Though Burton Malkiel, the author of the classic investing book A Random Walk Down Wall Street, has long favored passive management, he takes an active approach to enhancing a portfolio’s after-tax returns, particularly through the practice of tax-loss harvesting, reports an article in Financial Advisor that cites an interview Malkiel did with Bloomberg.
Utilizing software developed by Wealthfront, the firm where he is Chief Investment Officer, Malkiel reaps losses from portfolios throughout the year in order to sow capital gains for other investments, keeping portfolios balanced with a mix of assets and risks. In 2022, investors were hit hard by double-digit capital gains distributions in their actively-managed mutual funds as a result of managers reconfiguring portfolios because of market volatility. Wealthfront, along with other robo-advisors such as Schwab Intelligent Portfolios and Vanguard, offer tax-harvesting services to clients, which Malkiel describes as “the only reliable way for investors to outperform the market” since they can do so on an post-tax basis, the article recounts.
Malkiel, now 90, maintains that the strategy of buying and holding passively-managed funds has outperformed 90% of active funds in the long term, especially when taxes are factored in. At Wealthfront, he started practicing tax-loss harvesting with ETFs and, finding success there, they began to think about developing a software program that could do the same “within markets like the S&P 500…[where] you’d use an optimization program that holds a portfolio of about 250 of the S&P 500 stocks.” That direct indexing approach, Malkiel contends, brings in “a lot more bang for the buck.”
Tax-loss harvesting also works well for people who are continuously contributing to their retirement savings, because even if the returns from original investments diminish, there’s still new money coming in. When asked what other tax issues investors should take into consideration, Malkiel says that “a Roth account is the best way to go” for most people, especially younger investors, and for those still in the accumulation phase to practice dollar-cost averaging. For older investors such as himself, Malkiel says that as he is now taking out required minimum distributions (RMDs), he’s putting all his dividends into Treasury bills. For every investor, Malkiel advised paying a lower expense ratio to their investment service in order to retain more of their money, quoting the late Jack Bogle as saying, “In investing, you get what you don’t pay for.”