Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

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LMK5
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Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

I would like to reduce my equity percentage down to about 50% from 56% (I'm 55 years old). I have allocations I've maintained in the different classes of equities: Large Cap, Mid Cap, Small Cap, International, and Hard Assets (gold, energy, etc.), each with a specific percentage that in total equals my overall equity allocation.

The problem is this: I need to reduce my small cap equity percentage a fair amount, but the only assets I have left in this class are in taxable accounts. In the small cap fund I own, the LT capital gains comprise 70% of the total fund balance, so if I sold, I would be in for tax hit of about $7000. I do, however, have quite a bit of large cap equity funds within retirement accounts.

Here's the question: Should I make the needed sale in the small cap fund, take the tax hit, and get the full benefit of class reallocation, or, should I sell an equivalent amount in the large cap fund and get the lion's share of the equity reallocation benefit? I understand that large caps and small caps don't correlate that closely, but are they close enough that it makes sense to avoid the tax hit in selling small caps and get most of the benefit of equity reduction by selling the tax-protected large caps?
livesoft
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by livesoft »

I personally would not take the tax hit. I would be asking myself a couple of questions:

1. Where did all my tax-loss harvested losses go to such that I even need to think about net realized gains at tax time?

and

2. Can I wait until the September distributions when most equity funds will pay out distributions that will drop their NAVs and allow me to use the money for rebalancing?

I guess a third question would be:

3. Have I set my cost basis method to Specific Identification, so that I can use the shares with the highest cost basis and thus reduce the actual amount of realized gains when I sell?
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by Sandi_k »

I wouldn't sell. Instead, I'd simply make any new contributions in the asset class you'd like to own. It will rebalance itself over time that way.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by livesoft »

4. Can I give away shares to charity or my Donor-Advised Fund and avoid realizing capital gains?

5. Do I have kids that I can gives shares to and let them sell the shares? Would they pay 0% LTCG tax?
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Watty
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by Watty »

Sandi_k wrote:I wouldn't sell. Instead, I'd simply make any new contributions in the asset class you'd like to own. It will rebalance itself over time that way.
+1

And you can make sure that any dividends and capital gains distributions are not automatically reinvested in any mutual funds that you want to reduce.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by jfave33 »

Also don't be so strict with the percentages. If you sold large cap then how much is your small cap and what is your target %? Sounds like you are only wanting to sell about $10k.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by bdpb »

If you believe that SC has a higher expected return than LC, you could keep a lower overall stock position by keeping a higher SC allocation.

For example, you could sell the LC(and maybe even add more SC), thus having a new higher SC AA and go to 45/55 AA overall.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

livesoft wrote:I personally would not take the tax hit. I would be asking myself a couple of questions:

1. Where did all my tax-loss harvested losses go to such that I even need to think about net realized gains at tax time?

and

2. Can I wait until the September distributions when most equity funds will pay out distributions that will drop their NAVs and allow me to use the money for rebalancing?

I guess a third question would be:

3. Have I set my cost basis method to Specific Identification, so that I can use the shares with the highest cost basis and thus reduce the actual amount of realized gains when I sell?
Thanks for responding. To answer your questions:
1) I did my tax loss harvesting back in the debacle of 2008-2009. I've had loss carryovers for many years. I only have gains now in all my funds. I've left the SC Tax-Managed Fund alone for a long time and the gains are a large percentage of the overall value, just below 70%.
2) The September distributions, if any, will be a pebble in the pond as far as AA impact. Applying those funds just wouldn't move the needle.
3) Unfortunately I didn't have that foresight. I believe my method is average cost basis which I don't believe can be changed.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by livesoft »

LMK5 wrote:3) Unfortunately I didn't have that foresight. I believe my method is average cost basis which I don't believe can be changed.
If you haven't sold any shares, then you can change your cost basis method now.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

