Much like inflation, taxes on your investments will erode your real returns. The higher the taxes, the more return on your investments you’ll need to earn to compensate. So, I feel it’s important to minimize how much your portfolio is effectively losing in taxes every year. However, I also feel it’s a mistake to let taxes determine your investment strategy for you. By choosing investments based on how much you’ll lose in taxes, you risk building a portfolio with low diversification. Keep your concern for taxes in balance with a concern for a diversified portfolio. Sometimes it’s better to keep an investment despite its higher taxes than to lose even more in an undiversified, low-tax portfolio that can’t hold up during the ups and downs that come with investing. If you’d like help thinking through issues like this, contact me to set up a time to talk. You can also learn more about educated investing on my blog, where you’ll find more tips and videos like this one.”
DISCLOSURE: Waddell & Reed and its representatives do not offer tax advice. Investing involves risk and the potential to lose principal. Diversification is an investment strategy that can help manage risk within your portfolio but it does not guarantee profits or protect against loss in declining markets.