Watch the market and control what you can control.
That’s what Gerard O’Reilly, co-CEO of Dimensional Funds, tells his clients as the Biden government is considering raising taxes on capital gains, businesses and the wealthy, a move that could impact tax-managed investment strategies like Dimensional’s.
The most important thing for investors to consider is the market’s reaction to potential tax hikes, O’Reilly told CNBC’s “ETF Edge” this week.
“If the market perceives that something will lower future cash flows to investors or raise discount rates, this will affect prices,” said O’Reilly, also his company’s chief investment officer, in a Monday interview.
Since such expectations are often baked into market prices, the most constructive approach is also the simplest, said O’Reilly: “The price is forward-looking. Don’t worry. Go ahead.”
Fund managers, investment advisers and retail investors also need to remember what is under their control in changing market landscapes, the CEO said.
“You need to look at tax law at this point and then make sure you have the flexibility to maximize after-tax returns,” said O’Reilly.
There’s a lot you can do to maximize your after-tax return, whether it’s how you manage dividends, whether you rebalance … or the types of distributions you get from funds, ”he said. “A flexible approach allows you to adapt to changing tax laws over time to ensure that you, the investor, get the most of it regardless of tax number.”
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