As the great Benjamin Franklin so aptly put it, “In this world nothing is certain but death and taxes.” At Investment Advisor, it’s pretty certain that we’re going to write about taxes, and death, for that matter, as it pertains to taxes. In October 1998 we addressed tax-awareness in an article, “Watch Your Assets,” by Jean L.P. Brunel, at the time a managing director of J.P. Morgan & Co. Some of the still applicable advice from that article is excerpted below.
“Tax day is every day…every day brings you the opportunity to increase, or at least to look at, the tax efficiency of your portfolio. I define tax awareness as avoiding unnecessary taxes and deferring taxes that are unavoidable…Being tax aware requires you to address three different issues. First, you need to create a different conceptual framework within which you operate. You need to think in terms of strategic asset allocation. And, finally, you need to focus on how you make each investment decision. Tax-awareness is a frame of mind…Avoiding unnecessary taxes means focusing on the nature of your income or your return flows….Deferring unavoidable taxes means….assessing every transaction on an after-tax basis…[and] looking for tax sheltering opportunities….One of the most important parts of being a tax-aware investor is to recognize that an unrealized loss has value.”