Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

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buffalo
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Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by buffalo »

I'm just getting started with taxable investing and want to see if I'm on the right track:

I'll be investing with Merrill Edge and will have access to 100 commission-free ETF trades per month, way more than I'll ever need.

Rather than put everything into VT, the Vanguard Total World Stock ETF, does it make more sense to achieve the same asset allocation with the maximum number of ETFs, so that I can later tax loss harvest as individual ETFs decline?

So, instead of just VT, invest in a combination of:

MGK - Mega Cap Growth and
MGV - Mega Cap Value
which can swap back and forth to MGC - Mega Cap

VOT - Mid Cap Growth and
VOE - Mid Cap Value
which can swap back and forth to VO - Mid Cap

VBK - Small Cap Growth and
VBR - Small Cap Value
which can swap back and forth to VB - Small Cap

VGK - FTSE Europe and
VPL - FTSE Pacific and
VWO - Emerging Markets and
VNQI - Global ex-US Real Estate
which can swap back and forth to VEU - FTSE All World ex-US or other international ETFs

If the concept is sound, but you have different recommendations for ETFs to use, please share. And if I'm totally off base, please set me straight. Thanks.
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mhc
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by mhc »

The concept is viable, but it is way more work than I would want to do.
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David Jay
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by David Jay »

Tax loss harvesting is NOT a good thing. You can't TLH unless you have losses. You can recoup a small fraction of your losses with TLH. So you still suffer the majority of your losses.

TLH is a "least bad" thing. I would not structure my portfolio around "least bad"
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David Jay
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by David Jay »

If you really want to TLH, I would recommend very narrow, actively managed sector funds. :(
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Nate79
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by Nate79 »

You have to ask yourself two questions. One, what will be your trigger point for TLH? Will you TLH if a fund drops 1%? 5%? The second question is how closely are these funds tracking each other? In other words why do you need to have so many different funds if their correlation is so close that they are likely to all be going up and down in similar manner? Since funds mostly go up and unless we have a big drop coming you may have almost no TLH anyways.

Mostly looks like too much work to me.
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buffalo
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by buffalo »

David Jay wrote:Tax loss harvesting is NOT a good thing. You can't TLH unless you have losses. You can recoup a small fraction of your losses with TLH. So you still suffer the majority of your losses.

TLH is a "least bad" thing. I would not structure my portfolio around "least bad"

Hold on, doesn't TLH increase after-tax portfolio returns when assets are held long-term? If asset values fall, but someday return to (or exceed) their original values, I haven't actually suffered any losses--I've instead reduced the amount of tax that I will owe when I ultimately withdraw funds. TLH is a good thing as I understand it. Yes, it would be preferred to never need to TLH because asset values always move up, but why not take advantage of an opportunity rather than design a portfolio with no access to that option?
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David Jay
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by David Jay »

buffalo wrote:
David Jay wrote:Tax loss harvesting is NOT a good thing. You can't TLH unless you have losses. You can recoup a small fraction of your losses with TLH. So you still suffer the majority of your losses.

TLH is a "least bad" thing. I would not structure my portfolio around "least bad"

Hold on, doesn't TLH increase after-tax portfolio returns when assets are held long-term? If asset values fall, but someday return to (or exceed) their original values, I haven't actually suffered any losses--I've instead reduced the amount of tax that I will owe when I ultimately withdraw funds. TLH is a good thing as I understand it. Yes, it would be preferred to never need to TLH because asset values always move up, but why not take advantage of an opportunity rather than design a portfolio with no access to that option?
see comments by mhc and Nate79 (above)
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goingup
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by goingup »

In my opinion you're overthinking the harvesting part. First, set up a tax-efficient taxable portfolio. Usually that means start with Total Stock Market fund and Total International fund. Contribute to these funds regularly. When the Market tanks look to see if you have any lots with losses. If you have enough losses to warrant it, exchange those shares for a similar (but not identical) fund.

You have a misunderstanding, though, about taxes in the future. You are, in effect, lowering the cost basis of your shares when you tax loss harvest.
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dratkinson
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by dratkinson »

buffalo wrote:
David Jay wrote:Tax loss harvesting is NOT a good thing. You can't TLH unless you have losses. You can recoup a small fraction of your losses with TLH. So you still suffer the majority of your losses.

TLH is a "least bad" thing. I would not structure my portfolio around "least bad"

Hold on, doesn't TLH increase after-tax portfolio returns when assets are held long-term? If asset values fall, but someday return to (or exceed) their original values, I haven't actually suffered any losses--I've instead reduced the amount of tax that I will owe when I ultimately withdraw funds. ...
Quite the opposite, you've increased the taxes owed when you sell.

With a TLH, you do get a small* current tax deduction because you artificially lowered your cost basis. Meaning, when the investment recovers, your capital gain will be larger so will owe more tax when you ultimately sell. (* A $4 loss in the 25% tax bracket reduces your taxes by $1. You don't get the $4 back, only $1, so a TLH is "least bad".)

But if you TLH in a higher tax bracket (while working), and sell in a lower tax bracket (in retirement), you come out a little above "least bad".

A "greater tax victory" can be had by donating appreciated shares to charity, or by passing on investments to heirs who get a stepped up cost basis so owe nothing if they sell immediately. But structuring investments around TLHing sounds like a lot of work that may ultimately benefit someone else more. The term "Pyrrhic victory" comes to mind.

My game plan is to structure investments for simplicity, TLH if it's worth the effort, and hope I don't need to sell in retirement.