Sandi_k wrote:I wouldn't sell. Instead, I'd simply make any new contributions in the asset class you'd like to own. It will rebalance itself over time that way.
The problem is that any contributions I can make at this point aren't large enough--relative to the net assets of the portfolio--to make an impact. I generally readjust my portfolio once per year, and this year I want to take the stock allocation down about 6%. Just adjusting contributions won't do it for me. I need to sell equities to make it happen.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

jjface wrote:Also don't be so strict with the percentages. If you sold large cap then how much is your small cap and what is your target %? Sounds like you are only wanting to sell about $10k.
The problem is last year I also needed to sell small cap but didn't want the tax hit so I sold mid cap instead. Now I have no more mid cap in retirement accounts so I'm looking to possibly sell LC, or maybe international funds to bring the equity AA down. Not perfect, as small caps are riskier than LC or international but again, I'd rather not take a tax hit. What I'm really wondering is will I regret not taking the hit when small caps come tumbling down in the future. They can get very volatile of course.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

livesoft wrote:4. Can I give away shares to charity or my Donor-Advised Fund and avoid realizing capital gains?

5. Do I have kids that I can gives shares to and let them sell the shares? Would they pay 0% LTCG tax?
Sounds complicated. I smell attorney fees.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

bdpb wrote:If you believe that SC has a higher expected return than LC, you could keep a lower overall stock position by keeping a higher SC allocation.

For example, you could sell the LC(and maybe even add more SC), thus having a new higher SC AA and go to 45/55 AA overall.
True, but keeping the higher percentage in SC will certainly add risk to the portfolio. Risk reduction is the reason I want to bring the equity AA down to about 50%.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by BL »

livesoft wrote:
LMK5 wrote:3) Unfortunately I didn't have that foresight. I believe my method is average cost basis which I don't believe can be changed.
If you haven't sold any shares, then you can change your cost basis method now.
+1
Then sell any lots with low or no gains.

Be sure all purchases are all in bonds until you have enough bonds.

Turn off all reinvestments and use dividends & CGs to buy bonds.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

livesoft wrote:
LMK5 wrote:3) Unfortunately I didn't have that foresight. I believe my method is average cost basis which I don't believe can be changed.
If you haven't sold any shares, then you can change your cost basis method now.
What's the rule? Never having sold any shares since opening the fund, or never having sold since a certain date?
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by livesoft »

I don't know the new rules, but they have been discussed on the forum.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by BL »

I found a brief description of covered/uncovered shares here:
http://www.usfunds.com/investing-with-u ... ed-shares/

Any purchases from January 1, 2012 is when shares are covered and the cost basis on these must be reported to IRS by the holding company as well as by you for the year when sold. So Vanguard uses Average Cost on prior purchases (but does not report that to IRS), but will use the designated basis to report anything purchased after that date. Your 1040 forms will separate the reporting of covered and uncovered shares. Take a look at and work through the capital gains forms for a 1040, available on the IRS website.

Reinvesting div & CGs also create new lots for Specific ID.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by bdpb »

LMK5 wrote:
bdpb wrote:If you believe that SC has a higher expected return than LC, you could keep a lower overall stock position by keeping a higher SC allocation.

For example, you could sell the LC(and maybe even add more SC), thus having a new higher SC AA and go to 45/55 AA overall.
True, but keeping the higher percentage in SC will certainly add risk to the portfolio. Risk reduction is the reason I want to bring the equity AA down to about 50%.
Yes, that's why you bring the new overall AA to 45% stocks instead of 50%, to lower the overall risk.

You may want to search for the "Larry Portfolio" for the concept. That AA goes as low 30% stocks where the stocks are all highest risk highest expected return stocks, SCV, Intl SCV and EM.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

bdpb wrote:
LMK5 wrote:
bdpb wrote:If you believe that SC has a higher expected return than LC, you could keep a lower overall stock position by keeping a higher SC allocation.

For example, you could sell the LC(and maybe even add more SC), thus having a new higher SC AA and go to 45/55 AA overall.
True, but keeping the higher percentage in SC will certainly add risk to the portfolio. Risk reduction is the reason I want to bring the equity AA down to about 50%.
Yes, that's why you bring the new overall AA to 45% stocks instead of 50%, to lower the overall risk.

