Question about Vanguard frequent traders and automated investing

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Topic Author
bobsmith
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Question about Vanguard frequent traders and automated investing

Post by bobsmith »

Hi, I'm looking for some help and information.

I started with four Vanguard Index funds in a taxable account

500 Index
Extended Market Index
TSMI
TIn'tlSMI

I recently sold 100% of the TSMI and put it into the TIn'tlSMI, so now I only have three funds.

I would now like to sell 100% of the TIn'tlSMI and put it into the TSMI, but I cannot do that for 30 days because of Vanguard Freq Trading Policy.

I want to do this NOW instead of waiting 30 days is because the market and the unrealized gains for this fund are low. I know I can write a letter to get around the frequent trader policy but VanG wouldn't give me any guarantees it would be done in a timely fashion once receiving the letter and if I'm unlucky the market will bounce back just before the transaction.

It's my understanding that with automatic transactions the frequent trader policy doesn't apply. However, the transaction I would want to do is to do a 100% exchange from one fund onto a new fund all within the same account. Is this possible or are automatic transactions only for buying and selling into our out of the account? If this is a valid approach, how quick can it be setup? How many days in advance do I need to setup the automatic transaction for Vanguard to accept and apply it? Ideally, I'd like to set it up for the "next day" if possible.

Or, is there any other way I can get out from under the frequent trading policy?

Thanks for the help
livesoft
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Re: Question about Vanguard frequent traders and automated investing

Post by livesoft »

I don't know the answers to your questions, but you should be able to just go online RIGHT NOW and try to enter the automatic transaction that you are telling us about. Then you can see if it will work or not.

Please come back in the next 10 minutes and tell us how it worked for you. Thanks!
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grabiner
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Re: Question about Vanguard frequent traders and automated investing

Post by grabiner »

Since this is a taxable account, you don't want to do your proposed transaction anyway, as there will be a tax cost. When you sold Total Stock Market, you presumably had a capital loss, which you will be able to deduct from your 2016 taxable income. If you buy back the fund within 30 days of selling it, you have a wash sale and cannot deduct your capital loss (until you sell the replacement shares; the wash sale will be added to your basis).

There is no point in holding all three of 500 Index, Extended Market Index, and Total Stock Market Index, as Total Stock Market holds the other two combined. Thus, you should either put all your US stock in Total Stock Market Index, or, if that isn't the ratio of large to small you want, put all your US stock in the other two in the appropriate ratio.
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bobsmith
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Re: Question about Vanguard frequent traders and automated investing

Post by bobsmith »

I actually have my vanguard internet access turned off and would need to have them turn it back on before I can try this out.

I realize there are tax consequences to realizing these gains. It's a big reason why I want to do it now incase the market bounces back in a month. I'm open to explaining my reasons but so often when I do that here it becomes a long conversations about why I'm doing what I'm doing instead behind helped to do what I want to do. That said, I understand why it's good to save people from themselves sometimes.

I'd like to use both the TSMI and TInt'l SMI in my taxable account. I'm anticipating a small inheritance. So far going back before 2011, I've been using average cost basis, but i would like to use specified share. Although I'll take a small tax hit, the simplest way to do this is to wipe the fund out then start over before the new money comes in.

The 500 IN and extended mareket funds have too much unrealized gain for me to mess with them until I really need them some time during retirement. However, I'm just a humble index investor and the vanguard core indexes are fine with me. I only mentioned them to show that I don't have a simple substitute for the TSMI (i.e. recreating it with the 500 index and xtended mkt) but even if I did this wouldn't be as good as just putting it where I want it to go.

To be clear, I'm not simply talking about an online exchange. I believe this will be disallowed due to the freq trading policy. However, I think it was bogle wiki that suggested you could get around the policy by setting up an automatic transfer set for a certain calender date. Then, you just cancel future autotransfer after the first time. I wasn't sure if this would work or if auto transfers could be set to sell 100%.
jfave33
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Re: Question about Vanguard frequent traders and automated investing

Post by jfave33 »

Just try the 100% yourself - then you will know if it works. There is an automatic exchange option. If the 100% auto is the problem would 99% work? You can move the other 1% later. But I echo the warning that the loss when you sold the totalstock fund originally will be a wash and will not be allowed.

Since you already have the s&p500 and extended market is there a reason you can't sell your totalint and put it into these two? There is no need for total stock if you already have these two normally.

Maybe you could use the etf version VTI to get around this too if you are set on your plan. The way you invest leans more to using ETFs. However you may need the restrictions of mutual funds to save from doing irrational things or You may not like them anyway.
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bobsmith
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Re: Question about Vanguard frequent traders and automated investing

Post by bobsmith »

I'm surprised this issue hasn't come up before here the forums. Surly I can't be the first person to try to use automatic transfers to get around the freq trader policy?

https://www.bogleheads.org/wiki/Frequent_trading_policy

Set up a "one-shot" automatic purchase or exchange. "this rule does not apply to: ... Transactions made through Vanguard’s Automatic Investment Plan, Automatic Exchange Service ... Automatic Withdrawal Plan." Accounts held at Vanguard have a number of automatic options: automatic investment, automatic withdrawal, and automatic exchange. You set them up under "account profile." These account features are normally used for automatically recurring transactions, e.g. "exchange $500 from VTSMX (Total Stock Market Index Fund) into VBMFX (Total Bond Market Index Fund) on the 4th of every month," but you can set up starting and ending dates that result in only a single transaction occurring. The system does not let you schedule an automatic transaction for the next day, so this introduces a day or two delay before the transaction completes.

