TLH: Swapping identical indices vs. 31 day money market

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AZK
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TLH: Swapping identical indices vs. 31 day money market

Post by AZK »

This was spurred from another TLH thread and Taylor had the following post which I found interesting.
Taylor Larimore wrote:
zaboomafoozarg wrote: Does anyone have recommendations for alternative funds for these? And when you harvest and pass the wash sale period, do you usually sell the alternative fund and switch back to the original?
Hi zabooma:

I don't bother switching into alternate funds when tax-loss harvesting. I simply exchange losing shares into our money market fund; wait 30 days*; then exchange back into the desired fund. That's all there is to it!

* Vanguard require a letter request to exchange back into a fund within 60 days.

I am aware that most investors insist on exchanging into a similar (but not identical) fund. Personally, I don't think it is worth the hassle:

The primary reason investors give for exchanging into similar funds is that they "don't want to miss a big gain." They forget that it is often "better to miss a big loss."

Consider this:

A $100 investment in the Dow Jones Industrial Average at the beginning of 1900 grew to $25,746 by the end 2006.

Missing the 20 best days reduced the terminal wealth to $4,313

Missing the 20 worst days boosted the terminal wealth to $162,588

http://www.cxoadvisory.com/1529/big-ide ... et-timing/

No doubt those who took a tax loss by exchanging into a similar stock fund during the past 30-days wish they had exchanged into a money market fund instead. (Total Stock Market fell -6.82%.)

Advantages of exchanging into a money market fund:

* The market is almost as likely to go down as up.

* Portfolio is temporarily less risky.

* No getting stuck in a less desirable fund.

* No short-term capital gain or loss to report.

* No worry about a "wash sale."

* Saves time, paperwork, and less chance of error.

There is more than one road to Dublin.
What do all the TLH with identical index people say to this? It certainly makes things easier, and you are unlikely to miss out on large gains. The thoughts on "market as likely to go down as it is up" certainly struck home when I continuously rebalanced over the last 6 weeks...
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dnaumov
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Post by dnaumov »

Sounds like attempting to time the market.
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JDInvestor
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Post by JDInvestor »

I think it's an interesting point, but it's using a potentially useless set of data. As people who study markets doubtless know, best days and worst days often follow on one another's heels (just look at the markets a few weeks ago!). It would be much more useful to see what the best and worst consecutive 31 day periods have done over time. My suspicion is that the results would be quite different than looking at cherry-picked best and worst days.
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SpringMan
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Post by SpringMan »

Taylor's method puts you out of the market for 31 days. When the market has dropped enough to trigger tax loss harvesting, there is a good chance it may rise in the 31 days due to being in an over sold condition. If it does rise, you miss out. On the other hand, if the market drops further, you make out. Rather than be out of the market, I prefer to exchange to similar funds. I exchange to funds that I will be happy to hold long term should the market rise. If the market stays the same or drops further, I exchange back. I will wait 60 days so I don't need to write Vanguard a letter or alternatively use ETFs. Taylor's method has the virtue of being simple and is just as good an option. Many roads to Dublin :lol:
Best Wishes, SpringMan
livesoft
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Re: TLH: Swapping identical indices vs. 31 day money market

Post by livesoft »

AZK wrote:What do all the TLH with identical index people say to this? It certainly makes things easier, and you are unlikely to miss out on large gains. The thoughts on "market as likely to go down as it is up" certainly struck home when I continuously rebalanced over the last 6 weeks...
Maybe in the last 6 weeks, but not always. The market goes up more than it goes down. Furthermore, after a ReallyBadDay(TM) often goes up as it did on August 9th and August 11th.

The market is up since August 8th and August 10th (but may not be later this week :) ) which were 2 bona-fide RBDs.

With all due respect to Mr Larimore, he has probably not added any significant new money to his assets in a number of years. Any bit of tax-loss harvesting that he has had to to do is probably a very small percentage of assets, so being in a money market fund for 30 days would be no big deal to him.

What if you had TLH'd on August 13, 2010? How about back on March 16, 2011? What about on some other RBDs?

My point is that if you TLH while the market is not doing much or with a sub-1% of your portfolio, then sure a 30-day money market can be a good answer. But I think if you TLH on a RBD when the market goes to the low for the year, then you are asking for trouble many times if you use a money market fund. Since it is trivial to find replacement shares nowadays, there is no strong reason to use MM fund.
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tfb
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Post by tfb »

I did a "study." Taylor is right. During the period I looked at, if an investor sold for tax losses and sat in cash for 31 days, 54% of the time this investor would see a lower price on day 31. For the other 46% of the time when the price was higher on day 31, the investor didn’t have to wait too long before he would see a lower price again, at which point he could complete the repurchase for tax loss harvesting and suffer no loss from being out of the market or even profit from it.


