Tax Loss Harvesting

Marc Odo
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One of the toughest questions an investor faces is, “When should I cut my losses and sell out of a position?” Numerous behavioral finance studies explore the idea that investors are loath to realize a loss and will wait years in order to get back to the break-even point. Obviously such a mindset ignores the opportunity cost of a forgone investment in a more attractive alternative. Another opportunity cost that should be considered is the value of the losses of the underwater positions to offset capital gains of the winners, assuming they are held in a taxable account.

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The R-Squared is the correlation squared of the benchmark to a weighted portfolio return series. Correlation Squared is the classical statistical method for measuring how closely related the variances of two series are. R-Squared is calculated using the common date range of the benchmark and the weighted portfolio return series.


R2 = R-Squared


Generally speaking, the R-Squared (R2) of a manager versus a benchmark is a measure of how closely related the variance of the manager returns and the variance of the benchmark returns are. If the benchmark is a Style Benchmark, this can be rephrased by saying: The R2 is a measure of how well the variance of the Style Benchmark explains the variance of the manager.


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