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Sitting on Significant Capital Gains?

Dear Investor,

We were asked by more than a few investors as to what to do with all the significant capital gains due to this long bull market, specifically those owning a disproportionate amount of single company tech stock. And how then to be tax-efficient about this strategy during their lifetime? As always, the answers are not simple, while advising may be.

Our team then set out on a mission to write a thorough white paper on this. While recent academic research has been quite good and it could have been sufficient to summarize, we felt that some assumptions made were less realistic, such as lack of regimes within empirical stock returns. Still borrowing heavily from academics, we then developed a (customized) simulation strategy to evaluate the alternatives of various strategies.

Here is a brief summary of our findings:

  • The time to divest your company stock depends on your age, basis in the stock and your proportion of your total wealth in the stock. Contrary to popular opinion, if your stock is highly correlated with the broader market index and is more volatile (e.g. MSFT, QQQ ETF), don’t rush to divest today and invest in alternate equities, unless your resulting portfolio is significantly diversified/hedged away, even you are in the higher age bracket.
  • If you believe that your stock has limited returns compared to the market going forward but is still clearly more volatile, then the choice to divest may be clearer.
  • A regime shift to a bear market (for the stock or index or both) may change the allocation Divest and Diversify away when you know a bear market has begun. Easy said than done but we can guide you with our experience.
  • Shorting slightly outside the box,e. a correlated basket outside of the stock is still a viable tax-advantaged alternative. What and how much to short is an exercise that an advisor like Berunda can undertake on your behalf.
  • Our lifetime simulations can be tailor-made and specific to an individual’s exact current capital gains and bequest requirements.

The detailed PDF of the white paper can be found here:

White Paper – Capital Gains Harvesting

As always, thanks for your trust and staying invested with us!

Best regards,

Sri Nagarajan

Managing Partner