Need help with portfolio spring cleaning

[Redwing]

Hello:

First time poster. This is a fantastic forum!

I’ve been lurking on this site for several weeks now and could use some advice on how to significantly simplify our portfolio, reduce expenses and minimize our ongoing tax liability.

Wife and I have had a relationship with Merrill Lynch for roughly ten years and have been far too passive in how the portfolio was managed. I’ve recently asked for a plan to rationalize the number of accounts, holdings and address the expenses. It’s a mess and I’ve no one to blame but myself.

We’re planning an early retirement within 12-24 months and need the portfolio to finance our expenses as we have no defined benefit plans. At this point, taxes and investment fees are by far our largest expenses.

Finished The Bogleheads’ Guide to Investing and have started The Bogleheads’ Guide to Retirement Planning. Our next step is to create an IPS.

Emergency funds: 14 months of expenses (includes replacement car fund)
Debt: $230,000, 1.875% 25 yr, 10 Year Interest Only, 30 day Libor

Real Estate: Personal Residence, No Mortgage
Rental Condo, No Mortgage
Short Term Rental/Retirement Home, See mortgage above

Tax Filing Status: Married Filing Jointly
Federal Tax Rate: 35%
State Tax Rate: 7.5%
State: NC

His Age: 49
Her Age: 53

Desired Asset Allocation:
Stocks: 50%
Bonds: 40%
Cash: 10%

International: 30%

Current portfolio: Low to mid 7 figures, (Emerg Fund & Real Estate Excluded)

Available Contributions

$22,500: His 401k + 3% company match
$6,000: His rollover IRA at ML
$6,000: Her rollover IRA at ML
$36,000: Being used to pay down mortgage
$19,000: ESPP Program, currently have no position in company stock

Potential Windfall: Performance Bonus, Restricted Shares, Non Qual Stock Options
Current Value: Low six figures after taxes, vesting Sept 2011
High five figures after taxes, vesting Sept 2012




Taxable at ML
(8%) Cash

(34%) Actively Managed (1.6% Management Fee)

% of Portfolio Ticker Security Description ER
3.271% RPG RYDEX ETF TR 0.00%
3.152% VWO VANGUARD MSCI EMERGING 0.00%
3.048% IEI ISHARES LEHMAN 3-7 YR ??
2.287% PXF POWERSHARES FTSE RAFI ??
2.178% GHYIX GOLDMAN SACHS HIGH YIELD 0.57%
2.134% TTRZX TEMPLETON GLOBAL TOTAL 0.89%
2.109% VUG VANGUARD GROWTH ETF 0.00%
1.796% YAFFX YACKTMAN FOCUSED FUND CL 1.25%
1.544% VV VANGUARD LARGE-CAP 0.00%
1.425% HEOAX HIGHLAND LONG/SHORT 2.94%
1.419% EFA ISHARES MSCI EAFE INDEX 0.00%
1.355% TIP ISHARES BARCLAYS TIPS BO 0.00%
1.146% PWV POWERSHARES TR DYNAMIC 0.00%
1.103% IAU ISHARES GOLD TR ??
1.094% GHAAX VAN ECK GLOBAL 1.49%
1.082% DBLTX DOUBLELINE TOTAL RETURN 0.49%
1.074% MALOX BLACKROCK GLOBAL 1.90%
1.070% MERFX THE MERGER FUND CL 2.62%
1.069% GJRTX GOLDMAN SACHS ABSOLUTE 1.20%
1.060% XLU SECTOR SPDR UTILITIES 0.00%

3% Actively Managed (2.25% Management Fee)
69 Individual International Stocks

(20%) Actively Managed (1.0% Management Fee)
% of Portfolio Ticker Security Description ER
1.852% 930863T88 WAKE CNTY NC 0.00%
1.668% 206461ES0 CONCORD NC UTILS SYS REV 0.00%
1.656% 13066YQM4 CALIFORNIA ST DEPT WTR 0.00%
1.641% 71319RAT4 PEORIA ILL MET ARPT AUTH 0.00%
1.540% 759911WH9 REGIONAL TRANSN AUTH ILL 0.00%
1.426% 751091JK6 RALEIGH NC PUB IMPT 0.00%
1.337% 3466226G3 FORSYTH CNTY NC 0.00%
1.248% 658196S84 N CAROLINA EASTN MPA SYS 0.00%
1.137% 584002LD9 MECKLENBURG CNTY NC PUB 0.00%
1.130% 9756724Q6 WINSTON SALEM NC 0.00%
0.996% 161045DC0 CHARLOTTE NC WTR & SWR 0.00%
0.919% 199491VS7 COLUMBUS OH VAR PURP 0.00%
0.888% 117068CA2 BRUNSWICK CNTY NC 0.00%
0.716% 454624LG0 INDIANA BD BK REV ST 0.00%
0.702% 29270CEY7 ENERGY NORTHWEST WASH 0.00%
0.533% 65820QDP5 N CAROLINA INFRASTR FIN 0.00%
0.372% 658196KM1 N CAROLINA EASTN MPA SYS 0.00%
0.175% 658256MH2 NORTH CAROLINA ST PUB 0.00%


(12%) Managed Futures and Structured Products
% of Portfolio Ticker Security Description ER
3.104% MLDCJ BAC CURR LINK STEP UP ??
3.012% 73YC09997 ML SYSTEMATIC MOMENTUM 2.0%
1.658% MLOEA EKSPORT STARS SPX ??
1.331% 73F899998 BLACKROCK GLOBAL HORIZON 2.0%
1.015% MLDCD BAC CURR MITTS BRIC ??
0.839% 37973FY21 GLOBAL MACRO TRUST 2.0%
0.751% MLOCZ BAC BMSTARS SPX ??
0.001% DHK73FY25 1MTH GLOBAL MACRO TRUST ??