You may want to search for the "Larry Portfolio" for the concept. That AA goes as low 30% stocks where the stocks are all highest risk highest expected return stocks, SCV, Intl SCV and EM.
Ah, now I get what you mean. Keep a lower overall percentage of equities but in a higher risk category, thereby eliminating the need to take the tax hit in selling SC. I'll have to consider that one for sure. Adding to that, I have 8% of my overall portfolio in high yield bonds. I'm thinking I could reduce the overall risk of the portfolio by shifting some of that into intermediates. All the HY bonds are in retirement accounts.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

letsgobobby wrote:I am in a similar position as the OP only with US large cap stocks. And none of the suggestions will help. I have no more carry forward losses; donations to our DAF, new money, and dividends reinvested elsewhere will not be nearly enough alone to rebalance; I already use spec ID. No adult kids yet, sorry; my bad planning, I'll get on them to grow up.

I haven't bought any US stocks in several years.

I gave decided to just let the rebalancing band grow a little for now. Goal is 60% of equities and band is 65% and we're at 65.5%. At 67% I will have to do something.
May I ask what your age is, or better yet, how many years until retirement? 60% sounds like a heavy weighting if you're close, but I do see the Target Retirement funds always seem to be around 55% equities when the target year is reached. Just sounds too high to me, since, if we repeat something close to 2008 that will surely knock your retirement plans off course unless your portfolio is huge with respect to projected living expenses.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by Copernicus »

Assuming that you can not add new funds to readjust the AA.
1) It seems that you might be at the prime of your earning potential. If you think your tax rate may be higher in future than it is now, selling and paying taxes may not be such a bad idea. - Pay now, but lower than you would have to pay in future.
2) Think how stringent you want to be with the AA, and the bands around each class. Perhaps, it is not such a serious problem.
3) Wait until the next market swoon, and readjust AA at that time.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by livesoft »

LMK5 wrote:May I ask what your age is, or better yet, how many years until retirement? 60% sounds like a heavy weighting if you're close, ....
I don't see myself having less than about 58% in equities on the low end until I die. I do see myself having more in equities occassionally. I haven't worked in a couple of years now.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

livesoft wrote:
LMK5 wrote:May I ask what your age is, or better yet, how many years until retirement? 60% sounds like a heavy weighting if you're close, ....
I don't see myself having less than about 58% in equities on the low end until I die. I do see myself having more in equities occassionally. I haven't worked in a couple of years now.
Interesting. Let me ask you this: When you were contemplating retirement, did you conclude that you needed your total portfolio value to be at a certain number before you could do it? If so, what if you had been planning retirement on, say, January of 2008. Would you have been able to stay in retirement in January of 2009, with your stocks at about half the value they were when you first entered retirement?

Maybe my thinking is off, but I'd like to retire in 5 years, and I don't want a cratering market to impact my retirement date.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

Copernicus wrote:Assuming that you can not add new funds to readjust the AA.
1) It seems that you might be at the prime of your earning potential. If you think your tax rate may be higher in future than it is now, selling and paying taxes may not be such a bad idea. - Pay now, but lower than you would have to pay in future.
2) Think how stringent you want to be with the AA, and the bands around each class. Perhaps, it is not such a serious problem.
3) Wait until the next market swoon, and readjust AA at that time.
1) I think my tax rate will be about the same or lower in the future.
2) I'm just thinking I need to be closer to "your age in bonds" than I presently am.
3) I think that's exactly what I don't want to happen. I'd want to take profits and readjust AA, and in a swoon, readjust upward to re-establish the AA band. Isn't that the whole advantage of regular reallocation?
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

letsgobobby wrote:
LMK5 wrote:
letsgobobby wrote:I am in a similar position as the OP only with US large cap stocks. And none of the suggestions will help. I have no more carry forward losses; donations to our DAF, new money, and dividends reinvested elsewhere will not be nearly enough alone to rebalance; I already use spec ID. No adult kids yet, sorry; my bad planning, I'll get on them to grow up.

