Help with selling active funds

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marie567
Posts: 51
Joined: Mon Feb 17, 2014 10:06 am

Help with selling active funds

Post by marie567 » Sat Mar 01, 2014 9:02 pm

Hi, I have two active taxabke funds, Fidelity ContraFund and Fidelity Dividend Growth. I've had Contrafund since 1993 and Dividend Growth since 1998. I bought them before I was aware of index funds. I understand the Boglehead philosophy of investing in index funds. So it would seem simple to sell these funds and start over. Here's what I'm trying to understand.

Me: Single, California, little income in 2014 except investments. Probably won't work in 2014.

Contrafund market value: $78,000 cost value: $39,000.
Dividend Gr market value: $25,000 cost value: $18,320.

1) In 2013 my contrafund account earned 34%.
My dividend growth account earned 31%.
My S&P index earned 32%.

Contrafund 2013 Capital Gains Distributions: $5,393 (gasp)
Dividend Growth 2013 Capital Gains Dist: $1,461

Every year I've moaned over the capital gains distributions. But I viewed it as paying as I go. The capital gains are added to the cost basis, right?
Please confirm the problem is whether these funds can perform better than the indexes and worth the extra capital gains churning that I have to pay extra taxes on. For 2013 perhaps Contrafund did prove better than S&P but Dividend Growth did not. I don't know what past years have been like. I haven't paid attention.

2) As the years progressed, I knew the tax situation was getting worse but didn't do anything. I am now trying to right my portfolio. Would it make sense to take a long view and sell, for example 20% of each fund for 5 years to draw it down? Or just take the tax hit. Or is this even answerable because it's based on my tax situation. What would you do?

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in_reality
Posts: 4529
Joined: Fri Jul 12, 2013 6:13 am

Re: Help with selling active funds

Post by in_reality » Sat Mar 01, 2014 9:48 pm

marie567 wrote: Every year I've moaned over the capital gains distributions. But I viewed it as paying as I go. The capital gains are added to the cost basis, right?
If you are reinvesting them then yes, they are like a new purchase.
Please confirm the problem is whether these funds can perform better than the indexes and worth the extra capital gains churning that I have to pay extra taxes on. For 2013 perhaps Contrafund did prove better than S&P but Dividend Growth did not. I don't know what past years have been like. I haven't paid attention.
Well yes they can. Have they? I haven't looked at the performance. Will they in the future. Nobody knows but I wouldn't expect outperformance to go on indefinitely.

2) As the years progressed, I knew the tax situation was getting worse but didn't do anything. I am now trying to right my portfolio. Would it make sense to take a long view and sell, for example 20% of each fund for 5 years to draw it down? Or just take the tax hit. Or is this even answerable because it's based on my tax situation. What would you do?
I would run through various scenarios using turbo tax and see what looks good. I have funds I want to sell for the same reason but don't since the additional income will push me into a higher rate this year but won't next.

Laura
Posts: 7973
Joined: Mon Feb 19, 2007 7:40 pm

Re: Help with selling active funds

Post by Laura » Sat Mar 01, 2014 11:01 pm

Depending on your tax bracket for 2014 you may be able to sell at no cost. In the 10% and 15% tax brackets you pay zero capital gains tax. After that it is 15% unless you are in the top tax bracket. You might stagger this to minimize the tax hit but we don't know your tax situation other than that you don't expect to work in 2014.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.

larmewar
Posts: 359
Joined: Sat Mar 03, 2007 7:45 pm

Re: Help with selling active funds

Post by larmewar » Sun Mar 02, 2014 12:06 am

If you have been reinvesting dividends and capital gains, take in/to cash and reinvest in funds you want. You can reduce holdings and minimize cap gains by selling specific shares, ones that have the least capital gains.

Lar

pshonore
Posts: 6374
Joined: Sun Jun 28, 2009 2:21 pm

Re: Help with selling active funds

Post by pshonore » Sun Mar 02, 2014 11:51 am

Why do you want to switch? For the period 1/1/2001 thru today a $10K investment in Fidelity Contra Fund would have grown to $27560. The same investment in Vanguard Total Stock Market Fund would be worth $20484. Now I don't know if comparing those two funds is valid or not, (the difference is greater for Vanguard S&P fund) and we certainly know that past performance is no guarantee of future results but why rock the boat? You can certainly go to Morningstar and run a comparison for the Dividend Growth Fund as well.

marie567
Posts: 51
Joined: Mon Feb 17, 2014 10:06 am

Re: Help with selling active funds

Post by marie567 » Sun Mar 02, 2014 12:51 pm

Thanks, I hadn't checked a longer term comparison of Contrafund to the index. More information to do my usual, which is take no action:) I'll also see how taxes shake out in 2014 with no income. And consider reinvesting in cash.

Digital Dave
Posts: 36
Joined: Sat Mar 10, 2007 7:47 pm
Location: Western New York

Re: Help with selling active funds

Post by Digital Dave » Sun Mar 02, 2014 1:05 pm

Here are my ideas. I am not any kind of professional, just a bum that likes to legally game the tax system.

First take your distributions in cash instead of reinvestment. That way you don't add more shares to these funds. The tax outcome on these distributions is the same. These cash distributions can be used for anything including buying shares of tax efficient funds.

As to selling of some shares, wait until the end of the year when you'll know your income. Then sell just enough to keep just below your next tax bracket.

Sell shares only if you are either unhappy with the funds, or your asset and sector allocations have become out of kilter from your desires.

In my case, I have the added incentive of getting a bigger ACA subsidy. Inasmuch as it is all money, it is just like another tax refund.

Best wishes,
Dave
Investing in Mutual Funds, ETF's, P2P Lending, Forever Stamps and Bittulips.

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