(5%) Assorted Mutual Funds
% of Portfolio Ticker Security Description ER
1.772% FEVCX FIRST EAGLE US 1.98%
0.976% MCLOX BLACKROCK GLOBAL 1.90%
0.972% NECRX LOOMIS SAYLES CORE PLUS 1.65%
0.968% MCEGX BLACKROCK GLOBAL DYNAMIC 2.13%
0.525% REMGX RS EMERGING MARKETS FUND 2.55%

(5%) His rollover IRA at Merrill Lynch

% of Portfolio Ticker Security Description ER
1.651% MCLOX BLACKROCK GLOBAL 1.90%
1.069% VDSCX VICTORY DIVERSIFIED 1.87%
0.921% FESGX FIRST EAGLE 1.92%
0.743% MCBAX BLACKROCK BASIC 1.70%
0.703% LSBCX LORD ABBETT 2.00%
0.199% GNTX GENTEX CORP 0.00%

(3%) Her rollover IRA at Merrill Lynch

% of Portfolio Ticker Security Description ER
1.278% MCLOX BLACKROCK GLOBAL 1.90%
1.192% FESGX FIRST EAGLE 1.92%
0.235% LSBCX LORD ABBETT 2.00%

(9%) His 401k

% of Portfolio Ticker Security Description ER
1.982% FCNTX FID Contrafund 1.71%
1.927% FLPSX Fidelity Low Price Stock 1.76%
1.816% FUSEX FID Diversified International 0.17%
1.728% EHSTX Eaton Large Cap Value A 1.61%
1.428% FDIVX Spartan 500 Index 1.66%



Funds available in his 401(k)

Large Cap Ticker ER
EATON LG CAP VALUE A EHSTX 1.61%
FID CONTRAFUND FCNTX 1.63%
SPTN 500 INDEX INV FUSEX 0.17%
Mid-Cap
ARTISAN MID CAP VAL ARTQX 2.15%
FID LOW PRICED STK FLPSX 2.49%
MSIF MID CAP GRTH P MACGX 1.44%
RS SMALL CAP GRTH A RSEGX 2.48%
SPTN EXT MKT IDX INV FSEMX 0.85%
Small Cap
FID SM CAP DISCOVERY FSCRX 1.84%
KEELEY SM CAP VAL I KSCIX 2.03%
International
FID DIVERSIFD INTL FDIVX 1.98%
LZRD EMRG MKTS EQ IS LZEMX 2.15%
SPTN INTL INDEX INV FSIIX 0.37%
ARTISAN INTL VAL INV ARTKX 2.17%
Bond Investments
FID US BD INDEX FBIDX 0.44%
SPTN INT TR IDX ADV FIBAX 0.20%
Short-Term Investments
FID RETIRE MMKT FRTXX 0.84%


Questions/Comments:

1. What would be the most logical, least costly way to simplify this portfolio, reduce my investment expenses and minimize my ongoing tax liability?

2. Our current plan is to pay off the mortgage within 12-20 months, but would reconsider if the cash would be better served to restructure the portfolio. The mortgage is only 3 months old and it’s the only debt we’ve had in a decade. Our plan is to sell the current residence when the real estate market recovers.

[jej]

[quote="Redwing"...

1. What would be the most logical, least costly way to simplify this portfolio, reduce my investment expenses and minimize my ongoing tax liability?

2. Our current plan is to pay off the mortgage within 12-20 months, but would reconsider if the cash would be better served to restructure the portfolio. The mortgage is only 3 months old and it’s the only debt we’ve had in a decade. Our plan is to sell the current residence when the real estate market recovers.[/quote]

Spring cleaning is right.

You've read and are reading the basic texts you need to fix this. In your shoes, I would

1. Restrain my inclination to go postal on your investment salesmen to date.

2. Think really hard about whether there is any reason that a simple three fund portfolio won't take care of your needs. Well, three fund modified a little bit. Total stock, a good international, total bond, maybe a TIPS fund, and a tax exempt bond fund if there is not enough room in your retirement accounts for all the bond fund money you need. You need a serious reason to add complexity to your investments beyond this point. Or maybe some serious delusion that you can beat the market. Your salesman will happily provide a fill load of BS along these lines.

3. How to get there -
- Sell all your tax deferred investments. Move to Vanguard. Now.
- Sell all your non tax deferred investments that have losses. Move to Vanguard. Now.
- Continue to tax loss harvest and move the funds made available to the appropriate funds.
- Should you sell your holdings that have capital gains? Probably, but maybe not. Long term cap gains rates are now good. I won't speculate where they are headed, or what will happen with the estate tax. OTOH, if you can manage a move to an income tax free state, or if you have major charity plans, or if you want to wait to gain a step up tax basis, maybe you wait.

jej

[livesoft]

You know you made my eyes glaze over. That may affect other readers since usually I can take complicated portfolios. May I suggest that you edit and lump your individual stocks into something like
3% Individual stocks
in order to prevent losing eyeballs.

