for up to 18 years. In practice, the paper said, that could have meant avoiding up to about $50 million a year in federal income taxes. Note, however, that this was a net operating loss, which follows different rules than individual capital loss carryovers.

Why the portfolio comes first

From an investment standpoint, the tax incentive should never override portfolio quality. Instead, the firm keeps each portfolio aligned with its specific investment objectives. Trading costs and market moves while out of a position can also reduce any benefit. Therefore, we coordinate this strategy with the client’s CPA and other advisers.

Next, the adviser reviews which positions carry unrealized losses and whether selling them still fits the plan. For example, a small loss may not justify the trading costs involved. Finally, the family should document each sale and its replacement. Clear records help the CPA report every transaction accurately at tax time.

Wash sales, tax harvesting and the IRS rules that shape it

Advisers must consider several IRS rules when changing a portfolio. Above all, the wash sale rule exists to discourage selling at a loss purely to claim a tax benefit. A wash sale occurs when you sell at a loss and repurchase too soon (IRS Publication 550). Specifically, buying the same or a substantially identical security within 30 days before or after the sale triggers it. As a result, the IRS disallows the loss for now and adds it to the new position’s basis.

For instance, a hypothetical investor might sell an S&P 500 fund at a loss and buy a Dow Jones fund. The two indexes often move similarly, but they differ in composition. However, the IRS has not precisely defined “substantially identical,” and the replacement may perform differently. This example is not a recommendation. Your CPA can explain how tax harvesting and the IRS rules that shape it apply to you.

Seeking ways to improve after tax outcomes is a core part of our wealth management and family office services. One common approach is tax harvesting. This article explains how tax harvesting reduces what you owe on gains, and where it falls short.

How tax harvesting reduces what you owe on gains

The math is simple. In accounting terms, the goal is to push this formula toward a net loss:

Net gain or net loss = (long term capital gains less long term capital losses) + (short term capital gains less short term capital losses).

In other words, we realize losses in the portfolio to offset gains the portfolio realized during the year. As a result, the tax owed on those gains may fall or disappear. Those gains may come from selling positions or from capital gains distributions by mutual funds.

However, harvesting usually defers tax rather than erasing it. The replacement holding typically has a lower cost basis, so future taxable gains may be larger. In practice, the strategy also applies only to taxable accounts and can add trading costs.

In addition, the IRS lets most taxpayers deduct up to $3,000 of net capital losses per year against ordinary income. For married taxpayers filing separately, the limit is $1,500, according to IRS Topic No. 409.

Carryover losses

If losses exceed gains in a given year, the excess becomes a carryover loss. For individuals, federal rules let these losses carry forward to offset future gains, plus up to $3,000 of ordinary income each year. Meanwhile, taxpayers generally owe tax on realized gains for the year they realize them.

For example, The New York Times reported in 2016 that Donald Trump declared a $916 million loss on his 1995 tax returns. The Times tied the loss to casinos, an airline, and Manhattan properties. According to the Times, that loss could have let him legally avoid federal income taxes for up to 18 years. Of course, the Times described a net operating loss, which follows different rules than the capital loss carryovers most investors use.

Do not let the tax tail wag the portfolio

In our opinion, tax savings should not drive investment decisions. Instead, the portfolio should stay aligned with its specific investment objectives. Above all, coordinate this strategy with your CPA and other advisers, since results depend on your full tax picture.

Understanding how tax harvesting reduces what you owe on gains helps you set realistic expectations. First, review realized gains and losses as the year progresses. Next, weigh any potential loss sale against your long term allocation. In addition, consider whether a replacement holding keeps your intended market exposure. Finally, keep clear records of each trade so your CPA can report it accurately. In practice, market declines can create harvesting opportunities at any point in the year, not only in December.

Watch the wash sale rule

Advisers should consider several IRS rules when making portfolio changes. The most prominent is the wash sale rule, which discourages selling at a loss simply to claim a tax benefit. A wash sale occurs when you sell a security at a loss and buy a substantially identical one. The window runs 30 days before or after the sale. As a result, the IRS generally disallows the loss and adds it to the new position’s cost basis.

For instance, as a hypothetical illustration, an investor might sell a fund tracking the S&P 500 and buy a fund tracking the Dow Jones Industrial Average. The two indexes often move similarly but hold different stocks. However, the IRS has not clearly defined ‘substantially identical,’ and the replacement may perform differently. Therefore, confirm any swap with a tax professional first.

This article is for educational purposes only and does not constitute tax, legal, or investment advice. Tax rules can change, and individual results vary.