I haven't bought any US stocks in several years.

I gave decided to just let the rebalancing band grow a little for now. Goal is 60% of equities and band is 65% and we're at 65.5%. At 67% I will have to do something.
May I ask what your age is, or better yet, how many years until retirement? 60% sounds like a heavy weighting if you're close, but I do see the Target Retirement funds always seem to be around 55% equities when the target year is reached. Just sounds too high to me, since, if we repeat something close to 2008 that will surely knock your retirement plans off course unless your portfolio is huge with respect to projected living expenses.
42 and plan to reduce my hours and income about 25% within the next 3-5 years, but will continue to have a household income of at least $200k for 20 more years.
You're in a different boat than me. Much higher income and younger. At 42, 60% equities is OK, and with 200k coming in for another 20 years, why stop there? Why not go to 80% if it isn't going to impact the 200k/yr. income stream?
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by livesoft »

LMK5 wrote:
livesoft wrote:
LMK5 wrote:May I ask what your age is, or better yet, how many years until retirement? 60% sounds like a heavy weighting if you're close, ....
I don't see myself having less than about 58% in equities on the low end until I die. I do see myself having more in equities occassionally. I haven't worked in a couple of years now.
Interesting. Let me ask you this: When you were contemplating retirement, did you conclude that you needed your total portfolio value to be at a certain number before you could do it? If so, what if you had been planning retirement on, say, January of 2008. Would you have been able to stay in retirement in January of 2009, with your stocks at about half the value they were when you first entered retirement?

Maybe my thinking is off, but I'd like to retire in 5 years, and I don't want a cratering market to impact my retirement date.
I went to half-time work back in 2007. I had reached a decent number in 2006. I was at about 90/10 at that time and moved to about 70/30 when I joined the forum.

I had a great job that I enjoyed very much and going half-time made it even better. My spouse did not want to retire and works. Yes, I would have been able to stop working at anytime from 2007 on ... even at the bottom in 2009. Eventually, I changed asset allocation to 62% equities and then to 58% equities as our net worth grew. These changes are all noted in historical posts of mine at the times I made those changes.

So I agree with you that the most dangerous or riskiest time is a couple years on either side of one's day of retirement. That day is long behind me. I learned that my expenses are very low compared to most people on bogleheads and could go even lower in time of need. And one big expense is gone for me: My oldest child graduated from college and is no longer a dependent. Our next biggest expense is another in college, but it's must cheaper than the first one.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by BL »

I have 8% of my overall portfolio in high yield bonds. I'm thinking I could reduce the overall risk of the portfolio by shifting some of that into intermediates. All the HY bonds are in retirement accounts.
This sounds like a great idea! This is somewhat like an equity fund so not good at reducing risk. Any equity reduction would also reduce risk.

Not many of us keep "Hard Assets". Are these CGs taxed at "collectibles" rate?
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

livesoft wrote:
LMK5 wrote:
livesoft wrote:
LMK5 wrote:May I ask what your age is, or better yet, how many years until retirement? 60% sounds like a heavy weighting if you're close, ....
I don't see myself having less than about 58% in equities on the low end until I die. I do see myself having more in equities occassionally. I haven't worked in a couple of years now.
Interesting. Let me ask you this: When you were contemplating retirement, did you conclude that you needed your total portfolio value to be at a certain number before you could do it? If so, what if you had been planning retirement on, say, January of 2008. Would you have been able to stay in retirement in January of 2009, with your stocks at about half the value they were when you first entered retirement?

Maybe my thinking is off, but I'd like to retire in 5 years, and I don't want a cratering market to impact my retirement date.
I went to half-time work back in 2007. I had reached a decent number in 2006. I was at about 90/10 at that time and moved to about 70/30 when I joined the forum.