For all the assets in your taxable account, can you please provide the unrealized capital gains and losses; also whether they are short-term or long-term.

If you will be 50 on Dec 31, 2011, then you can do the catch-up $5500 in your 401(k). You might as well start now.

The general recommendation will be simple since you have given us your desired asset allocation:
Put 35% of your portfolio in VTSAX
Put 15% of your portfolio in VTIAX
Put 40% of your portfolio in VBTLX or equivalent (his 401(k) could all be in FBIDX, that is one fund used in his 401(k))
Done.

You can get more complicated than that, but it's a start.

[livesoft]

To avoid the costs of selling lots of small positions at MerrillLynch, just switch your account to the MerrillEdge first. Then sell all the positions at no commissions. Take the cash to a better place like Vanguard or WellsFargo.

[Redwing]

Thanks. Appreciate the feedback.

1. Restrain my inclination to go postal on your investment salesmen to date.

I should be fine so long as he doesn't name his new boat after me.

Total stock, a good international, total bond, maybe a TIPS fund, and a tax exempt bond fund if there is not enough room in your retirement accounts for all the bond fund money you need. You need a serious reason to add complexity to your investments beyond this point.

4-5 low cost index mutual funds. I'm opening an account with VG tomorrow.

Plan to meet with my CPA this week and determine whether to take the tax hit all at once versus prolonging the transition and paying the investment fees.

[Sidney]

You know you made my eyes glaze over

My head was spinning.

Take the cash to a better place like Vanguard or WellsFargo.

Need to get to a point in your head that you know you are going to abandon ML and move everything you own elsewhere. This clean up could take a while and you need to mentally prepare yourself for the trip. ML is bleeding you to death.

Taxes are important but don't let the potential tax hit paralyze you. If you aren't up to speed on tax loss harvesting, get up to speed. As you take new positions with the cash, inevitably there will be opportunities to harvest losses. You can't afford to miss these as they will give you a chance to liquidate things with unrealized gains.

[Redwing]

I've edited the OP as suggested.

Here are the unrealized (losses) and gains in the taxable portion.

ST Losses: (12,346)
ST Gain: 49,839
LT Losses: (13,639)
LT Gain: 126,614

I really appreciate the feedback.

[livesoft]

I messed up. See next post.

[livesoft]

1. Switch to Merrill Edge on Monday. I think this should be no cost to you. You should at least research it. By doing this, you immediately start saving those wrap and management fees.

2. Sell all losers in taxable. A portfolio of this size should have more than $300K of carryover losses from the past few years. So you should be able to sell everything. Would your carryover losses cover any future realized gains from your existing positions.

3. Stop any and all automatic reinvestment of distributions in your taxable assets.

4. Switch his 401(k) to FBIDX. This account can go into "set-and-forget" mode.

5. You also have to make a fundamental decision: Are you comfortable with ETFs or do you need mutual funds? I see you have lots of ETFs already. I would dump first the high-expense-ratio mutual funds and gravitate towards ETFs when using the Merrill Edge account. If there is a fee to sell mutual funds in Merrill Edge, then I would use WellsFargo PMA relationship which has not such fee.

If there is no fee to sell the mutual funds with your current ML account, then I would sell them there.

Also get hardcopy for all the cost basis + date acquired of your taxable investments, so that filling out Schedule D is trivial. If you close the accounts, it may be tougher to get this info from ML. If you transfer the assets "in kind", the cost basis and date acquired should transfer as well if the ACAT is used. You never know though if they will screw it up or not.

[amfox1]

Redwing -

We are in very similar life situations and also hold the bulk of my investible assets with Merrill. I know many of the people on this forum are going to recommend moving your portfolio to Vanguard. Assuming you are looking to structure a solution primarily within Merrill, I would recommend the following:

1. Don't touch the 20% actively managed tax-exempt bond portfolio.

2. Depending on your tax position, sell the 3% actively managed stock portfolio. It is not enough to make a significant difference in your portfolio and you can replicate the intended performance of these funds by instead investing in a fund/ETF that replicates the benchmark index for the investment manager (look at your quarterly performance report).

3. In his 401k, I would replace FDIVX with FSIIX, dump EHSTX and reallocate the EHSTX funds to the other four funds.

4. I hold both MCLOX and FESGX and am reasonably happy with both. In her rollover IRA, I would sell the LSBCX and reallocate to the other two funds. In his rollover IRA, I would liquidate VDSCX, LSBCX and GNTX and look to add taxable bonds in replacement. One point others will make on allocation funds such as MCLOX and FESGX is that their performance can be replicated by holding pure-play funds that replicate the underlying asset classes (stocks, bonds, internationals, etc) and that holding these funds are too costly. It's a fair point, although not the only answer.

5. I cannot comment on the managed futures and structured products portfolio.

6. I'll have to take a further look at the 34% actively managed portfolio later.

Given your timing to sell your residence and the interest rate, I would not pay off the mortgage at this time.

[bdpb]

I've edited the OP as suggested.

Here are the unrealized (losses) and gains in the taxable portion.

ST Losses: (12,346)
ST Gain: 49,839
LT Losses: (13,639)
LT Gain: 126,614

Do you have carryover losses?
Are they short term or long term?

