Capital gains in taxable; DFA / Vanguard

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Topic Author
tallinvestor
Posts: 13
Joined: Mon Jun 09, 2014 11:39 am

Capital gains in taxable; DFA / Vanguard

Post by tallinvestor »

Hello, my question is specifically about what to do with my current equity holdings in a taxable account. These are all in DFA funds purchased in 2009 through a previous financial adviser (I now manage the accounts myself). I would like to move to a 3 fund portfolio at Vanguard, but I have a capital gains in these funds.

Emergency funds: Yes, six months.
Debt: none
Tax Filing Status: Married Filing Jointly
Tax Rate: 28% Federal, 3.07% State
State of Residence: PA
Age: 39; DW is 35
Desired Asset allocation: 65% stocks / 35% bonds
Desired International allocation: 40% of stocks

Current holdings:

1.92% DFA EMERGING MKTS CORE EQTY PORT INSTL DFCEX 0.63
0.35% DFA EMERGING MKTS PORT INSTL DFEMX 0.57
2.84% DFA INTL CORE EQTY PORT INSTL DFIEX 0.39
4.91% DFA TAX MANAGED INTL VALUE PORTFOLIO DTMIX 0.53
2.28% DFA INTL VECTOR EQTY PORT DFVQX 0.51
11.89% DFA TA US CORE EQTY 2 PORT INSTL DFTCX 0.24
10.44% DFA TAX MANAGED US TARGETED VALUE PORTFOLIO DTMVX 0.44
10.90% DFA US VECTOR EQTY PORT INST DFVEX 0.32
5.99% Vanguard Total US VTSAX 0.05
14.01% Vanguard Total International VTIAX 0.14
19.03% Intermediate Term Bond Index VBILX 0.10 in IRA
13.80% Pen Fed 3% CD's in an IRA
1.64% I-bonds

Portfolio is in the low seven figures.

The funds have done well over the last five years, but with a small/value tilt, I’m concerned about performance going forward. I cannot purchase any more of these funds for re-balancing, and I am not reinvesting dividends.

I am in the 28% tax bracket, so there would be 15% capital gains tax. I do not have any carry over losses. With about $190k in capital gains, is it worth it to sell these?
I know I could wait until I’m in a lower retirement tax bracket to sell these at 0% capital gains tax, but will 0% tax still exist in another 10-20 years?

I’ve thought about this question for some time, and my own answer is, it depends…
How will DFA funds with a small cap value tilt perform in the future compared to a Vanguard market cap weighted approach? My guess, is that given enough time, small/value tilted portfolio (with proper rebalancing), will outperform. Personally, I don’t feel I need to take on the additional risk/work of managing such a complex portfolio in order to achieve a reasonable retirement. I would prefer to consolidate everything at Vanguard.

Thank you for any insight.
daffyd
Posts: 199
Joined: Sun Sep 29, 2013 11:51 pm
Location: Australia

Re: Capital gains in taxable; DFA / Vanguard

Post by daffyd »

I assume you are still saving and if you invest future savings into your Vanguard accounts your DFA will slowly become a lower percentage over time. I don't think it will be worthwhile to sell these entirely. What may be worth doing is be aware of opportunities to sell and switch if the market falls and perhaps simplifying a little at the edges (e.g. consider what the capital gains tax would be on the little DFA emerging markets component),

The simple way I would approach the holdings would be:
-Set a preferred asset allocation based on the proportion of US equities, World ex-US equities and Fixed Interest (as you would for a three-fund portfolio).
-Add up all the US equities (DFA and Vanguard) and over time rebalance this to target by purchasing VTSAX without worrying too much about the composition.
-Add up all the Ex-US equities (DFA and Vanguard) and over time rebalance this to target by purchasing VTIAX without worrying too much about the composition.
-Optionally, choose a slightly higher fixed-interest allocation than you would for a three-fund portfolio to reflect the risk.
Looking at your numbers this seems to be what you've done. Maybe you just need to find a tool to simplify how it looks (using a simple spreadsheet, brokerage or personal finance website to track the totals and ignoring the details).

If you find you need to sell to rebalance at a 3-slice level, and the tax-costs still make doing so worthwhile, then sell smaller and higher-fee or less tax-efficient DFA holdings to do so. But doing the above shouldn't require any more management except some simple cost-basis comparisons, etc once every year or two when rebalancing.
livesoft
Posts: 85971
Joined: Thu Mar 01, 2007 7:00 pm

Re: Capital gains in taxable; DFA / Vanguard

Post by livesoft »

I don't think it is worth it to sell them, but I am not a fan of simplicity.

But if you are asking this question and since you are so young, you can sell some every year for the next 10 years or so. Realizing $20K or so of capital gains every year is probably not a big deal in your tax bracket.

So in other words, develop a 10-year plan and execute it. Or donate to charity or your donor-advised fund over that same time period.
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Topic Author
tallinvestor
Posts: 13
Joined: Mon Jun 09, 2014 11:39 am

Re: Capital gains in taxable; DFA / Vanguard

Post by tallinvestor »

Thank you for the replies. Since the 3 and 5 year performance of most of the DFA funds beats the Vanguard total market funds, I thought this might be a good time to sell off the DFA. I was considering selling the funds that over performed, and keep the ones that under performed. I also recognize that this is some recency bias pushing me to sell since these funds have under performed YTD.

I am still saving, so I agree that the DFA % should decrease over time. I have a spreadsheet set up that shows allocation of equity/fixed income, US/international. Right now the portfolio is balanced for my desired allocation. I know I have a small/value tilt, but I don't know exactly how much.

I guess I will hold onto these funds for the foreseeable future. Hopefully DFA will not go out of business, and their funds can have comparable long term performance going forward.
target2030
Posts: 70
Joined: Sun May 04, 2014 11:55 am

Re: Capital gains in taxable; DFA / Vanguard

Post by target2030 »

Totally agree with livesoft. I would not sell DFA and let the DFA advantage work for me over the next 20 to 30 years, as I continue with my total asset allocation plan by adding Vanguard funds.
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asset_chaos
Posts: 2628
Joined: Tue Feb 27, 2007 5:13 pm
Location: Melbourne

Re: Capital gains in taxable; DFA / Vanguard

Post by asset_chaos »

There's nothing wrong with that portfolio or the funds in it per se. But, as you've changed your mind to want more simplicity---and that's a good thing to have---it's doesn't fulfill that new goal. But if it were me, I would not value simplicity sufficiently that I would pay $27k in capital gains taxes to achieve maximal simplicity. I would do what you're doing: redirect dividends and fresh savings to the funds I wanted to transition my portfolio to, keeping the old funds in mind only to the extent of keeping my overall stock:bond ratio at my desired point. Then I'd kind of try to ignore the old funds, peeking at them every now and again to see if opportunistic chances to sell without capital gains had arisen.

Take heart. Maybe there's a deep bear market just around the corner. All those pesky capital gains would go away, and you could without cost reshape your portfolio however you liked.
Regards, | | Guy
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