Advanced tax engi­neer­ing is a term that 3 factor uses for several tax defer­ral and tax min­i­miza­tion tech­niques, each based on research, which can drive on-going, after-tax value for clients who have a sig­nif­i­cant por­tion of their assets in tax­able accounts. Among the tech­niques are Tax Loss Har­vest­ing, Tax Lot Account­ing, and Tax-Optimized Whole Port­fo­lio Re-Balancing – which are enabled by the 3 factor Engine™.

Tax Lot Accounting:

The 3 factor Engine™ keeps track at the lot level the purchase and sale price, cost basis, and trans­ac­tion size for each secu­rity in an investor’s port­fo­lio.  If one adds to an account, either by putting in addi­tional funds or by accu­mu­lat­ing div­i­dends, new lots are pur­chased- each at a dif­fer­ent cost basis.  Com­pared to the more com­mon account­ing meth­ods such as lot aver­ag­ing, individualized tax lot account­ing allows us to do a bet­ter job of min­i­miz­ing the net present value of your cur­rent taxes by defer­ring the real­iza­tion of cap­i­tal gains and rec­og­niz­ing capital losses sooner.

Tax-Loss Harvesting:

The 3 factor Engine™ also continuously analyzes our clients’ portfolios to identify opportunities to take short-term capital losses without changing the asset allocation and risk profiles of the portfolios.   These tax losses can then either be used to off-set current-year capital gains or carried-forward to help reduce future capital gains taxes.

Through our research, we have also identified similar but not identical index funds which can function as acceptable substitutes for our primary set of index funds.  Thus, we can match sales and purchases to insure an investor’s mar­ket expo­sure is maintained.  We sys­tem­at­i­cally uti­lize this approach, as our own analy­sis and back-testing have val­i­dated the aca­d­e­mic find­ings on the value of Tax-Loss Harvesting.

Tax-Optimized Whole Port­fo­lio Re-Balancing

By looking at portfolio re-balancing and tax-harvesting in the context of a client’s whole portfolio– vs. taking a single account by account approach- the 3 factor Engine™ can often identify additional tax optimization opportunities.   One example- we allow positions in the tax-deferred retirement accounts to continue to build capital gains and take capital losses in taxable accounts while keeping true to the whole portfolio asset allocation.

By com­bin­ing 3 factor‘s Advanced Tax Engi­neer­ing discipline with Sys­tem­atic Portfolio Re-Bal­anc­ing approach and our Low Fees, we believe that we are able to pro­vide our clients with the best, real­is­tic after tax returns*.

Please click here to read a more detailed expla­na­tion of these techniques.

Better Returns Through Research

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* 3 factor Indexing has con­ducted exten­sive analy­sis con­cern­ing port­fo­lio per­for­mance. See “ 3 factor Method­ol­ogy and Invest­ment Risks” for details and dis­claimers regard­ing our state­ments con­cern­ing per­for­mance, and the var­i­ous assump­tions we have made in our analysis.  Past per­for­mance is not a pre­dic­tor of future performance.
3 factor has con­ducted exten­sive analy­sis con­cern­ing port­fo­lio per­for­mance. See “impor­tant dis­clo­sure” for details and dis­claimers regard­ing our state­ments con­cern­ing per­for­mance, and the var­i­ous assump­tions we have made in our analy­sis.