There are a few different combinations of selling this year and next year
that might significantly reduce your taxes due, but you need to know
what you have for carryover losses. You also need to know when the ST
gains become LT gains.

For example, if you have enough ST losses to cover the ST gains then
it probably makes sense to sell all the gains this year and wait to sell
all the losses next year. You'll pay 15% on the gains this year and get
a 35% tax break on losses in the following years.

[Redwing]

This clean up could take a while and you need to mentally prepare yourself for the trip.

Thanks Sidney.

Other than the timing associated with maximizing a tax loss harvesting strategy and terminating a 10 year relationship is there anything else I should be considering?

[letsgobobby]

only this: your portfolio is larger and messier than mine was, and yet it took me 15 months to clean it up. And I didn't have to disappoint a very nicely dressed adviser!

[sometimesinvestor]

very minor but if you follow livesoft's suggestion about moving to Merrill edge you might open a cd at bank america for 25k as I believe that will mean your commissions for selling online will be zero

[Sidney]

This clean up could take a while and you need to mentally prepare yourself for the trip.

Thanks Sidney.

Other than the timing associated with maximizing a tax loss harvesting strategy and terminating a 10 year relationship is there anything else I should be considering?

I went through a clean up -- not nearly as complex as yours but it was a fair amount of work. I kept putting it off because I had it in my head that I should do it all at once. It was so daunting. Once I decided to pace myself, it went quite quickly. Part of what freaked me out and caused me to move was that my holdings were so messy I wasn't sure what I had in terms of allocation, overlap etc.

One thing I did was to take all my taxable holdings and calculate the % of value in unrealized gain. Then I took the ER % and divided that by the % unrealized gain. I used this "index" to prioritize the moves. One thing I did up front to make it easier to look at was to take a lot of small holdings where it just didn't matter and I sold them right away -- just to clear the deck a little. I just picked a threshold and flushed any individual holding that was less than the threshold.

[Redwing]

We are in very similar life situations and also hold the bulk of my investible assets with Merrill. I know many of the people on this forum are going to recommend moving your portfolio to Vanguard. Assuming you are looking to structure a solution primarily within Merrill, I would recommend the following

Thanks amfox1

I originally considered this but the initial reaction from ML was not at all encouraging. We simply have a fundamental misalignment in incentives. I can't expect him to operate in a manner inconsistent with his company's goals.

I hold no ill will against ML. ML provided excellent advice during my accumulation phase, particularly with respect to managing the risk associated with a concentrated, but "mandatory" position in my company's stock.

However, I'm moving quickly to the spending phase and can no longer afford the services they provide.

It's not personal. It's just business.

[Redwing]

Also get hardcopy for all the cost basis + date acquired of your taxable investments, so that filling out Schedule D is trivial. If you close the accounts, it may be tougher to get this info from ML. If you transfer the assets "in kind", the cost basis and date acquired should transfer as well if the ACAT is used. You never know though if they will screw it up or not.

Thanks livesoft.

So if I transfer the assets "in kind" from my current account to Merrill Edge then I'll have the schedule D info? Or do you mean, get the hard copies before I make the transfer within ML?

[livesoft]

You should get the hard copies before you make transfers. ML should do the ACAT thing, but I have never used them, so I do not know for sure.

I transferred from TDAmeritrade and AmericanCentury to WellsFargo "in-kind" and all my transaction info came along for all my mutual funds and stock trades.

I have no idea what ML will do. You need to research that.

I would think that an expensive managed account like yours would not charge you any commissions at all, so perhaps an intermediate account like Merrill Edge is not needed at all. Just sell and transfer cash? However, I will say this, if you are no longer a customer of ML in February 2012, you will still get 1099's from them, but no easy way to login and look up transactions, etc. That is, if you close your account too soon, you may be screwed. It may pay to leave a very token amount in your account so that you can see how your 2011 tax info shakes out.

[Redwing]

I would think that an expensive managed account like yours would not charge you any commissions at all, so perhaps an intermediate account like Merrill Edge is not needed at all.

Livesoft. Thanks so much for your advice.

Now that you mention it, I've never seen any commissions in my accounts related to trades with the exception of certificate fees related to the managed international account. I think these are stock certificate fees but they amount to "only" $500 per year.

BTW. Both you and bdpb asked about capital loss carryover losses. I cannot find my 2009 Schedule D worksheets, but my recollection based on '02 and '08 activity is I should have a significant amount. However, I did sell a large concentrated position of my company stock in 2010, so I've got some more digging to do.

Thought I understood the concept of tax loss harvesting, but need to do some more study.

[retiredjg]

Redwing, welcome to the forum!

We simply have a fundamental misalignment in incentives.

This is one of the funniest things I've seen in a long time. I know you meant it to be true, not funny. But it's both to me.

Seems to me you should complete the liquidation of your taxable position in the next 21 months for two reasons.

-you are already in the highest tax bracket (can't push yourself any higher)
-capital gains are 15% right now, but are supposed to go back to 20% in Jaunary 2013 if I understand correctly

Of course, you are into the AMT netherlands. Not sure how/how much that would affect this. Just thought I'd mention it for your consideration.

[Redwing]

Redwing, welcome to the forum!

We simply have a fundamental misalignment in incentives.

This is one of the funniest things I've seen in a long time.

Thanks retiredjg! I like your sense of humor.

Here's a target portfolio I'm considering that uses the recommendations above and some VG ETF funds.

