Year-end is often viewed as a time of reflection. Within the context of your investment portfolio, it is also a great time to evaluate what’s working well and what isn’t. And for taxable investors, it is helpful to examine your portfolio through the lens of after-tax returns. After all, if not managed properly taxes can be a significant cost for investors.

The chart below provides a simple illustration. It shows how an initial $1 million investment would grow over 20 years assuming a 10% annual return, as represented by the “pre-tax portfolio return” line.¹

For taxable investors, however, this will not necessarily be your end result. Instead, you may land somewhere between the two red lines depicting the growth of the initial $1 million investment after deducting annual tax drag of 1% to 2% per year.

Tax-aware investment management may help narrow this gap by reducing tax drag and potentially generating tax alpha. Over time, small differences in tax efficiency can contribute to materially different outcomes. As seen in our illustration, managing tax drag can be a powerful lever for preserving long-term wealth.

With the importance of after-tax portfolio compounding in mind, here are some year-end considerations for taxable investors:

Know who pays the taxes: Nothing throws a wrench into year-end tax planning like finding out that two portfolios that have been managed separately roll up under the same tax-paying entity. Now is a good time to confirm who pays taxes for all your portfolios. It may be too late to affect the current tax year, but this knowledge can help you plan for the next tax year.

Tax-loss harvesting: Ideally, you have been tax-loss harvesting in your portfolio throughout the year, but if not, now is an excellent time to consider selling losing positions, especially if they no longer make sense to own. Before doing so, however, take note of any securities that have been recently bought or sold, as these transactions may factor into the IRS wash-sale rules.

Strategic gain realization: If you expect to be in a lower tax bracket this year, it may make sense to realize gains now and rebalance your portfolio. Similarly, if you’ve realized losses during the year, you may have capacity to realize gains and bring your portfolio more in line with your targets.

Review a transition plan: Year-end is also a good time to check in with your advisor on any strategies you are transitioning. What did the portfolio look like at the beginning of the year, and what does it look like now? How much in gains has been realized? Do you want to realize any more, or should you change course for the remainder of the year? These are just a few examples of questions that can guide the conversation.

Charitable gifting: If donating to charity is one of your priorities, now is the time to work with your advisor and portfolio manager to come up with a list of securities that may be appropriate for the gift. Donating appreciated securities may provide tax benefits while also allowing you to remove positions from your portfolio that you may otherwise hesitate to sell, even if you no longer want to own them.

Planning for corporate insiders: If you are subject to certain restrictions or regulations pertaining to the sale of stock you own, now is a good time to come up with a game plan. In fact, it may be one of the few opportunities you have to sell your stock. Blackout periods are frequently lifted for some portion of the fourth quarter of the current tax year and the first quarter of the next. Planning now can help keep you on track to meet your tax and investment objectives regarding your company stock.