Loss Harvesting and the Myth of Tax Alpha (EP.158)

Welcome back to another episode of the Rational Reminder Podcast, where we give you the most considered and evidence-based information about investing in Canada. Our focus for this episode is the topic of tax loss harvesting, a subject we have touched on before but felt warranted a revisit, with some updates. To kick off the show, we review Playing to Win, looking at the illuminating perspective it offers with regards to strategy and preparation. From there we turn to some recent investing news on ETFs and Robinhood, before we get into the main course of today's show. There are plenty of pitches and arguments for why tax loss selling can be very rewarding, and while these are not necessarily false, there are certain ways in which the information can be misleading, or not comprehensive for all investors. We discuss how best to think about the supposed gains, noting the importance of high expected returns and the time frame in which a case study is made. We also think about some of the potentially negative results of letting tax drive your investment decisions, despite the seeming attractiveness of this route. One of the most important points here is the adjustment needed in order to apply these strategies to the Canadian market, as many of the pitches and research are based in the US system, which has significant differences when it comes to taxation. We highlight some red flags to look out for and give some more general warnings around rushing into investments that lean too heavily in this direction. So for all this and a bunch more great advice for your portfolio, join us for the show.

Key Points From This Episode:

• This week's book review of Playing to Win by Roger Martin and A G Lafley. [0:08:43.3]
• Continued increases for ETFs and comparing the statistics with recent history. [0:12:30.7]
• Some amazing statistics about Robinhood users and cryptocurrency investments! [0:15:18.5]
• A reintroduction to, and revisited analysis of, tax loss harvesting. [0:18:20.8]
• The best times to consider tax loss selling; waiting for high expected returns. [0:27:55.5]
• Recent findings on the tax alpha and modifying the arguments and assumptions. [0:33:20.5]
• Creating a new base case to work from with some helpful adjustments. [0:38:41.3]
• The importance of the time period when looking at historical returns for tax loss selling. [0:43:10.1]
• Cases in which we believe tax loss selling makes the most sense. [0:46:14.3]
• Looking at the tax implications of pooling funds with other investors. [0:49:02.7]
• Locating these tax loss strategies within a specifically Canadian context. [0:52:18.5]
• A couple Talking Sense cards dealing with leading and following, and protection. [0:55:25.5]
• Bad advice of the week; looking at pensions in the UK. [0:58:03.5]