A portfolio can generate attractive investment returns and still produce disappointing results if taxes, costs, unnecessary turnover, and poorly coordinated investment decisions consume too much of those returns.

For high-net-worth investors, the question is not simply how much a portfolio earns. An equally important question is how much of that return the investor ultimately keeps after taxes.

At Di Bello Financial, tax efficiency is not treated as a year-end exercise. It is incorporated into portfolio construction, security selection, asset location, trading decisions, retirement planning, and ongoing portfolio management.

As a CPA/PFS and CFP® professional, I approach investment management from both an investment and tax perspective. The objective is to build portfolios designed to pursue attractive risk-adjusted returns while managing taxes, costs, and risk throughout the investment lifecycle.

Before selecting investments, we first evaluate the client's complete financial picture.

That includes:

• Investment objectives
• Risk tolerance and capacity
• Time horizon
• Current and future income needs
• Tax bracket
• Capital gains exposure
• Existing investments
• Unrealized gains and losses
• Retirement accounts
• Concentrated stock positions
• Business interests
• Estate and charitable objectives
• Anticipated liquidity needs

Two investors with identical portfolio values may require very different investment strategies.

An investor accumulating assets during peak earning years may benefit from a different portfolio structure than a recently retired client who needs regular distributions. Likewise, an investor arriving with substantial embedded capital gains requires a different transition strategy than someone investing cash.

Portfolio construction should therefore begin with understanding the client's entire financial and tax situation.

We do not believe every investor should be placed into the same standardized model portfolio.

Client portfolios are constructed using a combination of:

• Individual stocks
• Individual bonds
• Exchange-traded funds (ETFs)
• Cash and short-term investments

Stocks generally represent the majority of the equity allocation across our portfolios, while ETFs typically represent approximately 25%–30% of the overall portfolio, depending upon the client's allocation, objectives, and circumstances.

ETFs can provide efficient exposure to particular markets, industries, investment styles, or asset classes where broader diversification is desirable.

The combination of individual securities and carefully selected ETFs allows us to maintain diversification while retaining greater control over taxes, security selection, and portfolio positioning.

One advantage of owning individual stocks is the ability to make tax decisions at the individual security level.

Suppose an ETF owns hundreds of companies. An investor generally cannot sell one underlying company at a loss while retaining exposure to the rest of the fund.

With individually owned securities, we can evaluate each position separately.

That creates opportunities to:

• Harvest losses
• Realize gains strategically
• Reduce concentrated positions gradually
• Manage holding periods
• Offset realized gains with available losses
• Donate highly appreciated securities
• Transition portfolios more selectively

This flexibility can become increasingly valuable as portfolio size and tax complexity increase.

Tax-loss harvesting should not necessarily be limited to December.

Markets fluctuate throughout the year, and individual securities can experience temporary declines even when the overall market is performing well.

We continuously monitor portfolios for opportunities to realize losses when doing so makes investment and tax sense.

Realized capital losses may generally be used to offset realized capital gains. If losses exceed gains, current tax law generally allows individuals to deduct up to $3,000 of net capital losses against ordinary income annually, with unused losses carried forward to future years.

However, realizing a tax loss should never be viewed in isolation.

We also consider:

• The investment outlook
• Transaction costs
• Portfolio allocation
• Wash-sale considerations
• Potential replacement investments
• Expected future tax rates

The objective is not simply to generate tax losses. It is to improve the portfolio's overall after-tax outcome.

Sometimes realizing a gain intentionally can be advantageous.

A client may temporarily be in a lower tax bracket because of:

• Retirement
• A business transition
• A sabbatical
• Lower business income
• A period before Required Minimum Distributions begin
• An unusually high level of deductions
• Other changes in taxable income

These periods can create opportunities to recognize gains at potentially more favorable tax rates.

We evaluate tax-gain harvesting alongside Roth conversions, charitable giving, retirement distributions, and other planning strategies so that one decision does not unintentionally undermine another.

Asset allocation determines what an investor owns.

Asset location determines where those investments are held.

Different types of investments can produce very different tax consequences.

