All invest­ing involves risk, as the mar­ket crash of 2008 recently demon­strated. The prin­ci­pal risks of invest­ing includes one or more of the fol­low­ing: mar­ket risk, small com­pa­nies risk, risk of con­cen­trat­ing in the real estate indus­try, for­eign secu­ri­ties and cur­ren­cies risk, emerg­ing mar­kets risk, bank­ing con­cen­tra­tion risk, inter­est rate risk, risk of invest­ing for infla­tion pro­tec­tion, risk of munic­i­pal secu­ri­ties, and/or fund of funds risk. To more fully under­stand the risks related to an invest­ment in the funds, investors should care­fully read each fund’s prospectus.

SYNTHIUM has done numer­ous stud­ies before con­clud­ing that cer­tain rebal­anc­ing tech­niques have, in the past, resulted in over­all after-tax improve­ments in annu­al­ized returns. Our results con­clude that a major com­po­nent of the improved per­for­mance is attrib­uted to tax loss har­vest­ing (TLH). While the risk of TLH is much lower than the inher­ent risk of any mar­ket expo­sure, there is risk in a lower return that all investors should understand:

  • Inher­ent risk of tax deferral

TLH is a method of tax defer­ral. The longer one defers taxes, the bet­ter. How­ever, if in the future tax rates are higher than cur­rent rates, then the advan­tages of tax defer­ral could be low­ered or even eliminated.

  • A suit­able proxy secu­rity is not available

In order to har­vest a loss – when the cur­rent price of a secu­rity is lower than the pur­chase price – and to main­tain con­sis­tent mar­ket expo­sure, a proxy for the orig­i­nal secu­rity must be used. If no such secu­rity exists, it would not be sen­si­ble to har­vest the loss since leav­ing the mar­ket for 31 days (to avoid a ‘wash sale’) con­sti­tutes mar­ket tim­ing, which numer­ous stud­ies have shown is exces­sively risky.

  • Proxy returns less than the orig­i­nal security

Returns would be less­ened if dur­ing the 31 day ‘wash sale’ period the proxy invest­ment returns less than what the orig­i­nal secu­rity. Alter­nately stated, for TLH to ben­e­fit an investor, a proxy secu­rity which behaves sim­i­larly to the orig­i­nal loss secu­rity must be available.

  • Extra trans­ac­tion costs

TLH requires addi­tional sales and purchases.