The practical challenge when tax loss harvesting is maintaining a continuous asset class exposure at target levels without time gaps, while avoiding penalties under the IRS Wash Sale Rule (IRC Section 1091).

The problem with time gaps is that significant market moves can occur in the 30-day waiting period of the Wash Sale rule, which would prevent the portfolio from achieving the risk and return expectations on which the portfolio asset allocation was designed.

The solution to the problem is substitution. Immediately upon realizing a loss in one fund, open a position in an alternate fund that is similar to, but not “substantially identical” to, the fund on which the loss was realized.

After the waiting period of 30 days, close the substitute fund position and reopen the original position (assuming …

As you select asset classes and class weights for your portfolio, you should take into consideration, among other things, the mean return of those classes over different periods of time.

History is no guarantee of the future, but lack of understanding of the past may result surprising returns. It’s a good idea to do all you can to minimize surprises.

The chart shows the relative 1, 3, 5 10 and 15 year annualized returns for six major asset classes. The key feature to observe is the relative size of the return for each class within each year.

You can see bonds as a low return, but stabilizing asset class. You can see the US market has been weak relative to foreign markets. Commodities have been strong. Real estate did well, until it fell out out bed in a major way during the last 12 months.

A representative (but not exhaustive) list