“Typically, harvests happen seasonally. Strawberries ripen in the spring, corn is eye-high by the Fourth of July, those grapes get stomped in the fall, and chestnuts roast on winter fires.

Tax-loss harvesting is different. Those familiar with the strategy mistakenly assume that losses are best harvested at year-end when taxes are top of mind. In reality, tax-loss harvests can happen whenever market conditions and your best interests warrant it.”

From a 2016 post we did on tax-loss harvesting.

Unlike many advisors and do-it-yourself investors, we are on the lookout for tax-loss harvesting opportunities throughout the year. Many people (if they harvest at all) only harvest losses once per year, usually at the last minute in late December. Not us, not you if you’re a Hill Investment Group client. Remember the market decline in March 2020? If your advisor waited until December to harvest your losses, they were likely wiped away. 2020 is a perfect example of why, at HIG, we are opportunistic when it comes to harvest time.

The big question folks have debated is how much all this work is worth? How do we quantify the benefit to you? The Wall Street Journal caught our attention with Derek Horstmeyer’s report claiming the value to be more than 1%. The estimates go even higher if your tax rate is at the top end. If their estimates are somewhere in the ballpark, harvesting looks like a sound strategy year-round with the potential to show you some real money.

You can read about the study here.

Why would a stockbroker leave the office for lunch and end up spending the afternoon at a movie theater watching a Clint Eastwood triple feature? It’s hard to imagine a broker abandoning work in the middle of the trading day, but that broker was me. To understand what drove me into that darkened theater, you need to know what I was going through at the time—and how that experience contributed to one of the most important lessons I’ve learned during my 50+ year career in finance.

My fascination with the stock market began when I took my first investment class at Wharton Business School in 1967 during my MBA program. Investing was a new world to me (my father and grandfather weren’t investors—they both had pensions), and from that day on I wanted to learn as much as possible. I read investing books, followed the market’s movements in the newspaper and on TV, and listened to many so-called experts. It’s no surprise that this interest led me to a career in the investing world.

Along the way, though, I discovered that most of what you hear and read doesn’t teach you what you need to know to be a successful investor in the real world. Too often, investment “advice” is focused on specific products, like the stocks or mutual funds, or annuities, that someone wants you to buy. However, you can’t make sound investment decisions and manage your emotions without a grounding in the principles that lead to financial success. For me, I had to gain that knowledge through experience.

Some of those experiences were painful and humbling. Others were empowering. Now, more than 50 years into my journey to become a better investor, I want to share some of these stories and their lessons. I hope you can take something from my experiences to help put you on your path to investment success.

Investment class at Wharton—1966

A particular moment from my first investing class at the University of Pennsylvania made a big impression on me. One day, our professor asked us to calculate how much money we would have at retirement according to the following assumptions:

• We saved 10% of our starting salary the first year after graduation and continued saving 10% of our salary for the next 40 years
• Our salary would grow by 5% a year
• Our investments would earn 10% a year

I assumed a starting salary of $12,000 (which was a little optimistic—it turned out to be about $9,000), and then I began doing the math. We did not have computers back then, so I had to use manual calculations to work through all the figures. When I was done, I had an ending value of $1 million at age 64 in 2007.

I remember thinking this had to be a mistake. A million dollars was practically unheard of back then unless you were very wealthy.

I checked my work and got the same result. That’s when I realized that it was possible to become a millionaire by age 65 with a couple of reasonable assumptions—and a disciplined saving and investing strategy.

Lesson Learned: Compounding works wonders if you let it work.

Every retirement guide will tell you that starting to save early and keeping it up is the key to success. But it can be hard to stick with that approach because you must be willing to delay your gratification and ignore the noise around you – good and bad.

Investing doesn’t reward you consistently year after year. Some years you might not make much progress; other years, you might fall back a bit. Likewise, compounding isn’t exciting from one year to the next. Over long periods, though—like the 40 years you might spend saving for retirement—it’s going to make a big difference.

Clients and team members I work with have already experienced what compounding can do. They’ve been saving and investing for long enough that they can look back to where they were 20 years ago and be satisfied. Those of us in this fortunate position can help our younger friends and family members grasp the power of compounding.

When my granddaughters were around ten years old, I explained the Rule of 72 to them. It’s an easy way to quantify the benefits of compounding by calculating how long it takes for your savings to double. You divide the expected annual return of your investments into 72. For example, earning 10% per year means you’ll double your investments roughly every seven years, or six times over a 40-year career.  And remember, compounding continues to work even after you retire—so your savings can double a few more times in your lifetime.

Check back each month for the next lesson from Rick Hill’s long view career.

You might have seen articles making equity returns predictions for the next 5, 10, or 20 years. These predictions often forecast dire conditions, which in turn get the reader asking questions like “Is this true?”, “Should I be worried?”, “How should I use this information?” When reading these articles, it’s essential to step back and think about what we can control, what we can’t, and how we should act with that knowledge in mind.

Are these predictions accurate? No one knows. Equity markets are volatile, and the timing or magnitude of returns is tough to predict. Even experts have a terrible track record of reading the tea leaves and investing based on their predictions. Said differently, even those who get it “right” don’t get it right all the way. A common source of error is timing. A famous example is Robert Shiller, credited with “predicting” the 2008 housing market crash with the phrase “irrational exuberance.” The problem? He made that claim in June of 2005, and the market continued to rise for another three years. By the end of 2010, within two years of the crash, global markets on average were once again higher than the June 2005 levels and have remained higher ever since.¹

Should you worry? Since you can’t control near-term future returns, there is little benefit to trying to predict or worrying about them. However, based on the past 100 years or so of market history, we can be generally confident in the long-term future of positive global equity returns. This is because investing in equities involves taking risks, and investors would not take that risk unless they expected some positive return in exchange. Moreover, we know from the past that the range of short-term outcomes will be broad: sometimes positive, sometimes negative. Knowing that short-term results can vary may sound like a bummer, but it can help us build confidence (read on to find out how). 

How can I use this information? Using historical returns, we can determine how much investors, on average, have been compensated for investing in equities over the long term. We can also understand something about the range of possible outcomes over shorter periods. This info is useful when constructing your financial plan. 

At HIG, we can perform an in-depth analysis that includes the financial factors you can control, like saving and spending, and the ones you cannot, like market returns and inflation. Our team uses a sophisticated statistical tool that runs thousands of simulations to determine a range of different potential outcomes for your specific situation. Comparing this range to your goals can give you a sense of your personal “odds of success.” When the analysis shows >85% probability of meeting your goals, we find most clients are comfortable that they are on the right track. The benefit? Confidence. You can focus your time on what’s truly important and ignore the crisis of the month. In other words, we have your back.

If you would like to talk more about this, our CIO office hours are open. Feel free to schedule a 30-minute call.