Depending upon the client's circumstances, tax-inefficient assets may be better suited to tax-deferred or tax-exempt accounts, while more tax-efficient investments may be appropriate for taxable accounts.

Accounts may include:

• Taxable brokerage accounts
• Traditional IRAs
• Roth IRAs
• 401(k)s and other employer retirement plans
• Trust accounts

Asset location should be coordinated across the household rather than treating every account as an independent portfolio.

The goal is to create an appropriate overall allocation while placing assets where they can potentially be held most tax efficiently.

Fixed income is another area where customization can add value.

When appropriate, we construct individual bond ladders using:

• U.S. Treasury securities
• Investment-grade corporate bonds
• Municipal bonds

The structure of each ladder considers the client's:

• Tax bracket
• Income requirements
• Liquidity needs
• Risk tolerance
• Time horizon
• Interest-rate outlook

For investors in higher tax brackets, municipal bonds may sometimes provide more attractive after-tax income than taxable bonds.

However, the stated yield alone does not determine which bond is preferable. We evaluate the tax-equivalent yield and the investor's specific circumstances.

Duration is also considered in light of our outlook for interest rates and the client's financial objectives.

New clients frequently arrive with portfolios accumulated over many years.

Those portfolios may contain substantial unrealized gains.

Immediately selling everything and rebuilding the portfolio could create a significant and unnecessary tax liability.

Instead, we evaluate each holding individually and may develop a gradual transition strategy.

That can involve:

• Retaining attractive existing investments
• Selling weaker positions with smaller gains first
• Using available losses to offset gains
• Redirecting dividends and new cash
• Using charitable gifts of appreciated securities
• Gradually reducing concentrated positions
• Rebalancing over multiple tax years

The goal is to move toward the desired portfolio without allowing the tax consequences of the transition to overwhelm the investment benefits.

Executives, business owners, and long-term investors sometimes accumulate substantial positions in a single company.

A concentrated stock position can create significant wealth, but it can also introduce significant portfolio risk.

Selling the entire position may generate a substantial capital gain.

Keeping it indefinitely may expose too much of the client's wealth to one company.

The appropriate strategy often lies between those extremes.

We may evaluate:

• Gradual diversification
• Tax-loss offsets
• Charitable gifting
• Donor-advised funds
• Timing of stock sales
• Executive compensation schedules
• Other portfolio assets
• Estate planning considerations

Concentrated stock management is therefore both an investment-management and tax-planning issue.

For charitably inclined investors, donating appreciated securities can sometimes be more tax efficient than writing a check.

Depending upon the circumstances and applicable tax rules, gifting appreciated securities directly to a qualified charity or donor-advised fund may allow an investor to support charitable objectives while potentially avoiding realization of the embedded capital gain.

The strategy can also provide an opportunity to remove highly appreciated or concentrated securities from a portfolio and subsequently rebalance other assets.

Charitable planning should therefore be coordinated with investment management rather than handled independently.

Traditional retirement accounts, Roth accounts, and taxable investment accounts receive very different tax treatment.

Investment management should account for those differences.

For clients approaching or already in retirement, we evaluate portfolio management in conjunction with:

• Roth conversions
• Required Minimum Distributions (RMDs)
• Social Security
• Medicare IRMAA considerations
• Charitable distributions
• Capital gains
• Retirement income needs

A decision that appears attractive from an investment standpoint can have unintended tax consequences when viewed across the client's entire financial picture.

For example, realizing additional income could affect Medicare premiums or the taxation of other income.

Integrated planning helps identify these interactions before decisions are implemented.

Taxes are not the only expenses that reduce investor returns.

Investment costs matter as well.

Our use of individual stocks, individual bonds, and low-cost ETFs is designed to keep underlying portfolio expenses relatively low while providing the flexibility necessary for active portfolio and tax management.

Lower investment expenses mean more of the portfolio's gross return remains available to compound for the investor.

Over long periods, even relatively small differences in annual costs can have a meaningful effect on accumulated wealth.

Portfolio flexibility matters.

Markets change. Tax laws change. Interest rates change. Individual companies change.

A portfolio constructed primarily from individual securities and low-cost ETFs allows us to respond when opportunities or risks develop.