Taxable:
39% Total Stock Market ETF VTI 0.70%
15% Total International Stock ETF VXUS 0.20%
4% REIT ETF VNQ 0.13%
16% Total Bond Market ETF BND 0.12%
10% TBD Cash

Her IRA
3% TIPS Fund VIPSX 0.25%

His IRA
5% TIPS Fund VIPSX 0.25%

His 401k
9% Fidelity US Bond Index FBIDX 0.44%

Once I have a concrete destination in mind, I can start the journey.

[Redwing]

I've edited the OP as suggested.

Here are the unrealized (losses) and gains in the taxable portion.

ST Losses: (12,346)
ST Gain: 49,839
LT Losses: (13,639)
LT Gain: 126,614

Do you have carryover losses?
Are they short term or long term?

I have ST carryover losses of $16,452, no LT. In 2010, I had short term gains from the sale of a concentrated position in my company shares that will deplete this.

[YDNAL]

(9%) His 401k

% of Portfolio Ticker Security Description ER
1.982% FCNTX FID Contrafund 1.71%
1.927% FLPSX Fidelity Low Price Stock 1.76%
1.816% FUSEX Spartan 500 Index 0.17%
1.728% EHSTX Eaton Large Cap Value A 1.61%
1.428% FDIVX FID Diversified International 1.66%

Redwing,

The fund names (blue) above were mixed-up and I fixed it - livesoft caught this error. So, 0.17% for an S&P 500 fund is not as ludicrous as 1.66% would be.

[livesoft]

The NC bonds are something to evaluate carefully. I'll guess they are tax-exempt from both NC and Federal taxes, so that's 20% of fixed income held in your taxable account. These may not need to be changed for quite a while if at all, so go slow with them.

There are minor typos in the expense ratios. FDIVX is diversified int'l and not a S&P500 index fund. FUSEX is the Spartan S&P500 index fund. VTI has an expense ratio of about 0.07%, FBIDX about 0.22%. It is not clear if the 401(k) adds fees beyond the expense ratio.

[YDNAL]

Here's a target portfolio I'm considering that uses the recommendations above and some VG ETF funds.

Taxable:
39% Total Stock Market ETF VTI 0.70%
15% Total International Stock ETF VXUS 0.20%
4% REIT ETF VNQ 0.13%
16% Total Bond Market ETF BND 0.12%
10% TBD Cash

Her IRA
3% TIPS Fund VIPSX 0.25%

His IRA
5% TIPS Fund VIPSX 0.25%

His 401k
9% Fidelity US Bond Index FBIDX 0.44%

Once I have a concrete destination in mind, I can start the journey.

Redwing,

I'm glad to jump-in when after others have endured this mess.

Going from accumulation to withdrawal, your tax situation should change.

• Regardless, you want to be tax-efficient and not pay more in income taxes than you have to.
• REITs don't belong in taxable.
• Total Bond Market is inefficient. You should do the numbers and compare after-tax yield (nominal bonds) vs. tax-exempt yield.

[retiredjg]

Redwing, I too am happy to pile on.

Taxable:
39% Total Stock Market ETF VTI 0.70%
15% Total International Stock ETF VXUS 0.20%
4% REIT ETF VNQ 0.13% <---
16% Total Bond Market ETF BND 0.12%<---
10% TBD Cash <---

Her IRA
3% TIPS Fund VIPSX 0.25%

His IRA
5% TIPS Fund VIPSX 0.25%

His 401k
9% Fidelity US Bond Index FBIDX 0.44%

1) REIT does not belong in a taxable account. My feeling is you should just drop the REIT entirely. The other option is to put it in one of the IRAs and put more bonds in taxable (realizing they will return less than holding bonds in taxable). However, understand that REIT is already contained in your total stock market so having extra, while considered a good thing by some, is not really necessary.

2) In your tax bracket, any bonds that must be held in taxable should be tax-exempt bonds. Consider one of Vanguard's intermediate term tax-exempt bonds or a NC bond as already mentioned.

On the other hand....once you retire, your tax bracket could drop to almost 0% since you will probably be living off the returns of your money. Once/if that happens, feel free to hold Total Bond Market Index in your taxable account with no problem. Might even apply to REIT as well.

This might also affect the best time to liquidate gains in your taxable account. Unfortunately, we don't know what the cap gains taxes will be starting in 2013.

If/when you actually pull this all off, I think you will be our all time winner for reducing the number of holdings in a cluttered portfolio. We've seen some messy portfolios, but yours takes the cake! The interesting thing about it is that not even your "advisor" could possibly understand just what you were holding.

[bdpb]

I've edited the OP as suggested.

Here are the unrealized (losses) and gains in the taxable portion.

ST Losses: (12,346)
ST Gain: 49,839
LT Losses: (13,639)
LT Gain: 126,614

Do you have carryover losses?
Are they short term or long term?

I have ST carryover losses of $16,452, no LT. In 2010, I had short term gains from the sale of a concentrated position in my company shares that will deplete this.

You need to stay on top of this and be ready to move on TLH.
Your primary goal should be to eliminate any ST gains. They are taxed
at your marginal rate.

With stock markets taking a dip the last few days, these numbers may
change quickly. Since you have 69 individual Intl stocks, you should
pay very close attention, especially to ST losses. Some Japanese stocks
have dropped as much as 10% to 20%. You should be willing to instruct
your advisor to sell at losses and move the proceeds to cash.

