Having embraced evidence-based investing as one way we help our clients enjoy simplicity and transparency in their financial lives, we are careful to the point of obsession when  considering fund manager alliances. We want to collaborate with firms who share our “client-first” business strategy, and are as thoughtful as we are about investing.

That’s why I recently attended a two-day AQR Capital Management Investment Symposium in San Francisco. I wanted to hear more about the traditional and alternative strategies AQR is working on to help investors capture market returns, manage market risks and minimize the costs involved. Insightful commentary about the way they think (like this piece here) is just one of the reasons the firm has experienced explosive growth over the last eight years.

Here are some of the event’s key takeaways that appealed to me:

• The firm takes a systematic approach to its investment strategies, to avoid the emotional bias that creeps in when “human interaction” is involved.
• They’re big on peer-reviewed research – others and their own.
• They look at lots of new strategies or how to improve on existing ones, but they only bring a handful of what they consider to be their best ideas to market.
• While many of AQR’s strategies are hedged, they are a rare breed as low-fee champions, decrying the traditional (excessive) “2 and 20” hedge fund fee structure. “We won’t do anything that will not provide – or leave – the investor with a reasonable return,” said managing and founding principal Cliff Asness. (That sounds smart to me.)
• They’re also big on diversification as an important way to improve on investor outcomes. “We look at everything,” said Asness. “If it’s uncorrelated, it’s additive.”
• Like us, they emphasize financial literacy and investor education as key. As AQR’s managing director Pete Hecht said, “We all should hold our managers accountable for what they claim to offer. … It’s our job to be helpful and to educate.”

Well said, and I’m glad I invested the two days. While AQR’s solutions may not fit well with every investor’s portfolio, personal circumstances and long-range plans, it was refreshing to hear what they had to say.

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 who are familiar with the strategy tend to 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.

What is tax-loss harvesting?

When properly applied, tax-loss harvesting is the equivalent of turning your financial lemons into lemonade by converting market downturns (whenever they may occur) into tangible tax savings. A successful tax-loss harvest lowers your tax bill, without substantially altering or impacting your long-term investment outcomes.

How does it work?

If you sell all or part of a position in your taxable account when it is worth less than you paid for it, this generates a realized capital loss. You can use that loss to offset capital gains and other income in the year you realize it, or you can carry it forward into future years. (There are quite a few caveats on how to report losses, gains and other income. A tax professional should be consulted, but that’s the general premise.)

Here’s a three-step summary of the round trip typically involved:

1. Sell all or part of a position in your portfolio when it is worth less than you paid for it.
2. Reinvest the proceeds in a similar (not “substantially identical”) position.
3. Return the proceeds to the original position no sooner than 31 days later (after the IRS’s “wash sale rule” period has passed).

Again, once the dust has settled, our goal is to have generated a substantive capital loss to report on your tax returns, without dramatically altering your market positions during or after the event.

Any catches?

Remember, tax-loss harvests should occur when market conditions allow for them AND when your best interests warrant it. There are several reasons that not every available loss should be harvested. To name a few:

Costs – The potential tax savings may not offset the trading costs involved. Before the harvest, do the math.

Tax planning – A tax-loss harvest can reduce your taxes in the short-term, but may generate higher capital gains taxes later on (by lowering the basis of your holdings). Loss harvests should be managed in concert with your larger tax planning projections.

Asset location – Holdings in your tax-sheltered accounts (such as your IRA) don’t generate taxable gains or realized losses when sold, so they aren’t available to harvest.

It’s never fun to endure market downturns, but they are an inherent part of nearly every investor’s journey toward accumulating new wealth. When they occur, we can sometimes soften the sting by leveraging losses to your advantage. That’s why we keep a year-round eye on our clients’ holdings, so we can be ready to spring into action any time a harvesting opportunity may be ripe for the picking.

Let us know if we can ever answer any questions about this or other tax-planning strategies you may have in mind.

While we don’t think of ourselves as the passive types, it’s interesting to see The Wall Street Journal shine its bright spotlight on passive investing and related evidence-based investing in its new series, “The Passivists.”

You can browse the entire series, or here are a couple of our favorite installments:

The Dying Business of Picking Stocks,  Anne Tergesen and Jason Zweig

News flash! “Investors are giving up on stock picking.” Our take on the matter: It’s about time.

Making Billions With One Belief: The Markets Can’t Be Beat, Jason Zweig

Featuring Dimensional Fund Advisors, with founder, chairman and co-CEO David Booth reflecting that “A little bit of judgment can make a difference.”

As the media turns its attention to the types of investment strategies we’ve been employing at Hill Investment Group since our founding, we wonder whether this will be a passing fad, a lasting improvement for investors or (as is so often the case in life), a little of both. Whatever. We’ll enjoy the wider coverage while it lasts, and still be encouraging you to Take the Long View with your investments, long after the spotlight has moved on.