I had a great job that I enjoyed very much and going half-time made it even better. My spouse did not want to retire and works. Yes, I would have been able to stop working at anytime from 2007 on ... even at the bottom in 2009. Eventually, I changed asset allocation to 62% equities and then to 58% equities as our net worth grew. These changes are all noted in historical posts of mine at the times I made those changes.

So I agree with you that the most dangerous or riskiest time is a couple years on either side of one's day of retirement. That day is long behind me. I learned that my expenses are very low compared to most people on bogleheads and could go even lower in time of need. And one big expense is gone for me: My oldest child graduated from college and is no longer a dependent. Our next biggest expense is another in college, but it's must cheaper than the first one.
I could probably retire in 5 years if everything stayed flat for the next 5 years. But a fall similar to 1987, early 90's, 2000-2001, or 2008 would make it impossible. It's been eight years since the last crash and I don't want the next one to have the same impact the last one did. I know a fair amount of people who were impacted, and some who were so scared they got out of equities altogether. Thankfully I stayed in and kept adding via 401k contributions, but I don't want to be a fool a learn a painful lesson twice.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by livesoft »

Going from 56% to 50% will give you great peace of mind, but I don't think it will affect your portfolio so much. Also, that 6% difference could come from any of your equity assets: large, international, small, whatever.

Think of it this way: If an extra 6% in equities dropped 50%, then your portfolio would only be 3% lower than if you had not made the change.

Your retirement should not hinge on such a measly 3% difference in money. Your portfolio probably dropped 3% at the end of June this year. Sure, that's not a 28% drop, but there is not much difference between a 28% drop and a 25% drop.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by Copernicus »

LMK5 wrote:
Copernicus wrote:Assuming that you can not add new funds to readjust the AA.
1) It seems that you might be at the prime of your earning potential. If you think your tax rate may be higher in future than it is now, selling and paying taxes may not be such a bad idea. - Pay now, but lower than you would have to pay in future.
2) Think how stringent you want to be with the AA, and the bands around each class. Perhaps, it is not such a serious problem.
3) Wait until the next market swoon, and readjust AA at that time.
1) I think my tax rate will be about the same or lower in the future.
2) I'm just thinking I need to be closer to "your age in bonds" than I presently am.
3) I think that's exactly what I don't want to happen. I'd want to take profits and readjust AA, and in a swoon, readjust upward to re-establish the AA band. Isn't that the whole advantage of regular reallocation?


I think it is better to adjust AA after a significant market shift. In a market swoon (or surge), different assets will go down (or up) to different degrees. The one you want to lower could go down substantially more than the others, thus automatically reducing the tax impact.
Usually, adjusting AA may have costs, so doing it once may reduce those costs as well.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by Copernicus »

livesoft wrote:Going from 56% to 50% will give you great peace of mind, but I don't think it will affect your portfolio so much. Also, that 6% difference could come from any of your equity assets: large, international, small, whatever.

Think of it this way: If an extra 6% in equities dropped 50%, then your portfolio would only be 3% lower than if you had not made the change.

Your retirement should not hinge on such a measly 3% difference in money. Your portfolio probably dropped 3% at the end of June this year. Sure, that's not a 28% drop, but there is not much difference between a 28% drop and a 25% drop.
+1
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

livesoft wrote:Going from 56% to 50% will give you great peace of mind, but I don't think it will affect your portfolio so much. Also, that 6% difference could come from any of your equity assets: large, international, small, whatever.

Think of it this way: If an extra 6% in equities dropped 50%, then your portfolio would only be 3% lower than if you had not made the change.