Likewise, any ST gains that remain ST for an extended period of time
might be candidates for sale, too.

[Redwing]

I've edited the OP as suggested.

Here are the unrealized (losses) and gains in the taxable portion.

ST Losses: (12,346)
ST Gain: 49,839
LT Losses: (13,639)
LT Gain: 126,614

Do you have carryover losses?
Are they short term or long term?

I have ST carryover losses of $16,452, no LT. In 2010, I had short term gains from the sale of a concentrated position in my company shares that will deplete this.

You need to stay on top of this and be ready to move on TLH.
Your primary goal should be to eliminate any ST gains. They are taxed
at your marginal rate.

With stock markets taking a dip the last few days, these numbers may
change quickly. Since you have 69 individual Intl stocks, you should
pay very close attention, especially to ST losses. Some Japanese stocks
have dropped as much as 10% to 20%. You should be willing to instruct
your advisor to sell at losses and move the proceeds to cash.

Was thinking the same thing today on the way home from work. I thought I was getting a handle on TLH.

Likewise, any ST gains that remain ST for an extended period of time might be candidates for sale, too.

But then I realize I don't understand it at all. ST gains are bad because ST gains are taxed at my marginal tax rate. ST losses, while not so great, at least can be used to offset ST gains and can be banked for future years or carried over, thus lowering my tax burden.

But what I don't get is why is it bad to allow ST gains to become LT gains?

[livesoft]

But what I don't get is why is it bad to allow ST gains to become LT gains?

Did someone say that was bad?

If you had carryover ST losses and only LT gains, then those losses would offset the LT gains and you would not pay LT cap gains taxes. So if those gains are ST gains, you basically have the same situation. That is, selling for a short-term gain or waiting and selling for a long-term gain in this specific situation makes no difference tax-wise. Thus, if you want to reduce your expenses, you might as well sell even if it realizes a ST gain today.

Of course, your situation is not this exact situation, so be careful with what you do.

[Redwing]

This clean up could take a while and you need to mentally prepare yourself for the trip.

Thanks Sidney.

Other than the timing associated with maximizing a tax loss harvesting strategy and terminating a 10 year relationship is there anything else I should be considering?

I went through a clean up -- not nearly as complex as yours but it was a fair amount of work. I kept putting it off because I had it in my head that I should do it all at once. It was so daunting. Once I decided to pace myself, it went quite quickly. Part of what freaked me out and caused me to move was that my holdings were so messy I wasn't sure what I had in terms of allocation, overlap etc.

One thing I did was to take all my taxable holdings and calculate the % of value in unrealized gain. Then I took the ER % and divided that by the % unrealized gain. I used this "index" to prioritize the moves. One thing I did up front to make it easier to look at was to take a lot of small holdings where it just didn't matter and I sold them right away -- just to clear the deck a little. I just picked a threshold and flushed any individual holding that was less than the threshold.

After thinking about this over the last two days. I now really get it. This is not a "one and done" deal. The best analogy I can come up with from my business experience is this:

This is not dissimilar to divesting a non strategic, marginally performing product line with a poorly performing management team that has tentacles into the parent company. The board wants the business off the books this quarter. Management needs to execute while preserving shareholder value, and needs the incumbent mgnt team to keep performing even when they know their days are numbered.

[Redwing]

Double Post

[Redwing]

But what I don't get is why is it bad to allow ST gains to become LT gains?

Did someone say that was bad?

That was me. Sorry. I misunderstood your point. I really appreciate your participation in this post.

If you had carryover ST losses and only LT gains, then those losses would offset the LT gains and you would not pay LT cap gains taxes. So if those gains are ST gains, you basically have the same situation. That is, selling for a short-term gain or waiting and selling for a long-term gain in this specific situation makes no difference tax-wise. Thus, if you want to reduce your expenses, you might as well sell even if it realizes a ST gain today.

Of course, your situation is not this exact situation, so be careful with what you do.

I still don't quite get it. Just realized after 49 years that certain concepts I don't synthesize until I can put pen to paper or fingers to a spreadsheet. Will be meeting with a CPA this week and won't leave until I get this fully understood.

In the meantime, I will instruct my "advisor" to start liquidating the international stocks with ST losses and putting them in cash.

[retiredjg]

I still don't quite get it. Just realized after 49 years that certain concepts I don't synthesize until I can put pen to paper or fingers to a spreadsheet. Will be meeting with a CPA this week and won't leave until I get this fully understood.

I think this really is something most people literally have to work out on paper - Schedule D on your taxes. Just print out a copy or two and play with different numbers to see how it works. Then it will make sense to you. It is all in the order that the losses cancel out gains (I think )

[bdpb]

Likewise, any ST gains that remain ST for an extended period of time might be candidates for sale, too.

But what I don't get is why is it bad to allow ST gains to become LT gains?

I think I may have caused confusion here. What I meant was, if you had
a stock that was previously a large portion of the ST gains and it has taken
a dip but still remains a ST gain but won't turn LT until late in the year or
even next year, it might make sense to sell it anyway. It will remain a
ST gain, but you do have some ST losses to offset it and you'll be making
an effort to accumulate more ST losses to offset it, too.
If you wait for it to go LT, then you may end up with more LT gains. You
just have to weigh the probability of it recovering a lot of it's gains before
it goes LT.