That flexibility can be useful when:

• An individual stock becomes attractively valued
• A company's fundamentals deteriorate
• Interest rates change
• Tax-loss opportunities arise
• Capital gains should be realized
• A client's financial circumstances change
• New cash becomes available
• Retirement distributions begin

Rather than waiting for a predetermined annual rebalancing date, portfolios can be adjusted when circumstances warrant.

Tax efficiency should never substitute for sound investment analysis.

Before purchasing individual companies, I evaluate information that may include:

• Financial statements
• Earnings reports
• Earnings-call transcripts
• Analyst research
• Valuation metrics
• Revenue and earnings trends
• Cash flow
• Balance-sheet strength
• Competitive positioning
• Industry conditions
• Management execution
• Economic and market data

The objective is to understand both the investment opportunity and the risks associated with owning the company.

Tax considerations then become part of the decision regarding when to buy, hold, trim, or sell a position.

Portfolio management requires accountability.

We consistently monitor portfolio results against relevant broad-market and asset-class benchmarks.

Clients receive regular reporting, including monthly and quarterly performance information, and have access to detailed portfolio information through our Black Diamond client portal.

Performance analysis considers more than whether the portfolio increased or decreased in value.

We evaluate the relationship among:

• Return
• Risk
• Portfolio beta
• Asset allocation
• Market conditions
• Tax consequences
• Client objectives

Our investment process actively seeks to create positive alpha relative to the portfolio's beta while maintaining an appropriate level of risk for the client's objectives.

No investment strategy can guarantee positive alpha or outperform a benchmark, but disciplined measurement allows us to evaluate whether the portfolio is performing as intended.

Tax-efficient investing is not about avoiding taxes at all costs.

Sometimes paying a tax today is the correct decision.

An investment with deteriorating fundamentals should not necessarily be held simply because selling it creates a capital gain. Likewise, an attractive investment opportunity should not automatically be rejected because it may eventually produce taxable income.

The objective is to make investment decisions while understanding their tax consequences.

That distinction is important.

At Di Bello Financial, we seek to coordinate:

Investment selection + portfolio construction + tax management + retirement planning + financial planning into a single integrated strategy.

For high-net-worth investors, managing these decisions together can be considerably more effective than treating investments and taxes as separate disciplines.

There is no single transaction that makes a portfolio tax efficient.

Tax-efficient investment management is a continuous process involving:

• What we buy
• What we sell
• When we sell it
• Which account owns it
• How gains and losses are managed
• How income is generated
• How retirement accounts are distributed
• How charitable gifts are funded
• How portfolios transition across generations

As markets, tax laws, and client circumstances change, the strategy should evolve with them.

Our objective is straightforward: build portfolios designed to grow and preserve wealth while helping clients keep more of what their investments earn.

Annette Di Bello, CPA/PFS, CFP® is the Founder and President of Di Bello Financial, a fee-only Registered Investment Advisor headquartered in Mission Viejo, California.

With nearly four decades of experience in accounting, taxation, financial planning, and investment management, Annette specializes in helping high-net-worth individuals and families, business owners, executives, physicians, and retirees coordinate investment decisions with tax strategy and long-term financial planning.

As both a Certified Public Accountant (CPA) with the Personal Financial Specialist (PFS) credential and a CERTIFIED FINANCIAL PLANNER® professional, Annette brings an integrated perspective to portfolio management, retirement planning, tax strategy, estate planning coordination, and wealth preservation.

Di Bello Financial serves clients throughout Orange County, Los Angeles County, San Diego County, and other states where permitted by law.

This article is provided for informational and educational purposes only and should not be construed as individualized investment, tax, accounting, or legal advice. Examples and strategies discussed are illustrative and may not be appropriate for every investor. Tax laws and regulations are subject to change. Readers should consult their own qualified professional advisors regarding their individual circumstances.

Investment advisory services are offered through Di Bello Financial, a California Registered Investment Advisor. Registration does not imply a certain level of skill or training. Past performance is not indicative of future results. All investing involves risk, including the possible loss of principal. References to alpha, benchmarks, or investment objectives do not represent a guarantee of future performance.

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