I could live with a day or two delay. As you see I already have the basic information thanks to you good bogleheads. I'm just looking for clarification on the details before I ask Vanguard to turn on my internet access which itself might take some time possibly involving a written letter. Can I move 100%? Has anything changed since this wiki article was posted?

PS: jjface: I think we posted at the same time. You offer good suggestions but I believe I already ruled out the concerns you expressed in your last post.
jfave33
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Re: Question about Vanguard frequent traders and automated investing

Post by jfave33 »

It is rare for someone wanting to buy back a fund they just sold. Most here are buy and hold investors. Some tax loss harvest but ETFs are better for that and buying back within 30 days creates wash sales which would make tax loss harvesting pointless anyway.
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bobsmith
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Re: Question about Vanguard frequent traders and automated investing

Post by bobsmith »

jjface wrote:It is rare for someone wanting to buy back a fund they just sold. Most here are buy and hold investors. Some tax loss harvest but ETFs are better for that and buying back within 30 days creates wash sales which would make tax loss harvesting pointless anyway.
I'm not sure if you saw my post preceding yours, but I think it will help you to better understand my motivations.
wolf359
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Re: Question about Vanguard frequent traders and automated investing

Post by wolf359 »

Why didn't you just ask Vanguard to change the cost basis method on the fund as-is? Doing so isn't a taxable event. I think the worst case is that any uncovered shares are assigned the current average cost going forward. All new funds would be SpecID.

You can still do that for TISM, and just put the new money into TSM when it comes in 30 days.

To proceed with your current plan, you could buy the TSM ETF instead. Alternately, you could also buy a balanced fund or target date fund to hold until the new money comes in (and the 30 days has passed). When the new money comes in, sell that, and buy the core funds again. Since the balanced funds and target date funds hold the same underlying core index stocks, you'll still benefit from being in the same place as if you held throughout.

Otherwise, write the letter and take the risk. 1-2 weeks price change won't make a difference when you look at it 20 years from now. For the market to suddenly go up and stay there in the next week or so would take some kind of sustained good news that will offset oil, China, and Europe bad news. For example, the news that Japan went negative was bullish, but it was one news item and it didn't last. The continued collapse in oil prices, more news from China and Europe, kept offsetting it. Chances are that the market will remain unsettled for more than a few days.
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bobsmith
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Re: Question about Vanguard frequent traders and automated investing

Post by bobsmith »

wolf359 wrote:Why didn't you just ask Vanguard to change the cost basis method on the fund as-is? Doing so isn't a taxable event. I think the worst case is that any uncovered shares are assigned the current average cost going forward. All new funds would be SpecID.
I just wanted to keep things simple and not have to deal with uncovered stocks.
You can still do that for TISM, and just put the new money into TSM when it comes in 30 days.

To proceed with your current plan, you could buy the TSM ETF instead.
I understand, but I'd rather not invest in ETF if I can get around the freq trader and just invest in the traditional TSM index fund. I'll be adding to it in the future and as a long term buy and hold investor ETFs aren't for me.
Alternately, you could also buy a balanced fund or target date fund to hold until the new money comes in (and the 30 days has passed). When the new money comes in, sell that, and buy the core funds again.

Since the balanced funds and target date funds hold the same underlying core index stocks, you'll still benefit from being in the same place as if you held throughout.
Yes, but the whole point of me wanting to do this now is because the market is low. I realize there's no way to predict what will happen in the future, but that is the assumption I'm making. If the market bounces back 30 days from now and I try to move those funds back into TSMI or TISMI, then I'll be paying more taxes on the realized gain from the new funds which defeats the whole purpose of trying to make the exchange now.

Otherwise, write the letter and take the risk. 1-2 weeks price change won't make a difference when you look at it 20 years from now. For the market to suddenly go up and stay there in the next week or so would take some kind of sustained good news that will offset oil, China, and Europe bad news. For example, the news that Japan went negative was bullish, but it was one news item and it didn't last. The continued collapse in oil prices, more news from China and Europe, kept offsetting it. Chances are that the market will remain unsettled for more than a few days.
I understand, but if I can do the same thing with autotransfer I can accomplish the same thing with a little more control over the timing.
Topic Author
bobsmith
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Re: Question about Vanguard frequent traders and automated investing

Post by bobsmith »

For anyone still following this thread, I was able to access my account using my wife's login with vanguard.

Here's what I can report with regards to using Automatic transfer to thwart the freq trading policy.

Yes, you can do exchanges as opposed to only doing transfers or sales.

Yes, you can schedule it for NEXT day. I did this before market close on the day before. I'm guessing it would have still worked if I had done it after market close. I could not do it SAME day even though I was setting it up before market close.

So far as I could tell, you must use the average cost basis method or at least it seemed you were outlawed from using specified share method.

You cannot indicate a % value nor can you otherwise state "sell all" (i.e.100%). You must enter a dollar amount. I do not know what would happen if your automatic exchange exceeds the value of the fund you are selling from. Maybe it just sells everything. Maybe it negates the entire exchange. Not wanting to take a chance, I simply entered a dollar amount slightly lower than the actual balance.

Hope this helps anyone interested in this. For the record I strongly support a buy and hold long term strategy.
livesoft
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Re: Question about Vanguard frequent traders and automated investing

Post by livesoft »

Thanks for reporting back with your knowledge.
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Topic Author
bobsmith
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Re: Question about Vanguard frequent traders and automated investing

Post by bobsmith »

livesoft wrote:Thanks for reporting back with your knowledge.
It's the least I can do after all the good information this forum has given me! :happy
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