The Power of Tax-Efficient Investing

“You can’t predict. You can prepare.” – Howard Marks

The headlines this year have been relentless. Trade tensions escalate and de-escalate. AI investments soar to dizzying heights, then stumble amid concerns about valuations or Chinese competition. Geopolitical storms rage from Eastern Europe to the South China Sea. For many investors, this creates an uncomfortable paradox: extraordinary opportunities shadowed by genuine uncertainty.

When you’re standing in this kind of financial situation, it’s natural to want answers to the big questions to ensure that your financial house is solid. Which sectors will lead? Should I increase my AI exposure? What happens if trade tensions worsen? These feel like the questions that matter most.

But here’s what decades of investment research and experience have taught us: the questions that feel most urgent are often the ones we can’t answer with any reliability. What we can do—what actually moves the needle over time—is focus on the elements of investing that are within our control.

And one of the more powerful investing factors you control? Taxes.

What You Can Control

Fidelity issued a white paper regarding tax-efficiency in investing that cited Morningstar research showing that over a 95-year period ending in 2023, investors gave up about two percentage points of their annual returns to taxes. Two percentage points may not sound dramatic, but compounded over 20 years, the wealth difference between tax-aware and tax-unaware investors can exceed 25-30%. That’s not market timing. That’s not picking winning stocks. That’s simply keeping more of what you earn.

In uncertain markets, this matters even more. While we can’t predict whether trade negotiations will succeed or which AI company will dominate the next decade, we can design your portfolio to be as tax efficient as possible. This isn’t about exotic strategies or aggressive schemes. It’s about implementing proven approaches that work whether markets rise, fall, or move sideways.

As legendary investor Peter Lynch once noted, “The real key to making money in stocks is not to get scared out of them.” Part of not getting scared is having confidence that you’re managing the controllable elements well. Here are three strategies that we consider when managing client resources to control tax impact.

STRATEGY: Asset Location

Most investors think carefully about what they own. Fewer think carefully about where they own it. Yet asset location (the decision of which investments to hold in taxable accounts versus tax-deferred and tax-free accounts) can be just as important as asset allocation itself.

The principle is straightforward: investments that generate ordinary income or frequent and unplanned capital gains distributions work better in tax-deferred accounts like IRAs and 401(k)s, where those tax bills are postponed. Meanwhile, tax-efficient investments like broad asset class focused mutual funds or Exchange-Traded Funds (ETFs), stocks you plan to hold long-term, or municipal bonds are beneficial in taxable accounts where you can take advantage of preferential long-term capital gains rates or tax-free income. Stocks and ETFs have natural tax deferral built into their structure as investors can defer realizing taxable capital gains by delaying the sale of their investments.  

While the strategy is not complicated in theory, it does require intentional planning. When implemented thoughtfully across your entire portfolio, proper asset location can save thousands of dollars annually without changing a single investment decision about risk or return.

STRATEGY: Harvesting Opportunities in Volatility

Market volatility, while uncomfortable, creates opportunity. The very price movements that generate anxiety on the nightly news also create chances for “tax-loss harvesting”…selling investments at a loss to offset gains elsewhere in your portfolio while maintaining your overall market exposure.

When done systematically throughout the year rather than just in December, this strategy generates meaningful tax savings even in years when your overall portfolio shows positive returns. The key is vigilance and a disciplined process for identifying opportunities as they arise.

We view this volatility differently than most. Where others see chaos requiring action (for example, buying or selling based on predictions) we see the natural rhythm of markets doing their job of price discovery. And within that rhythm, we find opportunities to improve the after-tax efficiency of your plan.

STRATEGY: The Advantage of Patience

In a world fixated on quarterly results and real-time market updates, patience has become undervalued. Yet the tax code still rewards it handsomely. Hold an appreciated investment for over a year, and your federal tax rate on gains drops from ordinary income rates (which can exceed 37%) to long-term capital gains rates of 0%, 15%, or 20% depending on your income level.

This creates a natural bias in your portfolio management: favor patience over frequent trading, tax efficiency over frenetic activity. This doesn’t mean being stubborn about holdings that should be sold or, in other words, “letting the tax tail wag the dog”. It means making intentional management decisions with full awareness of their tax consequences.

When combined with thoughtful rebalancing and strategic use of tax-advantaged accounts for your distributions, this patience compounds over time. Not just in tax savings, but in the discipline it brings to your overall investment approach.

Looking Beyond the Headlines

The current environment, with its AI exuberance and trade tensions, will pass. It always does. Something else will take its place in the worry rotation. Markets will continue their eternal cycle of enthusiasm and caution, expansion and contraction.

What won’t change is the arithmetic of compounding and the drag that inefficient tax management places on long-term wealth creation. As Warren Buffett has observed, “The most important quality for an investor is temperament, not intellect.” Part of that temperament is staying focused on what matters and what you control rather than being swept up in the narrative of the moment.

This is where our partnership matters most. While the headlines scream about things beyond anyone’s control, we remain focused on building and maintaining your tax-efficient portfolio structure. We’re actively monitoring opportunities to harvest losses, ensuring your asset location remains optimal, and managing your distributions in the most tax-advantaged way possible.

A Word About Your Sterling Plan: It’s Different (and Better)

Unlike institutional investors or the broad market indices you hear about in the news, your portfolio is built specifically for you. It reflects your goals, your timeline, your risk tolerance, and your tax situation. This personalization isn’t window dressing…it’s the foundation of everything we do.

Your plan accounts for your specific distribution needs, ensuring you have the right resources in the right places to meet your lifestyle requirements without being forced to sell at inopportune times. It incorporates tax-efficient strategies at every level, from asset location to rebalancing methodology to thoughtful withdrawal strategies.

Most importantly, it’s designed for resilience. Not by predicting which way markets will move, but by building a structure diversified enough to capture returns across different market environments while keeping more of those returns working for you.

Small, thoughtful actions compound over time…much like your investments themselves. In a world that often feels unpredictable, that’s a reassuring truth worth embracing.

Our commitment to you remains constant regardless of market conditions: to focus on what we can control, to implement strategies supported by decades of research, and to keep your financial plan moving forward through all seasons. The questions about AI valuations and trade policy may dominate the headlines, but the work that truly builds wealth happens in the decisions we make together about tax efficiency, diversification, and disciplined portfolio management.

While the future may be uncertain, your approach doesn’t have to be. If you have questions about your specific tax situation or want to discuss opportunities in your portfolio, we’re here. It’s our continued privilege to partner with you to help you meet your most important goals.

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Sources & Disclosures

Disclaimer: This analysis is provided for informational purposes and does not constitute investment, legal, or tax advice. Investors should consult with qualified professionals regarding their specific circumstances.

Data points are accurate as of publication date but subject to revisions. Economic forecasts represent professional opinions of the specific entities and economists and are not guarantees of future performance.

The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Sterling to be reliable, and Sterling has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Sterling accepts no responsibility for loss arising from the use of the information contained herein.

Risks: Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful. Diversification neither assures a profit nor guarantees against loss in a declining market.