Did I TLH properly?

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Did I TLH properly?

Postby boggler » Thu Jun 27, 2013 1:20 pm

I sold all my holdings in VT (all at a substantial loss, purchased around $54 average cost) on Monday of this week near market bottom. I then immediately exchanged into 50% VTI, 50% VEU. Since then, the market has gone up substantially. I have two questions:

1 - Seems like I got lucky in timing the market bottom regarding when to harvest my losses. Is this a good thing?

2 - What do I do now?
I'd like to hold VT long term, not VTI and VEU. This is for 1) simplicity, and 2) because VEU doesn't hold small caps. (It had a much smaller bid-ask spread when I was harvesting.) Do I exchange back in to VT after 31 days? What if VEU and VTI have risen above the $54 average cost level? (Won't this mean I'll actually end up paying more tax at the end of the year, rather than less?)
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Re: Did I TLH properly?

Postby mhc » Thu Jun 27, 2013 2:22 pm

Based on the title, I would say you did not TLH entirely properly. You replacement fund(s) should be something you are willing to hold long term just in case the price goes up and up and up ....

VTI and VXUS would be a better replacement for VT even though VXUS and VEU are very similar. If you are left holding VEU for the long haul, you can always add the missing pieces if you like. To some extent this happened to me. I now have VSS in my HSA to add in what I am missing elsewhere.
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Re: Did I TLH properly?

Postby House Blend » Thu Jun 27, 2013 2:42 pm

boggler wrote:2 - What do I do now?

What I would do is not get worked up over a thimble full of Intl Small Caps.

I would plan on holding VTI and VEU either (a) forever, or (b) until another TLH opportunity arises and you can switch back, or (c) you need the money and these are the shares that generate the smallest cap gains when you sell, or (d) you are planning a donation and these are the shares that have the highest amount of unrealized cap gains. Whichever comes first.

If you really like VT better, you can of course resume purchasing it (but not until 31 days later).

Conspicuously absent from the above list is: selling shares at a gain after 31 days to go back to VT. In essence you are throwing away some of the value you just harvested. Ex. If you harvest a loss of $2000, and then sell back at a gain of $1000, all you've done is to reduce the net loss you can claim to $1000.

Selling in 31 days just so you can be back in VT would be insane if VT is above $54. You've not only erased the TLH, but you'll have managed to realize a net short term capital gain, taxed at your full marginal rate.
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Re: Did I TLH properly?

Postby boggler » Thu Jun 27, 2013 2:46 pm

mhc wrote:Based on the title, I would say you did not TLH entirely properly. You replacement fund(s) should be something you are willing to hold long term just in case the price goes up and up and up ....


Is this ever the case in practice? I mean, there's a reason we pick one fund over another in the first place, right?
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Re: Did I TLH properly?

Postby Simplegift » Thu Jun 27, 2013 3:00 pm

boggler wrote:
mhc wrote:Based on the title, I would say you did not TLH entirely properly. You replacement fund(s) should be something you are willing to hold long term just in case the price goes up and up and up ....

Is this ever the case in practice? I mean, there's a reason we pick one fund over another in the first place, right?

Don't forget, one can always tax loss harvest to cash if there's not an alternative fund that's attractive for a long-term holding. For especially volatile assets, such as emerging markets or REITs, you do chance missing out on a sizeable gain if markets turn around suddenly — but going to cash for 31 days will guarantee your realized tax loss.
Cordially, Todd
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Re: Did I TLH properly?

Postby boggler » Thu Jun 27, 2013 3:05 pm

Simplegift wrote:
boggler wrote:
mhc wrote:Based on the title, I would say you did not TLH entirely properly. You replacement fund(s) should be something you are willing to hold long term just in case the price goes up and up and up ....

Is this ever the case in practice? I mean, there's a reason we pick one fund over another in the first place, right?

Don't forget, one can always tax loss harvest to cash if there's not an alternative fund that's attractive for a long-term holding. For especially volatile assets, such as emerging markets or REITs, you do chance missing out on a sizeable gain if markets turn around suddenly — but going to cash for 31 days will guarantee your realized tax loss.


But if you decided to TLH in the first place, doesn't this mean you believe the market is at or near bottom, in which case you expect to miss out on the subsequent gains?
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Re: Did I TLH properly?

