Your client inherited $750,000 eighteen months ago. It has sat in a money market while equities gained 22%. Lump-sum wins two-thirds of the time, but she will panic-sell at the first 10% drawdown. The right strategy depends on the client.
The simplest and most tax-efficient equity strategy. Unrealized gains compound without tax drag. Over 30 years, deferral adds 50-100 bps of effective annual return. Assets held until death receive a stepped-up cost basis, potentially eliminating the embedded gain entirely. Short-term gains convert to long-term (0%/15%/20% vs. up to 37%).
Think of deployment strategy as a trade-off between expected return and behavioral risk. Markets drift up over time, so getting invested sooner usually wins on the math, but a client who sells after a 10% drop never captures that math. Match the method to the person, not the market.
Invest a fixed dollar amount at regular intervals. More shares purchased when prices are low, producing a lower average cost than the average price. DCA does not guarantee profits in declining markets.
Common mistakes
- Treating the wash sale window as 30 days total. It is 30 days before + the sale day + 30 days after = 61 days. Buying a substantially identical security even one day before the loss sale triggers the rule. Trap: 30 days total or 30 days after only.
- Forgetting the wash sale applies across all accounts, including IRAs. A loss sale in taxable followed by repurchase in an IRA permanently destroys the loss. Trap: "the loss is deferred", no, in an IRA it is gone forever.
- Believing DCA always outperforms lump-sum. Lump-sum wins roughly two-thirds of the time. DCA's edge is behavioral, not mathematical.
Bottom line
- Wash sale: 30 days before + sale day + 30 after = 61-day window, applied across ALL accounts including IRAs.
- An IRA repurchase permanently disallows the loss (not deferred, destroyed forever).
- Buy-and-hold is the most tax-efficient strategy: deferral, short-to-long rate conversion, and step-up at death that can eliminate the gain.
- Lump-sum beats DCA roughly two-thirds of the time; DCA's edge is behavioral, giving a lower average cost than average price.
Exam shortcut
Wash sale questions follow a pattern: loss sale + purchase of same or similar security + ask if the loss is allowed. Count 30 days before, the sale date, 30 days after = 61-day window. If repurchased in an IRA, the loss is permanently gone, not deferred. Margin questions come in three shapes and each has exactly one move.
The full lesson (about 4,320 words, 29 min read) adds 3 worked examples, all 10 common mistakes, a self-check, free in the app.
Learning objectives
- D.34
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