How This $150B+ Wall Street Strategy Could Lower Your Taxes
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What is the main topic discussed in this episode?
Hi, Miriam. Hi, Telus. So, audience, those of you who know our show know that Miriam recently started covering a new beat, moving from covering the private asset manager world for many years, hundreds of years.
It felt like hundreds of years.
And has transitioned to covering personal finance, wealth, and kind of focusing on what – basically what rich people are doing with their money.
And not rich people.
And not as rich people. Okay, okay. But, you know, for those of us who aspire to have a lot of money, we kind of want to know what people who do have a lot are doing and thinking about when it comes to – And one thing that you kept hearing about was something called a hot strategy. Everyone was talking about it. It was being discussed. Water coolers around the tri-state area. And that was talking about tax efficiency, how to offset your gains that are going to be taxed. And you were hearing about something called tax-aware investing and specifically long-short tax-aware investings.
Yeah, I'd been hearing about this strategy, Tax Aware Long Short, from pretty much every wealth advisor I talked to. And I wanted to figure out how big it had gotten and how it worked. And that search led me to Brent Sullivan. He runs Tax Alpha Insider, which is a publication that focuses on tax strategies for people looking to be the most efficient with taxes in their investing. He also manages a number of conferences around this subject. And Brent is usually based in Seattle, but today he joins us in our studio here in New York. Welcome, Brent.
It's a pleasure to be here.
So, Brent, just for our listeners at home, what is tax-aware investing? What is tax management?
Well, I think about tax management as three different things. The first one is the thing that you invest in. And so that could be stocks, bonds, real estate, et cetera. The second thing is location, where you put the thing. It could be in a taxable brokerage account. It could be in a tax-advantaged IRA, Roth IRA. It could be in your estate or out of your estate. So that's where you put the thing. And then the third thing is the timing. And the timing is like if you have a real estate asset and you're depreciating it. or if you have a direct indexing portfolio and you're realizing tax losses and you're deferring taxable gains, all of those things together, again, the investment the location, and then the timing.
That, in my mind, everything you can do around those things is tax management.
Location, location, location. Works for investing as well as real estate.
I mean, it's federal, state, estate. Those are your location, location, locations.
So Brent, as most people I think are, I'm aware of the idea that tax-aware investing is a smart thing to do You sell your losers to generate some tax losses, and then that offsets potential future capital gains on your winners. But it sounds like what you guys are talking about is something that is a much more souped-up, sophisticated version of that. Why don't you – how did you define for Miriam when she called you what exactly is tax-aware long-short? Am I even saying it right? Yeah.
Or you could say long-short tax-aware. You could put that descriptor on either side of the long-short.
So what the heck is this thing? What is different about that from the kinds of tax-aware investing that I think most people know about?
Well, so tax-aware long-short is really an extension or a combination of two different things. One, it is the direct indexing, individual securities approach to portfolio construction that allows you to sell losers, again, like you said, Telus, bank those losses, store them on the household balance sheet, and then deploy them later against capital gains. So you want to net those two. Now, what's new about tax-aware long-short is that now we're injecting leverage into the portfolio leverage comes in two forms one it is the margin that you add so you borrow and then you invest that margin and the other form of leverage is short positions you're borrowing those shares and then selling them that creates a short position what that does is increase the surface area of the portfolio so now instead of just one dollar invested maybe you have two dollars maybe a five dollars invested
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:02–6:45
2
What is tax-aware long-short investing and how does it differ from basic tax-loss harvesting?
6:45–13:17
3
How does leverage and shorting work in a 140/40 tax-aware long-short portfolio?
13:17–25:28
4
Why did tax-aware long-short strategies grow from near zero to over $150 billion in AUM?
25:28–34:44
Speakers
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