Active to Passive - but how to get there?

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djthedj
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Active to Passive - but how to get there?

Post by djthedj » Mon Nov 27, 2017 11:30 pm

Hi all -

Long time lurker, and now have a situation that I could use some perspective on.

Over the last 5 years, I've become a big Boglehead. I used to use expensive FA's, and I've now decided to go completely passive. The problem is that my FA had bought all sorts of silly things - she had basically replicated the entire S&P500 with individual stock purchases, bought a host of mutual funds and a bond ladder. Since things have been generally good over the last 8 years, I have gains in many of those positions. It's easy for me to sell the positions with a loss, but what do you do with the gains? I don't want to trigger what could be significant taxes.

(EDIT: Adjusted this post to the recommended Bogleheads format. See below.)

Emergency funds: Not necessary.
Debt: Effectively none.
Tax Filing Status: Married, filing jointly
Tax Rate: 39.6% Fed, 13% CA (although most of my gains are cap gains)
State of Residence: CA
Age: 45
Desired Asset allocation: 40% stocks / 60% bonds (although open to suggestions)
Desired International allocation: 10% of stocks

I have a total portfolio of $100M+. About 1/3 of that is in Vanguard stock funds (primarily VITSX), and bond funds (VCADX, VCLAX, VMLUX, VWIUX, VWLUX). The remainder is in real estate, a large cash position and a few individual investments. I also anticipate significant capital gains for the foreseeable future as I sell assets. My annual needs are about $1M, of which other income and existing cash position can cover.

My question is focused on the ~$10M that had been deployed by my FA at about a 1% mgmt fee. I have now fired her, and all of the funds are being moved to an account I manage with no significant fees (except commissions). However, as described above, it's deployed across a variety of holdings, including:

- ~200 equities with a combination of ST and LT gains ($3m)
- IAU (IShares Gold), VEA, VUG funds ($2m)
- CEMFX (Emerging Markets), DBLTX (Doubleline), MIPIX (Asia fund), MIPTX (Asia fund), TTRZX (Templeton Global) ($3m)
- Assorted CA Muni Bond Ladder ($2m)

Questions:

1. How to unravel the positions listed above?

2. Any other thoughts on overall positioning of my portfolio?

Apologies for any remaining gaps, but open to all advice!
Last edited by djthedj on Tue Nov 28, 2017 4:31 pm, edited 1 time in total.

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oldcomputerguy
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Re: Active to Passive - but how to get there?

Post by oldcomputerguy » Tue Nov 28, 2017 7:41 am

djthedj wrote:
Mon Nov 27, 2017 11:30 pm
Hi all -

Long time lurker, and now have a situation that I could use some perspective on.

Over the last 5 years, I've become a big Boglehead. I used to use expensive FA's, and I've now decided to go completely passive. The problem is that my FA had bought all sorts of silly things - she had basically replicated the entire S&P500 with individual stock purchases, bought a host of mutual funds and a bond ladder. Since things have been generally good over the last 8 years, I have gains in many of those positions. It's easy for me to sell the positions with a loss, but what do you do with the gains? I don't want to trigger what could be significant taxes. Any advice? Appreciate it!
Not quite enough information to give a good answer. Your situation will be affected by length of holding and your tax bracket, among other things. You'll probably get better and more helpful responses from the kind folks here if you post in the recommended format.
Anybody know why there's a 20-pound frozen turkey up in the light grid?

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Tamarind
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Re: Active to Passive - but how to get there?

Post by Tamarind » Tue Nov 28, 2017 8:02 am

Definitely provide a bit more info, but here are some general suggestions:

1) Tally up your unrealized losses. Tally up your unrealized gains. You should be able to sell positions with gains up to the amount you sold of positions with losses without triggering capital gains taxes.

2) Next, can you sell any more positions with gains without exiting the 15% bracket? If so, you can do so this year without triggering capital gains tax. This is not as simple as "is my total income under $37,950 if single, $75,900 if married". You can use a program like TaxCaster to set up your basic tax profile and then tweak the amount of gains and see what affect it has on your taxes. If you already know you are way above the 15% bracket, disregard this.

3) If you have any mutual funds with expenses ratios in excess of 1%, it might be worth paying some amount of capital gains tax to stop the bleeding.