Tax Loss Harvesting and Missing the Best Days
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Sidney
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Post by Sidney »

Since it is trivial to find replacement shares nowadays, there is no strong reason to use MM fund.
It is easy enough to identify a replacement set for each of your holdings. Then shuttle back and forth as the market goes down. Your replacement set should be something you are OK holding to the end.
I always wanted to be a procrastinator.
livesoft
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Post by livesoft »

tfb wrote:I did a "study." Taylor is right. ....
From the "study":
I pulled the daily closing prices of Vanguard Total Stock Market ETF (VTI) in 2008 and compared them with prices 31 days earlier.
I will write that this is not really a fair study, so thanks for encapsulating it in quotes. Also the idea of missing the best days is flawed I think.

Most of the days in 2008 one would not even consider for tax-loss harvesting. To harvest losses, one needs to have some losses. Thus, it only makes sense to check the days when the market has dropped quite a bit and to disregard days when the market has gone up.

I will have to do my own "study", but my hypothesis is that if one does TLH on a ReallyBadDay (as defined many times elsewhere in this forum), then the market has a high probability of being higher 31 days later. Since RBDs only occur a few times a year, one can disregard the noise of less volatile up and down days in this "study".

Of course, this hypothesis is not that every RBD leads to higher prices in a month, it is just that there is good chance of that.
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tfb
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Post by tfb »

livesoft wrote:I will have to do my own "study", but my hypothesis is that if one does TLH on a ReallyBadDay (as defined many times elsewhere in this forum), then the market has a high probability of being higher 31 days later. Since RBDs only occur a few times a year, one can disregard the noise of less volatile up and down days in this "study".

Of course, this hypothesis is not that every RBD leads to higher prices in a month, it is just that there is good chance of that.
Please do. Please also include "# of days of additional wait" if price on day 31 was higher. My hypothesis is that all RBDs in 2008 saw a lower price later, if not on day 31, not too long afterwards.
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TheEternalVortex
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Post by TheEternalVortex »

The average monthly return is something like 1% (may be a little lower going forward, e.g. 0.5%). So that's your expected loss for sitting in cash. It's possible that this return is substantially different right after a big drop, but I doubt it.

I suspect the "wait until the price is as low as before" strategy will fail terribly, although I haven't looked at the data for longer periods. How long do you wait? What if the price never drops that low again?

What happened in 2008 is irrelevant to this going forward. If you go by 2008 alone you should be 100% bonds anyway.
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indexfundfan
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Post by indexfundfan »

With the many substitute funds / ETFs available, I would not TLH by waiting 31 days in the MMF.

Yeah, studies might shown that on average you don't lose out. But if you stick your hands in boiling water and your feet in ice water, the average temperature is also a fairly benign 122 F.

With the volatile markets, I don't wish to be caught in the wrong tail of the distribution. It is for the same reason that people buy home insurance. On average, you are not going to need it but the insurance protects you from the tail end of the distribution (e.g. a fire).
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livesoft
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Post by livesoft »

tfb wrote:Please do. Please also include "# of days of additional wait" if price on day 31 was higher. My hypothesis is that all RBDs in 2008 saw a lower price later, if not on day 31, not too long afterwards.
Since the low for the market was in March 2009, we already know that your hypothesis is true if one waited until then. :) We should have all moved to a money market fund at the first RBD of 2008 and waited until March 2009 to buy back our original investment.

I am hoping that 2011 does not turn out like 2008.

Nevertheless, for many folks doing DCA in taxable accounts, the position that is tax-loss harvested may amount to only a percent or two of their entire portfolio so switching to a money market fund for a month would be an option. However, for a large position it is not something I would do.
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magellan
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Post by magellan »

As usual, Taylor's probably right that waiting it out in cash is a good 'keep it simple' approach. But since I really don't like being off my target AA, I sometimes do fancy footwork by temporarily swapping around tax deferred assets to fill the void. This eliminates the risk of getting 'stuck' in the replacement fund if it goes up a lot and also avoids tax reporting on the substitute fund.

You have be careful not to run afoul of Vanguard's frequent trading rules for the bond fund you swap out of, but I usually can keep my AA a pretty close to target with just a couple of trades. I did it twice during the 2008 panic with international stocks. I didn't want to have 0% international with markets moving 3-5% in some days. (note that even in tax deferred, you still can't use the original fund as the replacement or you'll run afoul of the wash sale rules.)

Jim
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