Postby Default User BR » Thu Jun 27, 2013 3:09 pm

boggler wrote:
mhc wrote:Based on the title, I would say you did not TLH entirely properly. You replacement fund(s) should be something you are willing to hold long term just in case the price goes up and up and up ....

Is this ever the case in practice? I mean, there's a reason we pick one fund over another in the first place, right?

Sure. I have replaced Vanguard Large-Cap (VV) with S&P 500 and the reverse. I've broken VEA into VPL+VGK. All kinds of moves I'm happy to hold onto to for as long as needed.


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Re: Did I TLH properly?

Postby Simplegift » Thu Jun 27, 2013 3:11 pm

boggler wrote:But if you decided to TLH in the first place, doesn't this mean you believe the market is at or near bottom, in which case you expect to miss out on the subsequent gains?

When tax loss harvesting, frankly, I have no idea where the markets are going, only that I've got a sizeable tax loss that I'd like to realize. If the tax loss is large enough, and the potential tax saving is greater than what I think I might lose to a market turnaround, then I'll go to cash to be sure to preserve the sizeable tax loss. The best option, though, is usually to find an alternative fund that one doesn't mind holding for the long term — then one gets both the tax savings and any potential gains in the new fund.
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Re: Did I TLH properly?

Postby Cash » Thu Jun 27, 2013 3:36 pm

Grabiner has performed a useful analysis of when it is better to go to cash or to use a replacement fund. It basically boils down to whether the harvest would place you outside of your rebalance bands:

viewtopic.php?f=1&t=96324

If you sold all of your position, it sounds like you lump-summed near the peak. I have had VT for a while now and decided it was worth more to me to buy more than to TLH the few positions with losses. I bought on Monday at what has so far been the low for the past several months ($49.75), so perhaps you sold some of your shares to me! :sharebeer
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Re: Did I TLH properly?

Postby avalpert » Thu Jun 27, 2013 4:35 pm

boggler wrote:
mhc wrote:Based on the title, I would say you did not TLH entirely properly. You replacement fund(s) should be something you are willing to hold long term just in case the price goes up and up and up ....


Is this ever the case in practice? I mean, there's a reason we pick one fund over another in the first place, right?

Sure it's the case. We pick one fund over all others because we have to - that doesn't mean you can't be essentially indifferent between them.
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Re: Did I TLH properly?

Postby mhc » Thu Jun 27, 2013 4:37 pm

boggler wrote:
mhc wrote:Based on the title, I would say you did not TLH entirely properly. You replacement fund(s) should be something you are willing to hold long term just in case the price goes up and up and up ....


Is this ever the case in practice? I mean, there's a reason we pick one fund over another in the first place, right?


To some degree, I agree with you.

I think with ETF's there are offerings from various companies that would create a toss up on which to buy.
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Re: Did I TLH properly?

Postby avalpert » Thu Jun 27, 2013 4:37 pm

boggler wrote:
Simplegift wrote:
boggler wrote:
mhc wrote:Based on the title, I would say you did not TLH entirely properly. You replacement fund(s) should be something you are willing to hold long term just in case the price goes up and up and up ....

Is this ever the case in practice? I mean, there's a reason we pick one fund over another in the first place, right?

Don't forget, one can always tax loss harvest to cash if there's not an alternative fund that's attractive for a long-term holding. For especially volatile assets, such as emerging markets or REITs, you do chance missing out on a sizeable gain if markets turn around suddenly — but going to cash for 31 days will guarantee your realized tax loss.


But if you decided to TLH in the first place, doesn't this mean you believe the market is at or near bottom, in which case you expect to miss out on the subsequent gains?


No, it means the losses have accrued enough to make it worth you while to TLH - if you are actually trying to time market bottoms you are really wasting your energy with TLH and should be changing your investment allocations.
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Re: Did I TLH properly?

Postby boggler » Fri Jun 28, 2013 11:39 am

So when you TLH, the market essentially determines which fund you'll get stuck with long-term, depending on how it moves during the 30-day period?

Seems like an odd thing to leave to chance.
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Re: Did I TLH properly?

Postby Default User BR » Fri Jun 28, 2013 1:08 pm

boggler wrote:So when you TLH, the market essentially determines which fund you'll get stuck with long-term, depending on how it moves during the 30-day period?
Seems like an odd thing to leave to chance.

