Moving from stocks to mutual funds [Advice requested]

[punkisgreat]

Hey All,

A little background: My dad and grandpa have helped set up a stock-portfolio for me. I've contributed since I started working some 10 years ago. At one point we caught a bit of Cramer fever (05 ish?) and ended up with some bad picks, that mostly due to inertia just never got back out of. Some have come back, some are still down. Lately though, I've had full control and made some pretty good picks. But with the market going up it's probably hard to make any bad picks... Long story short, I've got a bunch of stocks and I want to start moving into Mutual Funds in a controlled and automatic way.

I've got a Roth IRA and a Brokerage account with my current trading platform. Buying VFIFX has a transaction fee of 19.99, and no option for monthly automatic additions to that position. What would my transaction fees with Vanguard be if I were buying that fund? Can you set it up to automatically buy more each month? And finally, what's the best way to extricate myself from all these stocks?

Thanks!

David

[ObliviousInvestor]

Welcome to the forum.

I've got a Roth IRA and a Brokerage account with my current trading platform. Buying VFIFX has a transaction fee of 19.99, and no option for monthly automatic additions to that position. What would my transaction fees with Vanguard be if I were buying that fund? Can you set it up to automatically buy more each month? And finally, what's the best way to extricate myself from all these stocks?

Zero. Yes. Sell them.*


*OK, OK. It's not necessarily that simple. For stocks in the taxable account, there might be tax-planning reasons to hang on to them for the time being.

[punkisgreat]

Zero. Yes. Sell them.*


*OK, OK. It's not necessarily that simple. For stocks in the taxable account, there might be tax-planning reasons to hang on to them for the time being.

Haha, awesome answer! And thanks for the welcome! Tax issues aside is it best to just sell them all at once? This would leave me with a rather large stock-pile of cash, and I don't want to buy a big chunk of mutual funds up front, rather buying automatically every month and slowly moving into them. What would I do with the cash in the interim?

[Croce]

Hi Dave,

I just joined this forum a few moments ago, but have been investing with Vanguard for 40+ years. I apologize for not having read all through these boards prior to posting - but your question resonated with me. At your age, I was involved in a similar scenario as yourself. However, back then there was no Cramer. My advice would be to move your account over to Vanguard. I did this several years ago from E-Trade and it was a very smooth transition. I know that the trading platform at Vanguard pales in comparison with all the glitz of some of the brokerage firms out there and the research availability is limited, but it is very effective for me - the commissions can not be beat. Executions are very good. Once you have made the transition to Vanguard it will be easy to move into mutual funds. As far as selling stock automatically, I don't think that is on the table. You would have to decide what to sell and execute the trades yourself. It's no problem to have Vanguard do a periodic auto purchase for you from another Vanguard fund. Not knowing any of your details - were it me, I'd be selling off the individual stocks in a manner most beneficial to my situation with the proceeds going into their mm fund. Then set up the auto purchase from the mm fund to VFIFX. There should be no $20 transaction fee. Hope this helps to some degree and I certainly stand to be corrected if I am mistaken.

Good luck,
Croce

[Aptenodytes]

Long story short, I've got a bunch of stocks and I want to start moving into Mutual Funds in a controlled and automatic way.
...
what's the best way to extricate myself from all these stocks?

You are caught in a contradiction. You know you should be divested of individual stocks and in index funds instead. But you think you should get there via some controlled, automatic, "extrication."

As Oblivious investor says, you simply need to sell the stocks as fast as tax implications permit. Sell everything with a long-term position. Sell as many short-term positions as you can in a way that achieves zero net gain. If you have any short-term gains left over sell them as soon as they become log-term gains. The only exception would be if you happen to be near the threshold of a higher tax bracket and need to keep income artificially depressed to avoid going over.

If you have an itch to feed your crystal ball set aside a few positions that total < 5% of your total and see if you can time them right, but sell everything else as fast as you can.

[Aptenodytes]

Haha, awesome answer! And thanks for the welcome! Tax issues aside is it best to just sell them all at once? This would leave me with a rather large stock-pile of cash, and I don't want to buy a big chunk of mutual funds up front, rather buying automatically every month and slowly moving into them. What would I do with the cash in the interim?

The money is already in equities, so why think of it as being in cash? Forget about the fact that it will be in cash for a day or two. That's irrelevant. What you are doing is converting an extremely high-risk equity portfolio to a much lower-risk equity portfolio. Why would you want to do that gradually? Or why would you want to spend time in a zero-risk waiting pool in between? Just go from higher to lower risk right away.

[Khanmots]

Zero. Yes. Sell them.*


*OK, OK. It's not necessarily that simple. For stocks in the taxable account, there might be tax-planning reasons to hang on to them for the time being.

Haha, awesome answer! And thanks for the welcome! Tax issues aside is it best to just sell them all at once? This would leave me with a rather large stock-pile of cash, and I don't want to buy a big chunk of mutual funds up front, rather buying automatically every month and slowly moving into them. What would I do with the cash in the interim?

If I was in a concentrated equity position now like you are, then moving the money that's in them into a more diversified equity position wouldn't concern me to do it as a lump sum since I'm not really changing my risk exposure (well, lessening it actually since I'm getting rid of uncompensated concentration risk!) by doing so. However, if you're different and you feel that a semi-gradual move would make you sleep better at night, then that's what you'll want to do.