Don't let the tax tail wag the investment dog.
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mega317
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by mega317 »

Yeah this is a ton of work. I wonder if someone could do a study of this strategy vs just swapping total market with SP500. I can't imagine you'd see a meaningful difference.
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by livesoft »

I consider myself adept at tax-loss harvesting. Here's my advice:

1. Do not try to create losses. Only try to create gains.

2. Buy shares at the lowest price points for the year, but don't wait to buy shares if their prices are higher.

3. Tax-loss harvest at the lowest price points for the year.

4. There is no need to have lots of ETFs, but avoid investments that combine stocks and bonds in your taxable account. That is, avoid balanced funds.

5. All equities funds are highly correlated, so all will drop when equities drop. Whether they drop enough for you to TLH will depend mostly on when you buy them. The shares you bought at the peaks are going to be the one's that you TLH first.

6. I don't think you need more than Total US, Total Int'l, US Small Cap Value, Int'l Small caps, and maybe Emerging Markets. Another volatile asset that you might own are REITs, but you would not own those in a Taxable account, so you won't be TLHing REITs. The same goes for Small-cap Emerging Markets, unless you only own small-cap EM temporarily in a short-term trade.

7. You can TLH a tax-exempt bond fund if you have to have a bond fund in taxable.
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NiceUnparticularMan
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by NiceUnparticularMan »

dratkinson wrote:My game plan is to structure investments for simplicity, TLH if it's worth the effort, and hope I don't need to sell in retirement.
Same.

I put this in the same mental category as "hypermiling" cars. I buy reasonably fuel-efficient cars. I try to drive them sensibly. But I don't kill myself for every last bit of mileage. And some of that stuff is actually dangerous.
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by aristotelian »

I don't think cap size and growth/value factors are going to get you much divergence for TLH. All those funds track pretty well with S&P, it is more a matter of some having more gains at various times (rather than some having gains and some having losses). Those are still very diversified funds across a lot of sectors.

I think you would be better off splitting up total US stock market into sector funds (Energy, Health Care, etc).

Of course, if you want to get serious about TLH, you could make your own index of individual stocks and get decent enough diversification to track the S&P while enabling much more in the way of TLH buying and selling the individual positions.
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buffalo
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by buffalo »

Thanks, everybody, for the thoughtful replies.

New plan: split between VXUS and VTI, add new money to each as available, and take advantage of opportunities to TLH should they arise.
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by triceratop »

David Jay wrote:
buffalo wrote:
David Jay wrote:Tax loss harvesting is NOT a good thing. You can't TLH unless you have losses. You can recoup a small fraction of your losses with TLH. So you still suffer the majority of your losses.

TLH is a "least bad" thing. I would not structure my portfolio around "least bad"

Hold on, doesn't TLH increase after-tax portfolio returns when assets are held long-term? If asset values fall, but someday return to (or exceed) their original values, I haven't actually suffered any losses--I've instead reduced the amount of tax that I will owe when I ultimately withdraw funds. TLH is a good thing as I understand it. Yes, it would be preferred to never need to TLH because asset values always move up, but why not take advantage of an opportunity rather than design a portfolio with no access to that option?
see comments by mhc and Nate79 (above)
There is a difference between it not being worth the extra effort and it being a BAD thing to TLH, and I think we do a disservice to the OP to point out the incorrect reason his idea is an unworkable one.

The fact is that a total market fund will still be exposed to the risks and downturns in its component asset classes. You lose the same money. The fact they are decoupled in your portfolio mean if subset A declines 50% and subset B increases 50% you are able to TLH only the declines. This isn't really a novel concept; for very large taxable portfolios it can be more efficient to directly construct an index, e.g. the S&P500, so that one is TLHing the losers. Of course, one's pre-tax return is still similar, because, well, you own the S&P500.

I still wouldn't do this, because of the complexity. But that doesn't mean if done correctly it couldnt add after-tax value.
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goingup
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by goingup »

buffalo wrote:Thanks, everybody, for the thoughtful replies.

New plan: split between VXUS and VTI, add new money to each as available, and take advantage of opportunities to TLH should they arise.
That's a solid plan. Also, set up the cost basis as SPEC ID rather than Average Cost. That allows you to pick individual lots to sell.
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by livesoft »

goingup wrote:
buffalo wrote:Thanks, everybody, for the thoughtful replies.

New plan: split between VXUS and VTI, add new money to each as available, and take advantage of opportunities to TLH should they arise.
That's a solid plan. Also, set up the cost basis as SPEC ID rather than Average Cost. That allows you to pick individual lots to sell.
ETFs cannot use Average Cost anyways. Average Cost is only allowed for Mutual funds, but I think one should set their mutual fund shares to use SPEC ID, too.
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goingup
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by goingup »

livesoft wrote:
goingup wrote:
buffalo wrote:Thanks, everybody, for the thoughtful replies.

New plan: split between VXUS and VTI, add new money to each as available, and take advantage of opportunities to TLH should they arise.
That's a solid plan. Also, set up the cost basis as SPEC ID rather than Average Cost. That allows you to pick individual lots to sell.
ETFs cannot use Average Cost anyways. Average Cost is only allowed for Mutual funds, but I think one should set their mutual fund shares to use SPEC ID, too.
Of course! :oops:
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Re: Maximize number of ETFs in taxable account to maximize Tax Loss Harvesting opportunities?

Post by Tyler Aspect »

There are some very interesting possibilities in the fixed income side. If you look at the government bond index, the Vanguard offering is 1 to 3 years, and 3 to 10 years maturity, while the Fidelity offering is 1 to 5 years, and 5 to 10 years maturity. This neatly side-steps "substantial identical" test if you do the exchange one at a time.
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