It's not chance. YOU buy the fund(s). That's why you make sure it's something you'll be satisfied to own for the long haul. Much of what I bought in 2009, when I churned over almost the entire taxable portion to harvest substantial losses, I still own.

It seems to me, from your various posts on the subject, that you don't want to TLH so you look for reasons not to do it. You don't need anyone's permission. If you don't want to, then don't. We've given our reasons for it and methodologies for doing it, use them or don't use them.


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Re: Did I TLH properly?

Postby avalpert » Fri Jun 28, 2013 3:07 pm

boggler wrote:So when you TLH, the market essentially determines which fund you'll get stuck with long-term, depending on how it moves during the 30-day period?

Seems like an odd thing to leave to chance.

Huh? It isn't left to chance, it is a deliberate choice of yours. If there are two funds between which I am essentially indifferent but I can gain $1000 by moving from the one I marginally prefer to the other that is my choice, not the markets.
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Re: Did I TLH properly?

Postby spotty_dog » Fri Jun 28, 2013 3:09 pm

boggler wrote:So when you TLH, the market essentially determines which fund you'll get stuck with long-term, depending on how it moves during the 30-day period?

Seems like an odd thing to leave to chance.


You might like the discussion Larry Swedroe gives in his "Right Financial Plan" book. He lays out very clearly the circumstances when TLH might be beneficial, as well as all the "what happens next" scenarios (replacement position has a gain or a loss at the end of the wash sale period). It helped me to see that my piddling little 3- and 4-figure unrealized losses are not worth TLHing, not by a long shot. However, I might work out some figures to put in my IPS for the future so that if there is a more serious downturn I will have a procedure to follow.
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Re: Did I TLH properly?

Postby boggler » Fri Jun 28, 2013 3:11 pm

spotty_dog wrote:
boggler wrote:So when you TLH, the market essentially determines which fund you'll get stuck with long-term, depending on how it moves during the 30-day period?

Seems like an odd thing to leave to chance.


You might like the discussion Larry Swedroe gives in his "Right Financial Plan" book. He lays out very clearly the circumstances when TLH might be beneficial, as well as all the "what happens next" scenarios (replacement position has a gain or a loss at the end of the wash sale period). It helped me to see that my piddling little 3- and 4-figure unrealized losses are not worth TLHing, not by a long shot. However, I might work out some figures to put in my IPS for the future so that if there is a more serious downturn I will have a procedure to follow.


I'll take a look - thanks.
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Re: Did I TLH properly?

Postby livesoft » Fri Jun 28, 2013 4:08 pm

To confirm what others have already written:

1. Yes, one will most likely be tax-loss harvesting when the market has dropped. I prefer to TLH on an RBD during the year and look again in December, so that I have no losing positions in my taxable accounts at the beginning of each new year.

2. Yes, one may end up in a fund because of gains, but so what? When one purchases a position in a taxable account, they should already have in mind which fund will be used for pairing when TLHing. I own Vanguard Large-cap index because I tax-loss harvested Vanguard Total Stock Market Index in the Spring of 2009. With the unrealized gains in large-cap index, I am not going to sell it for a very long time.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Did I TLH properly?

Postby Cash » Fri Jun 28, 2013 11:06 pm

Another way to get rid of unwanted funds is to gift them to charity (assuming you would otherwise make charitable donations). But this sounds like most of your portfolio, so maybe not in this instance.
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Re: Did I TLH properly?

Postby boggler » Thu Jul 11, 2013 4:30 pm

Well, the market up. While that's nice, it looks like I'm now either stuck with my TLH alternatives, or stuck paying high short-term capital gains taxes. Bummer.
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Re: Did I TLH properly?

Postby archbish99 » Thu Jul 11, 2013 4:37 pm

You could move from VEU to VXUS if the small-caps really bother you. Or add some VSS. But no, you don't want to plan on moving back unless things have dropped. You would, at best, give back some of what you harvested.
I'm not a financial advisor, I just play one on the Internet.
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Re: Did I TLH properly?

Postby avalpert » Thu Jul 11, 2013 4:38 pm

boggler wrote:Well, the market up. While that's nice, it looks like I'm now either stuck with my TLH alternatives, or stuck paying high short-term capital gains taxes. Bummer.

Don't worry - still plenty of time for them to come back down.

And of course you wouldn't be paying taxes since you have losses to offset those gains...
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