So, transfer everything in-kind to Vanguard, likely easiest to do this by having Vanguard pull the assets to them and having them manage contacting your current broker and arranging it all. Then sell off a chunk and purchase mutual funds with the proceeds. I can't expand on the process of this too much as I've dealt almost exclusively with mutual funds rather than ETFs or individual stocks, but I think that once the order to sell went through and a buyer was found that you could place the order to purchase the mutual funds on the same day (getting the days closing NAV) to avoid being out of the market.

[punkisgreat]

Hey all,

Thanks for all the advice. I guess my main concern was making such large moves in my portfolio, but I guess moving from high to low risk makes the moves much more tolerable. To clarify a couple points: I'm not looking to automate my selling, I'm looking to automate my investing in a mutual fund. I just want to summarize the advice to make sure I understand everything.

Sell all long term positions immediately.
Sell any short-term gains that are break even or below now -> Wait for other short term gains to transition to long-term.
Transition account to Vanguard to avoid current broker's transaction fees into Vanguard fund
Buy a lump sum of VFIFX.

Buying such a large lump sum of something does still make me nervous. Any thoughts on buying say $100,000 of a mutual fund today vs splitting that up into 12 monthly installments to get dollar-cost averaging for the year?

[livesoft]

Tell us about the tax-loss harvesting that you have done over the years. Does the size of your current carryover realized losses exceed the taxable gains that you might incur?

Wiki article link: Tax Loss Harvesting

[punkisgreat]

Tell us about the tax-loss harvesting that you have done over the years. Does the size of your current carryover realized losses exceed the taxable gains that you might incur?

Wiki article link: Tax Loss Harvesting

I don't think I've actually ever done any tax loss harvesting. However, my current gains/losses in my taxable account are +5500/-6000 (estimated) Almost all of those gains are long-term investments at this point. My income last year was only about 20,000 ish.

[livesoft]

So do you pay commissions to sell stocks? To buy ETFs? If not, then sell all in taxable and use ETFs. If you do, then transfer all assets to a place that has no commissions for these trades.

If you sell everything in your taxable account, you will have a $500 net loss and no extra taxes, so no reason to wait or be orderly about it.

[ObliviousInvestor]

Depending on your income this year, you might be able to sell the stocks with unrealized long-term capital gains, yet pay no tax. Then sell the stocks with unrealized losses next year, and use the losses to offset your other income (probably over the course of two years due to the $3,000 annual limitation).

Of course, the downside of waiting is that you're taking on additional risk in the interim by continuing to hold the stocks rather than a more diversified portfolio.

[Aptenodytes]

Buying such a large lump sum of something does still make me nervous. Any thoughts on buying say $100,000 of a mutual fund today vs splitting that up into 12 monthly installments to get dollar-cost averaging for the year?

What you don't realize is that holding on to these stocks is far more dangerous than buying a bunch of index fund shares. You are worrying about the wrong thing. It is as if you were trying to get from Los Angeles to New York hanging on to the undercarriage of a freight train, and then finally realize your foolish ways in Salt Lake City and get off. There's a greyhound terminal right there but instead of buying a bus ticket you say "that bus is going so fast -- 65 miles an hour! -- I think I'll walk for a few hundred miles first." Just buy the bus ticket.

That said, the mind can play great tricks on us, and if yours is determined not to let you convert from stocks to mutual funds in one fell swoop, then convert to cash and buy the funds as fast as you can tolerate. Don't let the best be enemy of the good.

You do realize that the mutual funds you want to buy hold shares in thousands of stocks, right? They are FAR less risky than what you now hold.

[retiredjg]

Transition account to Vanguard to avoid current broker's transaction fees into Vanguard fund

Call Vanguard and tell them what you want to do. You might be able to move your holdings "in kind" which will mean less time out of the market. Once the money is actually at Vanguard, maybe they will give you a break on selling that stuff (transaction fees) to buy Vanguard mutual funds.

Buy a lump sum of VFIFX.

Buy several mutual funds, not just one. Consider a 3 fund portfolio of total stock market, total international stock index, and total bond index (or whatever bond holding you want).

Buying such a large lump sum of something does still make me nervous. Any thoughts on buying say $100,000 of a mutual fund today vs splitting that up into 12 monthly installments to get dollar-cost averaging for the year?

This would be nuts in my opinion. There is no reason to make a stop in cash when going from stocks to stocks.

[retiredjg]

Can you set it up to automatically buy more each month? And finally, what's the best way to extricate myself from all these stocks?

You can do this at Vanguard with mutual funds. I don't think it is possible to do automatic purchases with ETFs (but I don't use them, so I''m not sure).

[dbr]

To extricate yourself you want to make a table of the capital gains tax exposure you have for each tax lot of each holding.

Positions that are at a loss can be sold immediately. After that you have to consider potential gains compared to the risk of continuing to hold the position. As a rule one should not let the tax tail wag the investment dog, but if you pare things down to small holdings that have high tax cost to liquidate, then those might stay on as legacies, I'm talking about individual holdings totaling as a group less than 5% of assets where practically the whole value might be taxed at sale.

Some people here are big on using gifts of appreciated stock when one wants to make charitable donations. If you are a big giver, that is a consideration.