If the historic pattern continues following midterm elections, which have typically seen markets performing well right into the new year, many clients, and the advisors who put them into equities, could be dancing on New Year's Eve. But whether that trend repeats or not, the happy folks on Dec. 31 will also include clients counting their losses. We're talking about advisors and clients who were able to harvest losses during this year's selloffs. It turns out that what used to be largely an end-of-the-year affair is now a year-round practice of aggressively looking for losses in a portfolio and harvesting them right away, not just to avoid short-term capital gains taxes in other parts of the same portfolio, but to also enhance performance. Tax-loss harvesting has become a tried-and-true process for balancing losses against gains.

Nevertheless, there are plenty of skeptics when it comes to claims made by some tax-loss harvesting practitioners — particularly those promoting automated systems with daily monitoring for potential harvesting of tax losses. Robert Gordon, president of Twenty-First Securities, warns of "hyped benefits" that don't deliver as promised. Gordon argues that in the long term tax-loss harvesting can add perhaps an average 0.5% gain to a portfolio in annual tax alpha, if done properly. That, he adds, assumes that capital gains are being deferred, not avoided, and that they will ultimately end up having to be paid.

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