Your retirement should not hinge on such a measly 3% difference in money. Your portfolio probably dropped 3% at the end of June this year. Sure, that's not a 28% drop, but there is not much difference between a 28% drop and a 25% drop.
That's a good perspective.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

Copernicus wrote:
LMK5 wrote:
Copernicus wrote:Assuming that you can not add new funds to readjust the AA.
1) It seems that you might be at the prime of your earning potential. If you think your tax rate may be higher in future than it is now, selling and paying taxes may not be such a bad idea. - Pay now, but lower than you would have to pay in future.
2) Think how stringent you want to be with the AA, and the bands around each class. Perhaps, it is not such a serious problem.
3) Wait until the next market swoon, and readjust AA at that time.
1) I think my tax rate will be about the same or lower in the future.
2) I'm just thinking I need to be closer to "your age in bonds" than I presently am.
3) I think that's exactly what I don't want to happen. I'd want to take profits and readjust AA, and in a swoon, readjust upward to re-establish the AA band. Isn't that the whole advantage of regular reallocation?


I think it is better to adjust AA after a significant market shift. In a market swoon (or surge), different assets will go down (or up) to different degrees. The one you want to lower could go down substantially more than the others, thus automatically reducing the tax impact.
Usually, adjusting AA may have costs, so doing it once may reduce those costs as well.
That doesn't sit well with me, at least for equities. I would rather have sold to adjust equity AA the day before the crash, then adjust back to where I wanted equity AA to be on the day after. I think that would be far more profitable long term than to have the market wipe out value to go down to desired AA and then add funds on the day after to bring it back up. Portfolio value after the crash would be less using your preferred method.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by Dandy »

Interesting, I have a large small cap position in my taxable account with large cap gains. I decided not to reinvest any distributions but it is such a small percentage of my total equities that I have not decided to take cap gains to reduce or eliminate it. I am well into retirement but you may have some early retirement years before taking Social Security, RMDs or even a pension and be in a very low tax bracket - if so that might be the time to tax some cap gains or some Roth conversions.
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LMK5
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

Dandy wrote:Interesting, I have a large small cap position in my taxable account with large cap gains. I decided not to reinvest any distributions but it is such a small percentage of my total equities that I have not decided to take cap gains to reduce or eliminate it. I am well into retirement but you may have some early retirement years before taking Social Security, RMDs or even a pension and be in a very low tax bracket - if so that might be the time to tax some cap gains or some Roth conversions.
So are you saying that I should maybe sell large caps in my retirement accounts in order to reduce overall equity exposure, then sell the small caps in the taxable account once I stop working? That seems to be the only approach if I want to reduce equity exposure now while avoiding the tax hit.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by Dandy »

That is what I did but remember my small cap exposure was a decent size by itself but not a major percent of my allocation --maybe 4% of my portfolio, so I could afford to carry a bit more risk.

Also, I focus on the overall equity vs fixed income -- that is where the real risk/reward is. I don't get too excited about sub allocations if they are off a bit. Risk tolerance translated into overall allocation is iffy at best, further decisions about sub allocations are even iffier.
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LMK5
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

Dandy wrote:That is what I did but remember my small cap exposure was a decent size by itself but not a major percent of my allocation --maybe 4% of my portfolio, so I could afford to carry a bit more risk.

Also, I focus on the overall equity vs fixed income -- that is where the real risk/reward is. I don't get too excited about sub allocations if they are off a bit. Risk tolerance translated into overall allocation is iffy at best, further decisions about sub allocations are even iffier.
My SC allocation is about 5.5% of my overall portfolio.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by Copernicus »

LMK5 wrote:
Copernicus wrote:
LMK5 wrote:
Copernicus wrote:Assuming that you can not add new funds to readjust the AA.
1) It seems that you might be at the prime of your earning potential. If you think your tax rate may be higher in future than it is now, selling and paying taxes may not be such a bad idea. - Pay now, but lower than you would have to pay in future.
2) Think how stringent you want to be with the AA, and the bands around each class. Perhaps, it is not such a serious problem.
3) Wait until the next market swoon, and readjust AA at that time.
1) I think my tax rate will be about the same or lower in the future.
2) I'm just thinking I need to be closer to "your age in bonds" than I presently am.
3) I think that's exactly what I don't want to happen. I'd want to take profits and readjust AA, and in a swoon, readjust upward to re-establish the AA band. Isn't that the whole advantage of regular reallocation?


