rebalancing in taxable accounts

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rebalancing in taxable accounts

Postby letsgobobby » Sat Mar 03, 2012 1:35 pm

For those of you who have all or most of your stocks in taxable accounts, how do you rebalance out of stocks? Do you rely on carry forward losses, set broader rebalancing bands, eat the taxes?
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Re: rebalancing in taxable accounts

Postby livesoft » Sat Mar 03, 2012 1:47 pm

We only have about half our assets in taxable, so we really do not do rebalancing in taxable. However, I did have to raise some cash to pay some bills, so I selected the shares with the highest cost basis and thus had the lowest realized capital gain. The realized cap gains were offset by carryover losses from 2007-2009.

So I guess the answer to your question is Yes. We rely on carryover losses, set broader rebalancing bands, and eat the taxes.
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: rebalancing in taxable accounts

Postby Doc » Sat Mar 03, 2012 1:51 pm

letsgobobby wrote:For those of you who have all or most of your stocks in taxable accounts, how do you rebalance out of stocks? Do you rely on carry forward losses, set broader rebalancing bands, eat the taxes?


You have to "eat the taxes" sometime. All you are going to lose is the earnings on those taxes for the next n years. So what? You are not rebalancing to increase your return but rather to control your risk. Not re-balancing to increase you return is contrary to your objective.
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Re: rebalancing in taxable accounts

Postby momar » Sat Mar 03, 2012 2:29 pm

Direct dividend and capital gain distributions to a cash account and using those can help.
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Re: rebalancing in taxable accounts

Postby mwm158 » Sat Mar 03, 2012 2:44 pm

I have so far been able to maintain my AA by rebalancing my IRA and 401k or with new contributions. If equities jumped 100% tomorrow, I guess I'd just have to sell and eat the taxes. Under normal situations I make sure all new contributions go towards the lowest performing asset class and it keeps things in line pretty well.
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Re: rebalancing in taxable accounts

Postby letsgobobby » Sat Mar 03, 2012 2:56 pm

momar wrote:Direct dividend and capital gain distributions to a cash account and using those can help.

Good point.
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Re: rebalancing in taxable accounts

Postby moproblems » Sat Mar 03, 2012 3:42 pm

The only "rebalancing" you need is to reinvest dividends in the same proportion as the rest of your net worth: So if you initially invest 50% of your portfolio in A and 50% in B, but by the time dividends are paid these proportions have evolved to 40% A and 60% B, then all you need to do is use 40% of your dividends to buy more A and 60% of them to buy more B.

The only way for risk to get "out of control" is if you keep piling the dividends back into the same investment that paid them, but if you control the destination of reinvested dividends (along with all other cash) then the principal values automatically wax when assets are safe and wane when they are risky:
http://www.stanford.edu/~wfsharpe/aaap/

Purposely paying additional taxes or commissions in the hope of reducing risk and/or increasing return is the most unbogleheaded thing I've ever heard. Fortunately, in most practical scenarios, the misapprehended idea of "rebalancing" doesn't deviate too far from what would result from properly weighted dividend reinvestment.
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Re: rebalancing in taxable accounts

Postby Dale_G » Sat Mar 03, 2012 4:02 pm

Perhaps there are typos in your post moproblems. The annual dividends for Total Stock (VTSAX) and Total International (VTIAX) are about 2% and 3% respectively. No matter how the dividends are invested it is not going to put a 40/60 balance back to 50/50.

Directing dividends can help, but it won't necessarily do the trick.

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Re: rebalancing in taxable accounts

Postby moproblems » Sat Mar 03, 2012 4:15 pm

Dale_G wrote:Perhaps there are typos in your post moproblems. The annual dividends for Total Stock (VTSAX) and Total International (VTIAX) are about 2% and 3% respectively. No matter how the dividends are invested it is not going to put a 40/60 balance back to 50/50.

Directing dividends can help, but it won't necessarily do the trick.

Dale


It doesn't need to go back to 50/50, nor should it. The proportions can and should drift and, so long as you don't keep piling the dividends into the wrong place, they won't drift so far as to alter your risk profile.

The idea that there's less or constant risk for a portfolio allocated with fixed percentages is wrong. For example, a 50% allocation to equities in early 2009 was much riskier than a 50% allocation to equities in 2010. To maintain a constant risk profile the proportions need to change as the market changes:
http://www.stanford.edu/~wfsharpe/aaap/wfsaaap.pdf
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Re: rebalancing in taxable accounts

Postby Kevin M » Sat Mar 03, 2012 4:37 pm

Plenty of carryover losses from 2008/2009, so that should cover me for many years I would think.

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Re: rebalancing in taxable accounts

Postby DAK » Sat Mar 03, 2012 4:41 pm

I have dividends and capital gains deposited in tax exempt money market...I use that and new contributions to rebalance
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Re: rebalancing in taxable accounts

Postby Default User BR » Sat Mar 03, 2012 8:05 pm

letsgobobby wrote:For those of you who have all or most of your stocks in taxable accounts, how do you rebalance out of stocks? Do you rely on carry forward losses, set broader rebalancing bands, eat the taxes?

Over half of my holdings are in tax-advantaged. So a combination of moves there and new money have obviated the need to sell stocks in taxable.


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Re: rebalancing in taxable accounts

Postby grabiner » Sat Mar 03, 2012 9:03 pm

I do all my taxable rebalancing with new money; all new investments and dividends are directed to the most underweighted fund in my taxable account. I do have 5/25 rebalancing bands, and have hit them in tax-deferred but not in taxable. (The most important rebalancing band, and the one most likely to be hit, is my overall bond allocation, which must stay in the range 7.5%-12.5%. Since my bonds are all in retirement accounts, that can always be adjusted within the tax-deferred accounts.)
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Re: rebalancing in taxable accounts

Postby umfundi » Sun Mar 04, 2012 3:58 am

letsgobobby wrote:For those of you who have all or most of your stocks in taxable accounts, how do you rebalance out of stocks? Do you rely on carry forward losses, set broader rebalancing bands, eat the taxes?


The "correct" answer is, in my opinion:

A. Sweep all distributions into a cash account, use that cash to rebalance. (Do not automatically reinvest distributions.)

B. Direct new investments so they help to rebalance.

C. If you are making net withdrawals from your investments, take distributions so they help to rebalance, but make sure that you keep your asset allocation (like diversification across stock classes).

Last year, I came up with a different answer.

I realized that where I was was just too complicated and unsustainable. My funds had high costs, there were too many of them, and I needed to simplify. Then, I discovered Bogleheads.

So, I liquidated everything and transferred it to Vanguard, into something like the three-fund portfolio. Suck it up, pay the taxes, get into something that is much more tax-efficient and much simpler than I had before.

Think about it: A "Reset" button on all my record keeping to establish the cost basis for investments that go back 20 years or more. I was able to shred and recycle mountains of paper records.

Sure, I am about to pay a lot of taxes, but in the long run I owe them anyway. Since I pulled the trigger, I have a lot less to worry about what future tax rates may be. That translates into much more freedom about investment and spending choices.

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Re: rebalancing in taxable accounts

Postby Wagnerjb » Sun Mar 04, 2012 5:18 pm

letsgobobby wrote:For those of you who have all or most of your stocks in taxable accounts, how do you rebalance out of stocks? Do you rely on carry forward losses, set broader rebalancing bands, eat the taxes?


You have gotten a lot of good answers. Let me add one more - consider donating shares in the biggest winners to charity (in lieu of cash donations). It is more tax efficient than donating cash, and it serves to help in rebalancing.

Best wishes.
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Re: rebalancing in taxable accounts

Postby pascalwager » Mon Mar 05, 2012 2:53 am

I do any rebalancing in my tax-deferred accounts only. For example, if US grows too much in my taxable account compared to international, then I sell some US in my tax-deferred account(s) and buy international to maintain my desired overall 50:50 ratio of US versus international.
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Re: rebalancing in taxable accounts

Postby bbrock » Sun Sep 01, 2013 6:35 pm

reference post
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Re: rebalancing in taxable accounts

Postby nedsaid » Sun Sep 01, 2013 7:25 pm

This is why I don't go overboard on minimizing taxes at all costs. Sometimes the best tax shelter is to pay a bit more tax. The rebalancing in taxable accounts, particularly after a big run-up in the stock market, can result in an interesting problem when you try to rebalance. That is a big tax bill.

You also could look for taxable assets that show losses below what you paid for them and do some tax loss harvesting. Use the losses to offset the gains from rebalancing.

When you sell stock funds in taxable accounts, make sure you have met the one year thresh hold so that you can get the long term capital gains treatment. You also want to use the method of identifying the shares you are selling that is most advantageous to your taxes. Most of the time, this is a last in, first out method. Do some study on this before selling. It can save you serious money on your taxes.

Two schools of thought on this forum on how to position asset classes between taxable and non-taxable accounts.

One is to treat your tax deferred accounts and your taxable accounts the same. Use taxable bonds for the tax deferred accounts and tax-free bonds (if you are in high enough tax brackets) in the taxable accounts.

The other is to stuff your tax deferred accounts with tax inefficient asset classes like REITs, TIPS, and taxable bonds. Keeping more of your stocks in taxable accounts because of favorable capital gains treatment.

I think which way you go depends a lot on how much of your investments are in taxable vs. tax deferred accounts. Most of my investments are in tax deferred accounts. So I invest these tax deferred accounts for maximum return in a manner appropriate for my age. I don't worry too much about placement of assets. So I am in the first school of thought. Since my tax deferred accounts are my future "paycheck", I want to make that "paycheck" as large as possible. They went into those accounts as deferred wages and will upon being withdrawn will be taxed in a similar manner to wages (except no FICA and Medicare taxes). So wages in and wages out.

If you have substantial investment assets outside your tax deferred retirement accounts, the second approach makes more sense. Gee whiz, why not take advantage of the favorable capital gains tax rate on your stocks? So yes, TIPS and REITs are your best candidates for tax deferred accounts. Taxable bonds are your next asset to put in the tax deferred retirement accounts.

David Grabiner as always has sensible answers, and I liked what he said about rebalancing and taxable accounts.
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Re: rebalancing in taxable accounts

Postby John151 » Mon Sep 02, 2013 4:40 pm

I posted a similar question several months ago. Over the years, most of my stocks have been in taxable accounts, with a smaller amount in accounts that are tax-advantaged. As stocks have risen, I've rebalanced by exchanging from stocks into bonds within my tax-advantaged accounts, where exchanges can be made without triggering taxes. But as the stock market has risen even further, I've reached the point where I have no more stocks to exchange out of within my tax-advantaged accounts. All of my stocks are now in taxable accounts, and I'm bumping up against my maximum stocks allocation.

Rebalancing out of stocks now would cost me dearly in capital gains taxes, so I decided to stop rebalancing out of stocks and just let my stocks drift upward. I realize that this increases my risk, but only 30% to 35% of my investments are in stocks anyway, and I've decided to think of my taxable stock investments as, in a sense, "tax-deferred."
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