Technically, when you TLH you should be selling an asset class with losses
and replacing it with a similar but not substantially identical asset class.
For example, sell SP500 fund, buy Large Cap fund. Sell individual
foreign stocks, buy Intl index fund, etc. This leaves your AA effectively
the same. But you have such a hodge podge of investments that it's
hard to even tell what your current AA is. So, I wouldn't worry too much
about replacing one flavor of an asset class for another flavor until things
are more under control.

[Redwing]

Redwing, I too am happy to pile on.

Taxable:
39% Total Stock Market ETF VTI 0.70%
15% Total International Stock ETF VXUS 0.20%
4% REIT ETF VNQ 0.13% <---
16% Total Bond Market ETF BND 0.12%<---
10% TBD Cash <---

Her IRA
3% TIPS Fund VIPSX 0.25%

His IRA
5% TIPS Fund VIPSX 0.25%

His 401k
9% Fidelity US Bond Index FBIDX 0.44%

1) REIT does not belong in a taxable account. My feeling is you should just drop the REIT entirely. The other option is to put it in one of the IRAs and put more bonds in taxable (realizing they will return less than holding bonds in taxable). However, understand that REIT is already contained in your total stock market so having extra, while considered a good thing by some, is not really necessary.

2) In your tax bracket, any bonds that must be held in taxable should be tax-exempt bonds. Consider one of Vanguard's intermediate term tax-exempt bonds or a NC bond as already mentioned.

On the other hand....once you retire, your tax bracket could drop to almost 0% since you will probably be living off the returns of your money. Once/if that happens, feel free to hold Total Bond Market Index in your taxable account with no problem. Might even apply to REIT as well.

This might also affect the best time to liquidate gains in your taxable account. Unfortunately, we don't know what the cap gains taxes will be starting in 2013.

If/when you actually pull this all off, I think you will be our all time winner for reducing the number of holdings in a cluttered portfolio. We've seen some messy portfolios, but yours takes the cake! The interesting thing about it is that not even your "advisor" could possibly understand just what you were holding.

Thanks retiredjg and YDNAL

Made a few tweaks; corrected the ERs, dumped the REITs, replaced total bond with tax exempt intermediate.

How's this?


Account Description Sticker % Portfolio ER %
Taxable
38% Total Stock Market ETF VTI 0.07%
14% Total Intl Stock ETF VXUS 0.20%
21%TE Gov Bonds VWITX 0.20%
10%TBD Cash 10% 0.000%
Her IRA
3% TIPS Fund VIPSX 0.25%
His IRA
5% TIPS Fund VIPSX 0.25%
His 401k
9% Fidelity US Bond Index FBIDX 0.44%

Stock 53%
Bond 38%
Cash 10%

[retiredjg]

I think it looks good! I also think that tax time will be greatly simplified from how it is now.

If you do drop into a very low tax bracket when you retire, you could add the REIT back in and send the quarterly earnings to your "spending fund" (which I assume will be the cash.) You will be taxed on the earnings - might as well spend them. If you do add the REIT back in, they should be counted as part of your stock allocation, not the bond allocation.

In fact, the earnings from all your taxable funds should go into that spending pot. If the earnings are reinvested, you end up with a bunch of tiny lots which are a bother to keep up with.

Also, if you drop to a very low tax bracket and will probably stay there, you may want to revert back to the Total Bond Market if you can do so without a tax hit by selling.

Have you realized you probably won't need an accountant when this is finished?

[Redwing]

Thanks again for all the help!

retiredjg:

Have you realized you probably won't need an accountant when this is finished?

Yes. Absolutely. In fact, reliance on paid services to the financial industry is what got me here in the first place. Some services should not be outsourced.

If/when you actually pull this all off, I think you will be our all time winner for reducing the number of holdings in a cluttered portfolio.

Your post has stuck in my head for nearly a month and I accept the challenge.

Here’s a quick update. Since my last post, I’ve done the following:

Finished Boglehead’s Guide to Retirement
Completed our IPS
Stopped all mutual fund distributions to our cash sweep account in taxable
Consolidated his 401k to FBIDX
Opened a VG brokerage account and established initial positions in VTI, VXUS & VWITX
Contacted VG Concierge Services and provided a list of holdings including Q1 account statements
Instructed broker to begin process of unwinding any exotic investments
Met with accountant to discuss 2010 taxes, Roth conversion and TLH strategies
Requested paper copies of contribution history of rollover IRAs for Roth conversion planning
Provided DW with the link to this post in the unlikely event of my demise prior to project completion

Once we understand how much of the holdings can be transferred in kind, the process should accelerate. Right now we’re in a bit of a holding pattern.

Starting Positions: 144
Current Positions: 130
Goal: 5 by his 50th Birthday FBIDX, VTI, VXUS, VWITX, VIPSX

Someone asked my wishes for my 50th. I didn’t tell them, but here it is. This could get real expensive if I’m not careful. I’m a Leo.

At this point we need to balance the desire for immediate simplicity, tax loss harvesting, some reasonable asset allocation during transition and remaining in the market to any extent possible.

I’ll update this thread periodically to let you know the status and maybe provide a map for folks that find themselves in a similar situation in the future.

[livesoft]

I'm impressed.

[retiredjg]

I'm impressed too! But remind me why you are doing this?

