Today’s question comes via Adi from Michigan…
“I recently hired a financial advisory firm to help me manage my funds and finances.
After working with them for 4 months, I believe I have the time and skills to plan and manage my finances for myself. However, regarding managing my investments, there are 2 things I am unable to do by myself. They are:
- Tax loss harvesting.
- Sector investing.
My question to you both is: Are tax loss harvesting and sector investing as effective as this financial advising firm claims? Thank you!”
Matt & Joel’s response: I love that you think you’re ready to manage your own investments! We have mixed feelings about financial advisors…
On the one hand, they make little sense for folks in the beginning of their wealth-building endeavor. But the more progress you make and the more complex your finances get, the more you might want to employ the help of a pro.
Here are a couple of thoughts on your specific concerns about tax loss harvesting and sector investing:
Tax Loss Harvesting
Tax loss harvesting is great, but it’s not actually helpful when we’re talking about tax-advantaged accounts!
That’s because you can buy/sell anytime within those tax-advantaged accounts and not experience any tax consequences. All the money is locked up for retirement anyway.
The only way tax loss harvesting can be helpful is if you’ve got money in a taxable brokerage account.
If that’s the case, there are opportunities to reduce your current year’s tax burden by tax loss harvesting. Which basically means selling a fund at a loss and buying a very similar fund afterward.
The goal of tax loss harvesting is to save yourself money at tax time with minimal impact to your investment portfolio. By “harvesting” a loss you’re able to offset taxes on both gains and income.
Robo advisors, like Betterment, can help you do it for less. They say that 4 in 5 users cover their Betterment fee with the savings!
If you have a small portfolio, and only a couple funds, this is pretty easy to accomplish yourself. Don’t let an advisor trick you into thinking it’s difficult. With a bit of reading and learning, you can get up to speed with how it works.
You’ll save a lot more than what you’re paying to a traditional financial advisor.
Generally speaking, you’ll want to tax loss harvest when the market takes a big downturn (you need to sell at a loss). And you should always follow the TLH rules about not purchasing the exact same fund within a 30-day period!
Sector investing
You asked about sector-specific investing.
You could make that a priority, and you might want to. But so much depends on your specific goals & risk tolerance as well as how complicated you’d like to make your investments.
Some folks like to invest in precious metals, dabble in REITs, and go tech-heavy too. If that’s what you want to do, it’s up to you. But we also don’t think it’s a necessity.
That’s because picking winning sectors is extremely hard. Here are the winning sectors in prior years → As you can see, it’s nearly impossible to pick which sectors will outperform or underperform in a given year.
We’d encourage you to listen to our episode w/ Paul Merriman – Podcast Ep #734.
His take is that having some small-cap value exposure, over the long haul, will result in outsized gains. But he also keeps it simple, advocating a two-fund approach.
We think that, for most investors, DCA into one or two funds is ideal. It makes it more likely that you’ll do it (which is clutch!) and it doesn’t complicate things too much either.
Another episode worth listening to is the one we did with Brian Feroldi – Podcast Ep #794. He LOVES investing in single stocks. But he doesn’t recommend it for everyone. We’re fans of whatever approach that allows you to stay the course and keep building wealth.
Using a Financial Advisor
What I love about what Adi is saying is that he feels like having an advisor for a period of time has given him the tools to go it alone.
Going through the planning experience with an advisor can provide helpful insights! The information they task you with gathering and the ways they prompt you to confront the data can be enlightening. The goals they help you outline and the questions they ask can be illuminating.
All of those things combined can make the task of creating a financial plan less daunting.
Can you do that stuff by yourself? Maybe. But an advisor can prod in different ways. Plus they have a deeper level of knowledge on many fronts which means they might bring things to the surface crucial aspects of your financial plan that you haven’t thought about.
Remember that not all advisors are equal. You will definitely want a fee-only fiduciary. And we prefer that you do biz with an advisor who charges a flat hourly or one-time fee.
Advisors with 1%+ ongoing fees can really eat into those compounding returns.
The Bottom Line:
We’re super happy to hear you are confident enough to manage your finances alone.
We feel that both tax loss harvesting and sector investing are things you can probably handle on your own. And as for sector investing, we don’t think it’s an investing necessity.
Consider hiring a flat-fee financial advisor for an hour or two to get a second opinion. That will likely be cheaper than paying for an ongoing relationship and can help you get answers to the specific questions you have.
Cheers for the question Adi!
For the full version of this discussion, check out Podcast Episode #847 (it’s the 2nd question in the episode)
Related posts:
