Should I rebalance during a market correction?

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drramey
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Should I rebalance during a market correction?

Post by drramey »

I recently moved my taxable brokerage account from a firm where it was actively managed. I am using TD to manage my account personally now. It has 50 individual stocks and 30 etf’s. Due to fees and overlap I wanted to sell the etf’s and move everything over to VTI for the lower expense and to become more passive in my investing approach. The account is older so there are capital gains in everything. Even in a correction there would be some capital gains. Should I wait for a correction to sell the multiple etf’s and purchase VTI? Does this strategy make sense?
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retired@50
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Re: Should I rebalance during a market correction?

Post by retired@50 »

drramey wrote: Sun May 16, 2021 1:23 am I recently moved my taxable brokerage account from a firm where it was actively managed. I am using TD to manage my account personally now. It has 50 individual stocks and 30 etf’s. Due to fees and overlap I wanted to sell the etf’s and move everything over to VTI for the lower expense and to become more passive in my investing approach. The account is older so there are capital gains in everything. Even in a correction there would be some capital gains. Should I wait for a correction to sell the multiple etf’s and purchase VTI? Does this strategy make sense?
Welcome to the forum. :happy

This is primarily a tax question.

In other words, how much (in dollars) are you willing to add to your annual income from capital gains to deal with this problem? One common approach is to spread out the long term capital gains from selling stock and ETF positions over two or more tax years so as to not overwhelm your marginal tax rate in any particular year. Taking advantage of selling unwanted assets during a market correction can also be effective at minimizing the capital gains.

See link for more detail: https://www.bogleheads.org/wiki/Paying_ ... itch_funds

Regards,
This is one person's opinion. Nothing more.
retiredjg
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Re: Should I rebalance during a market correction?

Post by retiredjg »

Welcome to the forum. :happy

Much of this is your personal preference about how fast you want your portfolio to change into what you now want. Unless you are in a very low tax bracket, there will be capital gains taxes. How much depends on how much gains you have and which capital gains bracket you are in.

If you wait you might or might not be fortunate enough to sell during a downturn. If you don't wait, you might or might not be unfortunate enough for a downturn to happen right after you sell. No way of knowing. If you sell it all and the market goes down, we'll blame it on you. :D

I suggest you make a plan to start selling and increase the sales if there is a downturn.

Purchasing VTI Total Stock Market is a good strategy. Waiting...not so much. However, you might want to spread this out over at least a couple of years. Some people like to rip off the band-aid. Some prefer the longer but possibly less painful method.
Doctor Rhythm
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Re: Should I rebalance during a market correction?

Post by Doctor Rhythm »

Welcome!

This unfortunately boils down to a “market timing” problem. Your strategy assumes that the market will rise < n% before it falls by n%, where n is >10 (this being the definition of a correction). A core belief of this forum is that you cannot reliably time the market.

So, definitely sell unwanted securities during a correction. Waiting for a correction, though, is more like making a bet, or rather a series of bets.

As an example, let’s say you get what you want. Your portfolio gains another 8% before dropping 12%, yielding a net 4% drop in unrealized capital gains. Is it time to act? Maybe it will drop some more, and you should wait, or maybe it won’t. Maybe there will be a 2% gain the next day, wiping out half your desired capital loss.

Also, let’s say your portfolio dropped 12% as above, but VTI only dropped 4%. Do you still re-allocate?

Or alternatively, your portfolio is up 8% before the correction, while VTI is only up 2%. Do you still wait for a correction?

And to make it real, the market dropped by around 4% from its all time high last week, which is equivalent to the first scenario I presented. Did you take advantage of it?
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goingup
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Re: Should I rebalance during a market correction?

Post by goingup »

I think consolidating with the goal of holding fewer stocks and ETFs is worthwhile. A market correction presents a good opportunity, but corrections don’t happen predictably.

Find out the cost basis of each holding. Consider selling any holding that’s less 5% of your portfolio. Turn off dividend reinvestment for holdings you don’t want to keep. Shed positions methodically with taxes in mind. Recognize it might take a few years to achieve desired results and that you may be “stuck” with some stocks or ETFs because it’s too costly to sell them.

It’s good to set up a plan to execute when the market does crater. What will you sell and what to buy. :beer
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bertilak
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Re: Should I rebalance during a market correction?

Post by bertilak »

It does boil down to tax issues. Tax Loss Harvesting may help if there are some losses due to the downturn. At worst you will have lower realized gains to be taxed. As said above, try to spread net gains (after TLH) across a few years to stay out of higher tax brackets.

Don't worry about market timing. If you sell and reinvest so as to maintain your AA, consider it is an even trade.

Edit: I ignored the part about rebalancing! It is never wrong to rebalance.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
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drramey
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Re: Should I rebalance during a market correction?

Post by drramey »

Thanks so much for the replies. I have already sold several of the eft's with the worst expense ratios. I have realized gains of 41k as of today for the year. I think that is going to do it for this year. That will cost me around 6k for the 2021 tax year. I have around 350K of unrealized gains left to manage. There are some positions left that only have a gain of a few thousand dollars(REGL) but some have gains of 30k(MSFT) It is a bit overwhelming to try and decide what to sell and what to keep and when to sell moving forward. I wish I could go back 20 years and tell the younger me to invest in low cost index funds and keep things simple. Unfortunately I didn't do the research and assumed a financial advisor would give me a performance advantage. Instead I paid someone to have a convoluted portfolio that under performed the broad market. Now, I will have to pay taxes to simplify the portfolio. I would probably be sick if I knew how much money I left on the table by going active management. Lesson's learned. I set my daughters Roth up this year. She is 16. At least she will benefit from my mistakes. It's a total mess but if anyone is interested in giving advice I can give the portfolio details. Total account value is around 800k. IRA is around 400k. Since there weren't any tax consequences I already exited all the positions in the IRA. It is 100% VTI. I'm 43 and have a high risk tolerance. I don't really need the money for anything. House and cars are paid off.
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TomatoTomahto
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Re: Should I rebalance during a market correction?

Post by TomatoTomahto »

drramey wrote: Sun May 16, 2021 2:49 pm I would probably be sick if I knew how much money I left on the table by going active management. Lesson's learned. I set my daughters Roth up this year. She is 16. At least she will benefit from my mistakes.
Your daughter has a smart parent. As long as each succeeding generation gets better :sharebeer

I’m sure people here would be happy to help you with details. Use the recommended format.
I get the FI part but not the RE part of FIRE.
retiredjg
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Re: Should I rebalance during a market correction?

Post by retiredjg »

The recommended format can be found in the link at the bottom of this message.
helloeveryone
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Re: Should I rebalance during a market correction?

Post by helloeveryone »

drramey wrote: Sun May 16, 2021 2:49 pm Thanks so much for the replies. I have already sold several of the eft's with the worst expense ratios. I have realized gains of 41k as of today for the year. I think that is going to do it for this year. That will cost me around 6k for the 2021 tax year. I have around 350K of unrealized gains left to manage. There are some positions left that only have a gain of a few thousand dollars(REGL) but some have gains of 30k(MSFT) It is a bit overwhelming to try and decide what to sell and what to keep and when to sell moving forward. I wish I could go back 20 years and tell the younger me to invest in low cost index funds and keep things simple. Unfortunately I didn't do the research and assumed a financial advisor would give me a performance advantage. Instead I paid someone to have a convoluted portfolio that under performed the broad market. Now, I will have to pay taxes to simplify the portfolio. I would probably be sick if I knew how much money I left on the table by going active management. Lesson's learned. I set my daughters Roth up this year. She is 16. At least she will benefit from my mistakes. It's a total mess but if anyone is interested in giving advice I can give the portfolio details. Total account value is around 800k. IRA is around 400k. Since there weren't any tax consequences I already exited all the positions in the IRA. It is 100% VTI. I'm 43 and have a high risk tolerance. I don't really need the money for anything. House and cars are paid off.
You should consider posting your question in this format... viewtopic.php?f=1&t=6212

I found it was a good exercise in understanding my portfolio but then the smart people on BH can see your big picture and give advice based on that.
Then the next time you ask a question you can just cut and paste the post and edit with new data points.
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goingup
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Re: Should I rebalance during a market correction?

Post by goingup »

drramey wrote: Sun May 16, 2021 2:49 pm Thanks so much for the replies. I have already sold several of the eft's with the worst expense ratios. I have realized gains of 41k as of today for the year. I think that is going to do it for this year. That will cost me around 6k for the 2021 tax year. I have around 350K of unrealized gains left to manage. There are some positions left that only have a gain of a few thousand dollars(REGL) but some have gains of 30k(MSFT) It is a bit overwhelming to try and decide what to sell and what to keep and when to sell moving forward. I wish I could go back 20 years and tell the younger me to invest in low cost index funds and keep things simple. Unfortunately I didn't do the research and assumed a financial advisor would give me a performance advantage. Instead I paid someone to have a convoluted portfolio that under performed the broad market. Now, I will have to pay taxes to simplify the portfolio. I would probably be sick if I knew how much money I left on the table by going active management. Lesson's learned. I set my daughters Roth up this year. She is 16. At least she will benefit from my mistakes. It's a total mess but if anyone is interested in giving advice I can give the portfolio details. Total account value is around 800k. IRA is around 400k. Since there weren't any tax consequences I already exited all the positions in the IRA. It is 100% VTI. I'm 43 and have a high risk tolerance. I don't really need the money for anything. House and cars are paid off.
I somewhat understand the advisor strategy to hold stocks. No expense ratio. Dividends for some investors who want them, and lots of candidates for tax loss harvesting. Mainly, though, I think it’s to make investing seem complicated. In a case like yours, unwinding is so overwhelming that many people would be disinclined to try. Client inertia is an advisor’s best friend. :wink:

Stay with the streamlining and you’ll get the portfolio you want. It may just take some time. Think marathon not sprint.
Topic Author
drramey
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Re: Should I rebalance during a market correction?

Post by drramey »

goingup wrote: Sun May 16, 2021 4:07 pm
drramey wrote: Sun May 16, 2021 2:49 pm Thanks so much for the replies. I have already sold several of the eft's with the worst expense ratios. I have realized gains of 41k as of today for the year. I think that is going to do it for this year. That will cost me around 6k for the 2021 tax year. I have around 350K of unrealized gains left to manage. There are some positions left that only have a gain of a few thousand dollars(REGL) but some have gains of 30k(MSFT) It is a bit overwhelming to try and decide what to sell and what to keep and when to sell moving forward. I wish I could go back 20 years and tell the younger me to invest in low cost index funds and keep things simple. Unfortunately I didn't do the research and assumed a financial advisor would give me a performance advantage. Instead I paid someone to have a convoluted portfolio that under performed the broad market. Now, I will have to pay taxes to simplify the portfolio. I would probably be sick if I knew how much money I left on the table by going active management. Lesson's learned. I set my daughters Roth up this year. She is 16. At least she will benefit from my mistakes. It's a total mess but if anyone is interested in giving advice I can give the portfolio details. Total account value is around 800k. IRA is around 400k. Since there weren't any tax consequences I already exited all the positions in the IRA. It is 100% VTI. I'm 43 and have a high risk tolerance. I don't really need the money for anything. House and cars are paid off.
I somewhat understand the advisor strategy to hold stocks. No expense ratio. Dividends for some investors who want them, and lots of candidates for tax loss harvesting. Mainly, though, I think it’s to make investing seem complicated. In a case like yours, unwinding is so overwhelming that many people would be disinclined to try. Client inertia is an advisor’s best friend. :wink:

Stay with the streamlining and you’ll get the portfolio you want. It may just take some time. Think marathon not sprint.

I didn’t have a problem with the stocks as much as I did the 30 something etf’s. Most of the stocks are dividend growth stocks. The multiple eft’s are like you’ve said just a way to make it look to complicated to do ones self.
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retired@50
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Re: Should I rebalance during a market correction?

Post by retired@50 »

drramey wrote: Sun May 16, 2021 4:12 pm I didn’t have a problem with the stocks as much as I did the 30 something etf’s. Most of the stocks are dividend growth stocks.
Keep in mind that individual stocks are riskier than ETFs or mutual funds because you're exposed to firm-specific risk.

This may not seem like a big deal when holding Microsoft, but it didn't seem like a big deal for holders of General Electric either, until it did. A couple bad decisions by a CEO or two and it's curtains. GE now pays 4 cents per year in dividends. By slowly eliminating the individual stock positions and using the proceeds to buy stock index funds, you'll actually be reducing your overall risk.

Regards,
This is one person's opinion. Nothing more.
ralph124cf
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Re: Should I rebalance during a market correction?

Post by ralph124cf »

The federal income tax rates are the lowest they have been in the last 100 years. The rates are currently scheduled to snap back up in 2026, but of course congress can change the tax law at any time. For this reason I advise filling up your current tax bracket, and possibly evenly the next higher bracket. Jumping from the 22% bracket to the 24% bracket is no big deal, jumping from the 24% bracket to the 32% bracket is more painful.

Consider state and local taxes also, some places like CA and NY may cause you to change your mind if you are planning to leave for a less taxing place in a couple of years.

Ralph
Topic Author
drramey
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Re: Should I rebalance during a market correction?

Post by drramey »

Keep in mind that individual stocks are riskier than ETFs or mutual funds because you're exposed to firm-specific risk.

This may not seem like a big deal when holding Microsoft, but it didn't seem like a big deal for holders of General Electric either, until it did. A couple bad decisions by a CEO or two and it's curtains. GE now pays 4 cents per year in dividends. By slowly eliminating the individual stock positions and using the proceeds to buy stock index funds, you'll actually be reducing your overall risk.
I agree with this. Unfortunately they didn’t reduce the positions when they went up drastically. MSFT and LOW are two examples of individual stocks that should have been reduced in my portfolio. Of course it’s fine for the time being since I have the sizeable gains. I am ready to dump it all in favor of a low cost index though. I’m just trying to navigate the tax implications as best I can.
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drramey
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Re: Should I rebalance during a market correction?

Post by drramey »

Emergency funds: 35k in checking

Debt: No debt

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, 5% State

State of Residence: MS

Age: 43

Desired Asset allocation: 100% stocks / 0% bonds
Desired International allocation: 0% of stocks


Current retirement assets
Taxable approx 800k

Market Value Cap Gains
VTI VANGUARD TOTAL STOCK MKT $285,095.40 $12,184.43
MSFT MICROSOFT CORP $34,167.03 $29,844.15
XLK TECH SELECT SECTOR SPDR $25,758.96 $20,426.58
DON WISDOMTREE US MIDCAP DIVIDE $23,552.04 $8,972.12
LOW LOWES COS INC $18,365.16 $14,621.78
DGRW WISDOMTREE US QUALITY DIVID $14,998.95 $7,531.67
ITW ILLINOIS TOOL WKS INC $13,669.63 $11,277.41
ADI ANALOG DEVICES INC $12,981.51 $10,785.35
LHX L3 HARRIS TECHNOLOGIES INC $12,860.71 $10,433.32
NSC NORFOLK SOUTHERN CORP $12,851.64 $10,400.94
NEE NEXTERA ENERGY INC $12,404.81 $10,143.31
VEA VANGUARD FTSE DEVELOPED MKT $11,725.58 $6,340.03
XLY SECTOR SPDR $11,631.83 $9,229.06
TGT TARGET CORP $11,065.21 $9,271.02
APD AIR PRODS & CHEMS INC $9,987.03 $7,860.18
LIN LINDE PUBLIC LIMITED COMPAN $9,975.96 $7,590.21
XLF FINL SELECT SECTOR SPDR $9,785.92 $5,743.70
ADP AUTOMATIC DATA PROCESSING $9,785.14 $7,992.96
RDVY FIRST TRUST RISING DIVIDEND $9,751.51 $4,067.41
FDS FACTSET RESH SYS INC $9,286.00 $8,075.80
VWO VANGUARD FTSE EMERGING MARK $9,235.89 $8,067.26
XLV SECTOR SPDR TR SHS $9,173.20 $6,603.67
MDT MEDTRONIC PLC $8,937.76 $3,524.12
JNJ JOHNSON & JOHNSON $8,794.41 $5,320.75
BDX BECTON DICKINSON & CO $8,511.90 $5,960.35
AFL AFLAC INC $8,236.22 $5,046.54
XLI SECTOR SPDR $7,993.73 $5,611.33
SYY SYSCO CORP $7,860.38 $5,152.21
GD GENERAL DYNAMICS CORP $7,730.77 $5,449.59
REGL PROSHARES S&P MIDCAP $7,493.88 $2,135.55
MCD MCDONALDS CORP $7,269.75 $5,596.99
PAYX PAYCHEX INC $7,107.81 $4,808.66
VFC V F CORP $6,874.84 $4,698.27
ES EVERSOURCE ENERGY $6,769.17 $4,317.53
CLX CLOROX CO $6,052.10 $4,162.49
SJM JM SMUCKER CO $6,048.31 $4,269.26
PII POLARIS INC $5,979.63 $5,329.06
PG PROCTER & GAMBLE CO $5,971.28 $3,219.49
VZ VERIZON COMM $5,869.00 $269.00
MMM 3M COMPANY $5,816.86 $3,769.77
WMT WALMART INC $5,461.37 $3,489.06
XLP CONSUMER STAPLES SELECT SEC $5,219.97 $2,871.71
PEP PEPSICO INC $5,019.97 $2,893.26$
CL COLGATE PALMOLIVE CO $4,873.97 $2,985.08
DGRS WISDOMTREE US SMALLCAP QUAL $4,848.42 $2,186.57
IJK ISHARES S&P MID-CAP 400 GRO $4,777.84 $3,067.56
GWW GRAINGER W W INC $4,706.09 $3,948.90
SO SOUTHERN COMPANY $4,588.11 $1,714.94
CVX CHEVRON CORP $4,491.01 $927.38
EMR EMERSON ELEC CO $4,460.68 $1,995.41
BAX BAXTER INTERNATIONAL INC $4,374.05 $2,925.83
IJJ ISHS S&P MDCP400 $3,724.84 $3,216.41
GIS GENERAL MILLS INC $3,709.79 $1,851.63
NVS NOVARTIS AG SPONS ADR $3,553.42 $1,657.18
WEC WEC ENERGY GROUP INC $3,416.74 $2,005.67
PSX PHILLIPS 66 $3,325.94 $2,007.53
T AT&T INC $3,282.35 $261.34
RTX RAYTHEON TECHNOLOGIES $3,025.98 $1,798.30
MS MORGAN STANLEY $2,882.55 $2,063.64
JWN NORDSTROM INC $2,293.20 $1,833.53
D DOMINION ENERGY INC $1,574.67 $569.93
CARR CARRIER GLOBAL CORPORATION $1,532.33 $1,180.28
OTIS OTIS WORLDWIDE CORPORATION $1,349.16 $830.67
KTB KONTOOR BRANDS INC $726.53 $598.71
ALC ALCON INC $478.45 $253.17

His Simple IRA approx 400k
100% VTI


His Roth IRA approx 20k
100% VTI

Her Roth IRA approx 8k
100% VTI

Her 403b approx 130k
100% Unspecified zero cost S&P 500 fund
Company match? No

_____________________________________________________


Contributions

New annual Contributions
$15,500 his Simple IRA
$19,500 her 403b no match
$0 his Roth IRA
$0 her Roth IRA



Questions:


1. 2020 taxable income was 185k and 2021 taxable income should be close(without cap gains). I have realized capital gains of about 41k so far with with the trades I have made to begin the move over to VTI. I can realize about 100k more in capital gains before moving from the 24% to the 32% tax rate. It would be an additional 15k in taxes for the year but I am considering this. Thoughts, ideas?

2.With fund overlap MSFT makes up a little over 6% of the entire portfolio. I realize I need to reduce this holding.(I'm working on it) I am also aware that I have little to no foreign exposure and I am ok with that. Other than that is there anything that jumps out at you?

3.In 15-20 years will I be in the same situation again trying to sell a portion of the VTI holding to get exposure to bonds? Selling some VTI for BND..... Paying tax(again)
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retired@50
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Re: Should I rebalance during a market correction?

Post by retired@50 »

drramey wrote: Sun May 16, 2021 11:05 pm ...
His Simple IRA approx 400k <- Consider a bond fund here...
100% VTI
...
Her 403b approx 130k <- Or here.
100% Unspecified zero cost S&P 500 fund
...
3.In 15-20 years will I be in the same situation again trying to sell a portion of the VTI holding to get exposure to bonds? Selling some VTI for BND..... Paying tax(again)
Either one of the accounts above (assuming they are tax-deferred) would be a suitable place to hold bond funds.

Since bond funds aren't generally very tax efficient, they are often better held inside a tax-deferred account.

See tax-efficient fund placement wiki page for details: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
This is one person's opinion. Nothing more.
Dude2
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Re: Should I rebalance during a market correction?

Post by Dude2 »

Hmm. Maybe I'm missing something, but, assuming these are going to be treated at long-term capital gains rates, why not exchange all of them into, for example, VTI? Call it tax-gain harvesting or whatever, but the OP will either pay now at the LTCG rate or pay later at the LTCG rate. What's the difference unless they raise the LTCG rate or if you want him to wait it out until his income drops to where he can pay less than LTCG rate? I say exchange it all, keep a percentage in cash for the taxes, done. Waiting for a correction can mean that some of these will be corrected to a far greater extent than others. Lock in the gains, not the losses.
Then ’tis like the breath of an unfee’d lawyer.
retiredjg
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Re: Should I rebalance during a market correction?

Post by retiredjg »

1. 2020 taxable income was 185k and 2021 taxable income should be close(without cap gains).
You seem to have some misunderstandings about how income is taxed.

Ordinary income is taxed at 10%, 12%, 22%, 24%, and so on. Long term capital gains (LTCG) and qualified dividends (QD) are taxed at 0%, 15%, and 20% (depending on total income).

If your taxable income (after deductions) was $185k you might be just into the 24% bracket or not. Some of that total income might have been LTCG and QD so your tax bracket for ordinary income might actually be 22%.

Looking at your 2020 taxes, what is on line 9 (total income), line11 (AGI) and line 15 (taxable income)?

As long as you keep your modified AGI under $250k, your LTCG and QD will be taxed at 15%, not 24%. Any capital gains amount over $250k will have an additional NIIT (net investment income tax) of 3.8%. So you might want to keep your AGI under $250k.

Short term capital gains will be taxed at 22% or 24%, whichever bracket you are in. If you have not done it already, you need to turn off the reinvestment of dividends for all these things you want to get rid of - so that new shares are not being bought that will have to age a full year for the lower tax rate.


I have realized capital gains of about 41k so far with with the trades I have made to begin the move over to VTI. I can realize about 100k more in capital gains before moving from the 24% to the 32% tax rate. It would be an additional 15k in taxes for the year but I am considering this. Thoughts, ideas?
As above, long term capital gains will not move you into a different tax bracket. Well, I suppose if you sold everything, you might move into the 20% capital gains rate. I don't suggest you do that.

I think 100k more in LTCG will be more than an extra $15k in taxes because some of it would be in NIIT territory. However, to get rid of this mess ( :( ) you might be willing to do that with some of the gains.



3.In 15-20 years will I be in the same situation again trying to sell a portion of the VTI holding to get exposure to bonds? Selling some VTI for BND..... Paying tax(again)
Bonds can be held in the 403b and SIMPLE IRA.

A market correction or significant downturn would be a very nice thing for you, but I would go ahead and start chewing on this elephant now, one bite at a time. If you are fortunate, you'll get to sell some during a downturn too.

It is disappointing that you have to do this, but it does mean that you have made money - a lot of money. :happy
nrkv
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Re: Should I rebalance during a market correction?

Post by nrkv »

drramey wrote: Sun May 16, 2021 8:04 pm
Keep in mind that individual stocks are riskier than ETFs or mutual funds because you're exposed to firm-specific risk.

This may not seem like a big deal when holding Microsoft, but it didn't seem like a big deal for holders of General Electric either, until it did. A couple bad decisions by a CEO or two and it's curtains. GE now pays 4 cents per year in dividends. By slowly eliminating the individual stock positions and using the proceeds to buy stock index funds, you'll actually be reducing your overall risk.
I agree with this. Unfortunately they didn’t reduce the positions when they went up drastically. MSFT and LOW are two examples of individual stocks that should have been reduced in my portfolio. Of course it’s fine for the time being since I have the sizeable gains. I am ready to dump it all in favor of a low cost index though. I’m just trying to navigate the tax implications as best I can.
OP, I’m in similar position as yours and I cannot sell anything more this year unless the market goes down substantially. I’m thinking of about 40-45k in LTCG per year for the next 3-4 years. Coming to taxes, LTCGs do not add to earned income. So why should the tax bracket increase in this scenario? Thanks
Topic Author
drramey
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Re: Should I rebalance during a market correction?

Post by drramey »

Looking at your 2020 taxes, what is on line 9 (total income), line11 (AGI) and line 15 (taxable income)?
Total income $236,359
Adjusted gross income 236,359
Taxable income $184,037

Do realized capital gains raise the total income? I didn't have capital gains to speak of in 2020 since I didn't do any trading. I did have dividend income though. Since I have already realized 41k of gains for 2021 will that raise the total income with these numbers to $277,359? If so then I suppose I should wait to any additional selling until 2022?
Topic Author
drramey
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Re: Should I rebalance during a market correction?

Post by drramey »

Also, DRIP is turned off for everything but VTI.
retiredjg
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Re: Should I rebalance during a market correction?

Post by retiredjg »

drramey wrote: Mon May 17, 2021 8:55 am
Looking at your 2020 taxes, what is on line 9 (total income), line11 (AGI) and line 15 (taxable income)?
Total income $236,359
Adjusted gross income 236,359
Taxable income $184,037

Do realized capital gains raise the total income?
Yes, realized capital gains do raise total income, AGI and taxable income. However, your ordinary income and LTCG/QD income are taxed at different rates and adding more gains does not increase the ordinary income that you are paying 24% on.

I didn't have capital gains to speak of in 2020 since I didn't do any trading. I did have dividend income though.
There are two kinds of dividend income. There are "qualified dividends" which are paid by stocks and stock funds (although only a percentage of the dividends from a stock or stock fund may be "qualified"). And there are dividends that are not qualified. These are are paid by bond funds and stocks/stock funds (the part that is not qualified). The two of these together are called "ordinary dividends".

Since you have no bonds or bond funds, I would guess that most of your dividends are qualified (taxed at the lower capital gains rate). If you want to know for sure, what are the numbers on line 3a (qualified dividends) and 3b (ordinary dividends)?

Since I have already realized 41k of gains for 2021 will that raise the total income with these numbers to $277,359? If so then I suppose I should wait to any additional selling until 2022?
Yes, it will raise those numbers and if you wish to avoid any more gains that are subject to NIIT's extra 3.8% tax, you should stop. However, I sensed some urgency on your part...are you willing to pay 18.6% on the gains that are subject to the NIIT?
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drramey
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Re: Should I rebalance during a market correction?

Post by drramey »

Yes, it will raise those numbers and if you wish to avoid any more gains that are subject to NIIT's extra 3.8% tax, you should stop. However, I sensed some urgency on your part...are you willing to pay 18.6% on the gains that are subject to the NIIT?
No, I am not willing to pay the extra if I can avoid it. I am a little anxious I suppose. I need to be a little more patient. I'm just ready to simplify and forget about it. I'm not one to look at my portfolio. I want to get this thing "fixed" and look at it again in 5-10 years.
retiredjg
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Re: Should I rebalance during a market correction?

