“First in – First Out”

A little- noticed provision in the Senate’s tax proposal has the potential to significantly raise taxes on investors.  The change would prevent an individual investor from reducing taxes by selectively selling stocks that have the smallest gain or a loss when reducing their investment in a particular company or fund.  Instead, individuals would be required to sell their oldest shares first using the “First in – First Out” (or “FIFO”) method to determine gains (and losses). 

So called “active” investors, who try to beat the market by frequently selling losers and buying winners, and who “time” their investments by buying stocks when they expect the stock market to go up and vice-versa, could be particularly hard hit by the change.  As a result, the change could further the growing trend toward “smart-beta” investment strategies.  These strategies typically utilize well-diversified portfolios of low cost, index oriented mutual funds and ETFS.  Passive investment strategies aim to maximize returns by using a rules-based approach to determine when to buy and sell securities, thereby limiting the amount of buying and selling, with the goal of building slow, steady wealth over time.