Bogleheads

[larryswedroe]

It is often discussed about TLH whether to wait 31 days and reinvest or immediately.

As you know I have been proponent of not waiting for two reasons--every day you are out of market you miss the ERP. But you also have far greater chance of missing a big up then avoiding a big down. Using 5% as the definition of "big" I found 70% more likely to miss the big up than avoid the big down

Imagine harvesting losses a few days ago and sitting it out now. Already missed about 8% --of course we dont know the eventual outcome.

[SVariance]

[tfb]

Small ups and downs add up too. So only looking at "big" swings isn't that meaningful. Since you've looked at data, you should really look at the full 31-day period and see what the outcome is in a down market (remember you have to have a loss to begin with before you TLH). Because nobody can time the market, it's unlikely the TLH is done at the exact bottom of the market.
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The Finance Buff

[gummy]

Tho' I've played with missing the best or worst months, I've never played with days ... until now:
If you use 10-years worth of daily returns, but replace returns greater than 5% by 0%, you get this:

which also includes replacing daily returns less than -5% by 0%, so you "miss" the really bad days, too.

[tfb]

I just looked at a random fund, Vanguard Total Stock Market ETF (VTI), for 31-day price changes. Here's what I got for between 2/4/2008 and 9/19/2008 (first trading day in 2008 is 1/2/2008; waiting 31 days gets to 2/4/2008).

[larryswedroe]

this is simple

every day stocks are riskier than bonds, so every day you are out of market you are giving up the ERP. On annual basis ERP has been about 8%. So divide that by 12 and that is the ERP you gave up by being out of market on average, randomly, for 31 days.

[tfb]

[amp]

[Sidney]

[tfb]

[tfb]

[yobria]

While selling/immediately rebuying to TLH is obvious for Boglehards and other investment geeks, I doubt most people even understand the rule.

I told a friend, who has his money with a ML broker, Thursday that I'd TLH'd a couple of ETFs and immediately bought similar ones. He asked why I'd bother to do that, and I explained the tax writeoff. "You can do that?" he asked. Apparently his broker never bothered to TLH his account.

Nick

[stan1]

It's not as obvious as it seems even on this board. There are high profile contributors still advocating the "sit out 31 day" approach (perhaps because they personally don't ever want to hold anything other than Vanguard total market mutual funds).

[amp]

[yobria]

[Taylor Larimore]

Hi Bogleheads:

We had a big 2-day jump in the U.S. Stock Market and it appears that waiting 30 days in a money market fund when tax-loss harvesting is a mistake. No one knows what the next 30-day period will bring, but we do know that the S&P is below its price 30 days ago, so sitting in a money market fund during that period would have provided a gain unstead of a loss (and less worry).

There has been research on the subject of avoiding gains and losses. For example, I found that since 1950, the Dow's best monthly gain was +14.4% (Jan 1976) and its worst monthly loss was -23.2% (Oct 1987).

This is from InvesTech Research:

Quote:

Measuring from 1928 to 2002, if you started with $10 and you followed the famous buy-and-hold strategy, that $10 would become $10,957. If you missed the 30 best months, your $10 would only be $154. However, if you missed the 30 worst months, your $10 would be $1,317,803. One can see from these numbers that missing the worst periods is very important to long-run compounding."

http://moneycentral.msn.com/content/P36303.asp

When tax-loss harvesting a small part of our portfolio, this is one reason we simply sit in a risk-free money market fund for 30-days.

Best wishes.
Taylor

[larryswedroe]

again this is extremely simple
there is an ERP, every day.
thus every day you wait you are giving up that ERP

doesnt matter if one day or 31 or whatever, and the longer the period the more premium you give up
While it is true you will miss some really bad days as the worst losses are bigger than the biggest gains but that doesnt matter, the gains are more frequent, as I have shown-- big gains 70% more likely over 31 days than big losses. That is big difference

[gummy]

[Imperabo]

"I found that since 1950, the Dow's best monthly gain was +14.4% (Jan 1976) and its worst monthly loss was -23.2% (Oct 1987). "


Perfect examples. In the 6 months preceding Jan 1976 the S&P had lost about 5%. In the 6 months preceding Oct 1987 it had gained about about 8%. Only in the first case would most people have been taking losses, and they would have missed a huge rally if they had sat it out. Small sample size of course, but I personally would rather not be sitting out a market that had suffered large recent declines, and should therefore be a relative bargain. Still, not a huge deal if it's small portion of your portfolio.

[Roverdog]

I saw the post title, and my first thought, actually, was to figure out what John Lennon has to do with investing.

Anyway, I'll add another consideration-- If it's necessary to sell only a small portion of one's holdings to TLH (i.e., those shares with the highest cost) rather than one's entire position, perhaps one has to consider what fraction is being sold. If it's relatively small, then waiting 31 days might be best. If it's a large portion, then transferring to a similar fund might be better. As with many other matters, it's a matter of degrees.

Bob

[larryswedroe]

Yes stocks are negatively skewed and exhibit excess kurtosis--so there are possibilities of very large losses

Also note in the case of TLH that you are selling AFTER a big down month. So the ERP is now higher than average.

Also on momentum, while I know it exists on individual stocks not sure it exists on asset classes. Have not seen any evidence on that.

But let's assume you have same momentum as for individual stocks. Well it looks like this. First you get REVERSAL in the short term--30 days--then momentum for months 2-12 and then reversal again. So if going to get out after the first 31 days down doesnt seem to be such a good idea since the next 31 is a reversal.

[Easy Rhino]

[Bimmer]

From the behavioral perspective, isn't one nice aspect of buying immediately that it taken some of the decision-making out of the equation. Set it and forget it, make TLH an automatic process. Waiting a month almost puts a second decision point in the mix - i.e. buy on day 31 or 32, wait for another drop and be burned, Friday is day 31 so wait 'till Monday to see what happens.

Buying immediately makes this more of an automatic process, and keeps your portfolio at all times at the risk level you decided on in your investment statement.
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Bimmer
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[Prokofiev]

I always try and buy immediately.

But the down-side to this is getting stuck in a different mutual fund/ ETF that has a higher ER or is not exactly what you want.

If after TLH, the new ETF goes down after 31 days - no problem. You just switch back to the lower ER VG ETF/fund and TLH again. However, in this case you would have been better to sit out the month in cash.

If the new ETF retraces a significant amount of the former loss (which is what you were hoping for), you now have a ST cap gain in the new ETF/fund. So if the market goes up you get stuck. And give up .2% or .3% each year to expenses. So if the ERP is 8% and you actually get the 8/12% = .75%, you might still lose that much after 2-3 years.
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Everything should be made as simple as possible, but not simpler - Einstein

[mudfud]