Post by retiredjg »

Unfortunately, the two things you want are in direct conflict. If you convert more, you will pay the extra 3.8% on more.

I suggest you not sell any more for the time being and let your preference make itself known to you with more time and experience. You have only been managing this account a short time. Nothing has to happen this week. Later on this year will be fine too.

Just to summarize, you will pay 15% on long term capital gains up to a modified AGI of $250k. Over that number, the LTCG will be taxed at 18.8% (unless you sell so much that you go into a 23.8% range).

I am not very familiar with the modified AGI for NIIT. Here is a link about that.

https://www.schwab.com/taxes/net-invest ... come-taxes

It looks to me like your MAGI will be the same as your AGI since you have little in the way of foreign investments.
retiredjg
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Re: Should I rebalance during a market correction?

Post by retiredjg »

I'll just point out one thing. These investments have made good money for you. Something near $350k. Paying tax at only 18.8% is a pretty darn low rate. It is less than you pay on your next dollar of salary.

Paying tax just means you have made money. Always be cautious about letting the tax tail wag the dog.

I'm not trying to say "sell it all this year", but do encourage you to consider that this may be the lowest rate you will pay for income while working. Don't let taxes steer you away from a good deal.
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drramey
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Re: Should I rebalance during a market correction?

Post by drramey »

Hmm. Maybe I'm missing something, but, assuming these are going to be treated at long-term capital gains rates, why not exchange all of them into, for example, VTI? Call it tax-gain harvesting or whatever, but the OP will either pay now at the LTCG rate or pay later at the LTCG rate. What's the difference unless they raise the LTCG rate or if you want him to wait it out until his income drops to where he can pay less than LTCG rate? I say exchange it all, keep a percentage in cash for the taxes, done. Waiting for a correction can mean that some of these will be corrected to a far greater extent than others. Lock in the gains, not the losses.
This I understand. But lets say VTI drops by 20% and so does LOW and MSFT. Then I would be saving around $1600-$1700 in tax just on those two trades alone. If it's just swapping one stock/eft for VTI then it makes sense to do it during a correction. I have no idea which of these stocks could correct by %35-%40 if the broad market corrects by %20. If I did then I would definitely get rid of those first. If any one holding is screaming sell me then let me know.
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retired@50
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Re: Should I rebalance during a market correction?

Post by retired@50 »

drramey wrote: Mon May 17, 2021 10:41 am If any one holding is screaming sell me then let me know.
Your long list of holdings cries out for you to set up market alerts (presumably available at your broker's website) so you can be notified when a particular threshold has been crossed. That way, you could lock in minimal gains (or losses) without the constant monitoring.

Regards,
This is one person's opinion. Nothing more.
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drramey
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Re: Should I rebalance during a market correction?

Post by drramey »

I would like to thank everyone for their replies. The information has been very useful.
Topic Author
drramey
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Re: Should I rebalance during a market correction?

Post by drramey »

This unfortunately boils down to a “market timing” problem. Your strategy assumes that the market will rise < n% before it falls by n%, where n is >10 (this being the definition of a correction). A core belief of this forum is that you cannot reliably time the market.

So, definitely sell unwanted securities during a correction. Waiting for a correction, though, is more like making a bet, or rather a series of bets.

As an example, let’s say you get what you want. Your portfolio gains another 8% before dropping 12%, yielding a net 4% drop in unrealized capital gains. Is it time to act? Maybe it will drop some more, and you should wait, or maybe it won’t. Maybe there will be a 2% gain the next day, wiping out half your desired capital loss.

Also, let’s say your portfolio dropped 12% as above, but VTI only dropped 4%. Do you still re-allocate?

Or alternatively, your portfolio is up 8% before the correction, while VTI is only up 2%. Do you still wait for a correction?

And to make it real, the market dropped by around 4% from its all time high last week, which is equivalent to the first scenario I presented. Did you take advantage of it?
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I did not take advantage of the 4% drop. I had already sold enough positions for 40k of realized gains and wasn't sure if I should sell anymore due to the tax implications. I did however make most of the changes early in the year before we got a 12% gain on the year.
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