I think it is better to adjust AA after a significant market shift. In a market swoon (or surge), different assets will go down (or up) to different degrees. The one you want to lower could go down substantially more than the others, thus automatically reducing the tax impact.
Usually, adjusting AA may have costs, so doing it once may reduce those costs as well.
That doesn't sit well with me, at least for equities. I would rather have sold to adjust equity AA the day before the crash, then adjust back to where I wanted equity AA to be on the day after. I think that would be far more profitable long term than to have the market wipe out value to go down to desired AA and then add funds on the day after to bring it back up. Portfolio value after the crash would be less using your preferred method.
- In that case, rebalance now and pay tax.
- As far as portfolio value outcomes in two scenarios, the discussion is hypothetical since we do not know which asset class drops more than the other within equity subclasses like SC, etc.
- If the market drops after rebalancing at high market, you lose the tax money and your portfolio value; by how much is unknown.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by sperry8 »

livesoft wrote:Going from 56% to 50% will give you great peace of mind, but I don't think it will affect your portfolio so much. Also, that 6% difference could come from any of your equity assets: large, international, small, whatever.

Think of it this way: If an extra 6% in equities dropped 50%, then your portfolio would only be 3% lower than if you had not made the change.

Your retirement should not hinge on such a measly 3% difference in money. Your portfolio probably dropped 3% at the end of June this year. Sure, that's not a 28% drop, but there is not much difference between a 28% drop and a 25% drop.
+1 - Just sit tight. An upcoming correction (whenever it occurs) will rebalance for you without the tax implications. And just make sure you are not reinvesting divs/cap gains in the interim.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by LMK5 »

sperry8 wrote:
livesoft wrote:Going from 56% to 50% will give you great peace of mind, but I don't think it will affect your portfolio so much. Also, that 6% difference could come from any of your equity assets: large, international, small, whatever.

Think of it this way: If an extra 6% in equities dropped 50%, then your portfolio would only be 3% lower than if you had not made the change.

Your retirement should not hinge on such a measly 3% difference in money. Your portfolio probably dropped 3% at the end of June this year. Sure, that's not a 28% drop, but there is not much difference between a 28% drop and a 25% drop.
+1 - Just sit tight. An upcoming correction (whenever it occurs) will rebalance for you without the tax implications. And just make sure you are not reinvesting divs/cap gains in the interim.
Letting the market "rebalance" for you means you don't have an asset allocation strategy. The whole idea behind rebalancing is to keep your risk at a predetermined level. Allowing the market to whipsaw your portfolio means you have a let-it-ride strategy which of course allows the markets to determine your risk level.
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Re: Asset Reallocation Dilemma: Can I Avoid the Tax Hit?

Post by sperry8 »

LMK5 wrote:
sperry8 wrote:
livesoft wrote:Going from 56% to 50% will give you great peace of mind, but I don't think it will affect your portfolio so much. Also, that 6% difference could come from any of your equity assets: large, international, small, whatever.

Think of it this way: If an extra 6% in equities dropped 50%, then your portfolio would only be 3% lower than if you had not made the change.

Your retirement should not hinge on such a measly 3% difference in money. Your portfolio probably dropped 3% at the end of June this year. Sure, that's not a 28% drop, but there is not much difference between a 28% drop and a 25% drop.
+1 - Just sit tight. An upcoming correction (whenever it occurs) will rebalance for you without the tax implications. And just make sure you are not reinvesting divs/cap gains in the interim.
Letting the market "rebalance" for you means you don't have an asset allocation strategy. The whole idea behind rebalancing is to keep your risk at a predetermined level. Allowing the market to whipsaw your portfolio means you have a let-it-ride strategy which of course allows the markets to determine your risk level.
I understand but there are issues here. First 6% is quite close to the OPs AA. There are sig tax consequences to selling now. And we're likely in the latter stages of the bull.
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