Featuring insights from Russell Investments’ Phil Lynch and Jacob Kelderman
As we closed out 2025, many investors once again found themselves focused on capital gains — particularly in taxable investment accounts. For some, that meant an unexpected tax bill. For others, it was a reminder of how closely taxes and investing are intertwined.
At the end of 2025, my assistant Ashley and I had a thoughtful conversation with Phil Lynch and Jacob Kelderman about the broader market environment, year-end capital gains dynamics, and what these trends suggest as we look ahead to 2026. While the calendar has turned, the themes from that discussion remain highly relevant — and continue to shape how investors should be thinking about portfolio strategy, taxes, and long-term planning.
This post reflects those insights and why they still matter as we move forward.
Why Capital Gains Still Appear — Even in Difficult Markets
One of the most common questions investors asked in 2025 was:
“Why am I paying capital gains when my portfolio didn’t grow much — or even declined?”
The answer lies in how investment vehicles operate and how gains are realized over time. Capital gains are not tied to your personal experience alone; they are driven by activity inside investment structures, including:
- Long-held securities being sold
- Index rebalancing and reconstitution
- Other investors’ redemptions triggering sales
- Gains built up over many years finally being realized
Historically, this has produced some counterintuitive outcomes.
Years like 2008, 2018, and 2022 all showed that capital gains can still occur even when markets struggle — and 2025 was another reminder of how persistent this dynamic can be.
This isn’t necessarily a failure of investing — it’s a structural reality. But it does highlight why tax awareness matters.
Why This Still Matters in 2026
While capital gains distributions are tied to specific calendar years, their impact is long-lasting.
Taxes paid in 2025 permanently reduce the capital available to compound in 2026 and beyond. That means:
- Every dollar paid in tax is a dollar that no longer works for you.
- The effects of tax drag compound just like investment returns do — only in the opposite direction.
So while we technically move on from 2025, the planning implications absolutely carry forward.
This makes it especially important as we enter 2026 to:
- Review taxable account structures
- Understand where income and gains are coming from
- Align investment decisions with tax planning
- Avoid surprises by being proactive rather than reactive
The Quiet Impact of Tax Drag
One of the most overlooked forces in investing is tax drag — the gradual erosion of returns due to taxes on dividends, interest, and capital gains.
Even a small difference compounds meaningfully over time.
For example:
- A portfolio earning 6% after tax instead of 7% pretax may end up 20–30% smaller over 20 years.
- This effect is subtle, steady, and powerful.
We see this often when clients consolidate older portfolios, inherit assets, or restructure finances after major life transitions. Tax efficiency is rarely the focus early on — but it becomes critically important later.
Interest Rates, Income, and the 2026 Landscape
Another key theme coming out of late 2025 is the shifting interest rate environment.
As inflation cools and monetary policy evolves, yields on cash and short-term instruments are likely to decline over time. That means investors may begin reassessing:
- how much cash they hold,
- how they generate income, and
- how after-tax yields compare across different options.
In 2026, this makes income planning more nuanced than simply chasing the highest stated yield. The real question becomes:
What do I actually keep after taxes — and how stable is that income long-term?
Why Discipline Beats Timing
Another lesson reinforced by 2025 is that last-minute financial decisions are rarely the most effective.
Many people try to “fix” tax issues in November and December. But markets are often strong at year-end, and that can limit flexibility.
The most effective planning happens steadily:
- Monitoring throughout the year
- Adjusting thoughtfully, not emotionally
- Reviewing taxes alongside investments
- Making incremental improvements over time
That approach reduces stress, improves clarity, and leads to better long-term outcomes.
Why This Matters for Our Clients
At Arrow & Bow, our role isn’t just to manage investments — it’s to help clients feel confident about their financial decisions.
That means:
- helping you understand what’s happening,
- preparing you before issues arise,
- and ensuring your strategy evolves with your life.
Our team plays an important role in helping translate these insights into action — supporting communication, implementation, and follow-through so clients feel supported, not overwhelmed.
Final Thoughts
The conversation we had at the end of 2025 reinforced an important truth:
Markets change. Tax rules evolve. But the principles of good planning remain constant.
Understanding how capital gains arise, how taxes affect long-term outcomes, and how disciplined decision-making supports financial stability remains just as important in 2026 as it was in 2025 — if not more so.
If you have questions about how any of this applies to your situation — whether you’re navigating a transition, planning for retirement, or simply reviewing your investment approach — we are always here to help.