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Investing Specialists

A Tax-Efficient Portfolio Makeover May Be Less Painful Than You Think

Proper accounting of cost basis is essential to avoid paying more taxes than you need to.


It's a fact of life: Many investors begin putting together their portfolios before they really know what they're doing. As they get more knowledge and experience under their belts, they're apt to realize that some adjustments are in order. The young investor who started out with a balanced portfolio may decide he really should be mostly in stocks, for example, or the investor who started out amassing a portfolio of individual stocks may decide that mutual funds are a better fit for her busy lifestyle.

In a similar vein, some investors may have started in a taxable brokerage account without regard for the tax-efficiency of their investments. A few unwanted income or capital gains distributions later, they realize that they should have been more focused on investments that limit those taxable distributions. On the short list of tax-friendly investments for stock investors are individual stocks, broad-market exchange-traded funds and index mutual funds, and tax-managed funds. For bond investors, municipal bonds, whose distributions are free from federal and in some cases state and local taxes, often make sense.

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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