I give quite a bit to charity each year. I have realized that I can give appreciated securities to charity. When I do so, I get the full deduction for the market value of the securities, but nobody pays taxes on that market value. I do this when the shares rise. When shares fall in price, I can tax loss harvest those shares and get an income tax deduction.
Let's say that I will donate $11,000 no matter what this year. Let's say I have $20,000. I could hold this in one of two ways--in two separate stocks (tickers XXX and YYY), or in a diversified fund of those two separate stocks (ticker ZZZ). Let's assume that XXX increases by $1000 and YYY decreases in value by $1000. So, ZZZ has not changed in value from when I bought, but my position in XXX is worth $11,000 and my position in YYY is worth $9,000. If I held the diversified fund, it'd be worth $20,000.
If I hold my positions as separate securities, I can now donate my shares of XXX to charity and pay no taxes on the donation. I can also tax loss harvest YYY for a tax deduction of $1000. If I hold my position in a mutual fund, I get no tax loss harvesting since the mutual fund technically has not had a loss.
We are taught from time and time again as bogleheads to minimize alpha in a portfolio. However, that alpha is exactly what makes this portfolio great. We want that individual variation, since it's what gave us the power to not get taxed on gains and to tax loss harvest.
The crux of the issue is that this is an option. Options gain value when they have increased volatility. If we group our assets together to decrease volatility, we decrease the value of the "donating shares to charity" option.
I realize, however, that the only people that can really make this option work well for them are those that have many many different positions in different securities. To make this work economically, however, you have to have a lot of money, otherwise you'll be dwarfed in trading costs. Only rich people can make use of this system very well since they're the only ones that have this much money to not be dwarfed in trading costs for individual securities.
It would be great to bring this type of security to the common Joe Shmoe. That means that a common Joe Shmoe should be able to do something like buy a share in a mutual fund, hold the entire thing for a year, then donate the shares of the fund that have appreciated and tax loss harvest those that have not. If we could make this work, I think that this idea could take off since there are huge savings for the average person in this manner of donating to charities.
Does anyone have any advise? Has anyone heard of this type of system before? Is what I'm talking about not going to be possible? I'd love any thoughts that people have on the issue.