"Stopped all mutual fund distributions to our cash sweep account in taxable"

That sounds backwards to me. Usually, you don't want your mutual fund distributions reinvested in the mutual funds - you do want them to go to the sweep account.

[Redwing]

I'm impressed.

Thanks for your encouragement and advice on TLH. I really want my life back.

I'm impressed too! But remind me why you are doing this?

"Stopped all mutual fund distributions to our cash sweep account in taxable"

Can't edit original post. What I meant to say is all mutual fund distributions are being directed to my sweep account and not reinvested.

[retiredjg]

Can't edit original post. What I meant to say is all mutual fund distributions are being directed to my sweep account and not reinvested.

Ah, good. Livesoft would have been so disappointed had you gotten that backwards.

[Redwing]

Thought it was time to provide an update as promised.

Today was a great day!

Since my last post:

His Reading
Liar’s Poker—Michael Lewis
The Big Short—Michael Lewis
Too Big to Fail—Andrew Ross Sorkin (Still about 1/3 to go but know how it all ends)

Her Reading
Boglehead’s Guide to Retirement—40 Authors

Attended a local BH chapter meeting last month

Reviewed financial plan(s) from VG and selected immediate, intermediate and long term positions based on timing of ST to LT capital gains transitions

Sold 3 proprietary positions at ML (hedge funds/structured products) and have plan to get out entirely within 60 days

Completed 4 of 6 VG assets-in-kind transfer applications and obtained Medallion signature guarantees

Next Steps:

Schedule a face-to-face meeting with ML next week
Fedex my VG transfer paperwork just prior to or after the ML meeting

Starting Positions: 144
Current Positions: 130
By July 2011: 24
By Aug 2011: 7

Note on Medallion Signature Guarantees:

A medallion signature guarantee is a stamp that certifies that you are who you say you are (your identiy, name and signatures on the various accounts are one and the same) and that you own the securities you wish to transfer. The institution issuing the stamp is liable up to their bonded limit, should there be a misrepresentation or fraud. The stamp has a special coded green ink, a bar code and a designation identifying the dollar limit of their bonded limits. If the amount of your account exceeds the bonded limit the transfer will not take place.

From a practical standpoint you present copies of your brokerage statements from the incumbent broker, your driver’s license/passport and your new broker’s transfer paperwork.

In our case we went to our local bank branch but were redirected to a branch across town we’ve never frequented as our local branch did not have authorization to issue medallion signature guarantees. DW and I show up in our 12 year old vehicles, she in work-out clothes, me in my “business” casual attire, with 72 pages of recent brokerage statements and 4 VG asset-transfer-kind documents.
The banker’s a nice guy, well dressed, an Eagle Scout, and young enough to be my son and was really, really agitated. After two calls to his risk management counselor (lawyer) and one call to VG we exited with 2 of 4 documents completed. I had to return today to complete the other two.

My point is getting a Medallion signature can be a big deal. The bank manager was not only putting his branch on the line, he was putting his career on the line. The next time I do this I will contact the manager well in advance, explain my situation and present myself in a manner (suit and tie?) that does not cause a great deal of cognitive dissonance.

[retiredjg]

Very impressive Redwing!

We've heard other horror stories about Medallion signatures. I've never figured out what triggers the requirement for one. Sometimes people seem to need one, other times they don't. I'm glad I didn't since I have not seen my credit union since 1992.

[Redwing]

Things are moving forward.

Had my last meeting with ML in mid June and started the in kind asset transfer process. As previous posters noted, at the end of that day there was one well dressed but very disappointed banker.

He wanted me to know he had never intentionally recommended an inappropriate investment. I assured him I thought he gave the best advice possible given the nature of his incentive system and his company’s goals.

I originally wanted to do a good deal of the portfolio cleanup while still at ML, but decided to make the break rather than delay further. While it probably would have been less complicated since I’m very familiar with the ML website, it was important to get this behind me and move on.

The assets were transferred in two steps. Since I wasn’t sure how this would go, I didn’t want my entire nest egg potentially in cyber-space limbo should something go off the rails. In the end the transfer process was seamless. I’m now a little light in equities having earlier sold off all the hedge funds and structured products.

Once I get the green light from VG that I qualify for discount trades, I’ll start the simplification in earnest. It looks like I’ll need to schedule some time off from work over the next few weeks in order to make some headway.

My next steps are:

1. Transition IRAs to 100% bonds and rebalance with equities in taxable
2. Sell all individual international equities (~67) and rebalance

After that:

3. Sell non performing, non-core, high expense ratio mutual funds and rebalance into Total Stock Market Index Fund, Total International Stock Market Index Fund and Intermediate Term Tax Exempt Fund as appropriate. I should be able to tax loss harvest a number of these without incurring significant capital gains.

Then:

4. Address the individual muni bonds. While I originally wanted these exchanged for Intermediate Term Tax Exempt Fund, I’m beginning to question whether or not to hold all or some of these to maturity, collect the interest and guarantee my principal. Previous posters suggested taking it slow on this one.

Anyway, thanks for all the advice and support. I’ve read each and every post multiple times and continue to find valuable nuggets that I missed earlier.

I feel like a giant weight has been lifted from my shoulders.

[retiredjg]

I feel like a giant weight has been lifted from my shoulders.

Sounds like that falls under the category of "priceless". Good work you your part and good luck!