Skip to main content

Academy of Financial Services Annual Meeting 2022

September 27–28, 2022

Virtual Conference via Zoom

Should Investors Defer Long-Term Gains in Taxable Stock Portfolios?

Wednesday, September 28, 2022 at 12:00 PM–1:30 PM EDT add to calendar

Diversification return; Capital gains; Risk

Short Description

Investors with taxable portfolios sometimes delay the sale of appreciated stock to defer capital gains taxes. While this strategy may reduce taxes, it can cause the portfolio to become more concentrated over time, leading to higher overall volatility and lower long-term returns. We evaluate the tradeoff between tax efficiency and diversification via Monte Carlo simulation and find that the latter has a far greater impact on the investor’s terminal wealth, especially over longer time horizons. For the scenarios considered, the investor is better off rebalancing almost completely each year, even though it requires selling some recent winners and paying capital gains taxes.

Lead & Corresponding Author

Jeff Whitworth, University of Houston - Clear Lake