4) Don't forget about trading costs to sell. If you would be paying more than $10-15 per position, maybe you could move them in kind to a low cost brokerage and take advantage of some free trades. Vanguard is not the place to do that although they are great for buying and selling Vanguard products for free in your passive future.

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nisiprius
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Re: Active to Passive - but how to get there?

Post by nisiprius » Tue Nov 28, 2017 8:12 am

The only thing I'll say is that part of the Bogleheads philosophy, "stay the course," amounts to "be patient and move slowly." It's always tempting, when I change my mind about investments, to try and do it all at once, right away. But part of being a Boglehead is not to be in a hurry and not act on impulse.

So, I would say, if you can get out from under the advisory fees that would be a very good thing to do, so step one is whether you can do that; do you have to move your assets to a different brokerage? Will all of them move? Are there any fees involved in doing that? You can being by trying to move all of your holdings "in kind" to a new brokerage (e.g. Vanguard Brokerage Services). You may find that there are one or two here or there that the brokerage can't hold. So your first step would be to liquidate those things that you can't move.

Even if she has "basically re-created the S&P 500 with individual stock purchases," even though that's theoretically awful, there's no compelling reason to be in a big rush to do anything about it.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

goingup
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Re: Active to Passive - but how to get there?

Post by goingup » Tue Nov 28, 2017 9:13 am

This is the usual problem when trying to untangle yourself from an FA. It's done by design to keep you trapped with your broker. Someone who posted here had 140 individual holdings to sort through. Nuts.

Things you can do:
Don't reinvest dividends. Have them swept to cash or MM and purchase index fund shares.
Sell the losers.
Sell the most expensive funds.
Sell tiny positions to eliminate clutter.

A lot depends on your tax bracket. It may take a few years to whittle your positions down. Make sure you are building a simple tax-efficient portfolio of index funds with the proceeds of your sales.

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ruralavalon
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Re: Active to Passive - but how to get there?

Post by ruralavalon » Tue Nov 28, 2017 11:08 am

Welcome to the forum :) .

Start by posting the additional information in the format linked by oldcomputerguy. You can simply add this to your original post using the edit button.

Also as suggested by nisiprius promptly get out from under the advisory fee, explore moving the accounts to a low cost provider like Vanguard. How this is accomplished depends on the types of accounts you have.

What advisory fee are you currently paying?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

inbox788
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Re: Active to Passive - but how to get there?

Post by inbox788 » Wed Nov 29, 2017 12:58 pm

djthedj wrote:
Mon Nov 27, 2017 11:30 pm
- ~200 equities with a combination of ST and LT gains ($3m)
- IAU (IShares Gold), VEA, VUG funds ($2m)
- CEMFX (Emerging Markets), DBLTX (Doubleline), MIPIX (Asia fund), MIPTX (Asia fund), TTRZX (Templeton Global) ($3m)
- Assorted CA Muni Bond Ladder ($2m)

Questions:

1. How to unravel the positions listed above?

2. Any other thoughts on overall positioning of my portfolio?

Apologies for any remaining gaps, but open to all advice!
What a mess, but looks like it represents only about 10% of your portfolio, so I'd take my time unwinding it. Some funds may have high fees you want to get rid of, but you're in a high tax bracket. Balance fees vs tax consequences vs simplification. More specific advice would involve listing specific positions (amounts, tax consequences, etc.) which appear to be a huge burden. Absent fees, there's a fair chance any 200 random stocks pretty much mirror the SP500 over shorter terms.

Your large real estate holdings is a business that you need to consider when determining how to invest. Or you could ignore it and just separately treat financial investments vs business investments. At your spending rate, you won't be running out of money. So the main thing is figuring out why you're taking risk, and who (or what) you're making money for.

I've yet to find the Estate Planning equivalent of BH, and it's a weak area/topic here, though tangentially discussed. And I've yet to identify THE book on the subject. Mostly, the answer here has been you can afford a good attorney and adviser, but is still a challenge finding a trustworthy one.

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

FoolMeOnce
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Re: Active to Passive - but how to get there?

Post by FoolMeOnce » Wed Nov 29, 2017 1:58 pm

I'm sure you'll get a lot of advice about unwinding slowly and minimizing your tax burden, as you could also find in a search for similar threads. At your asset level, though, I would prefer to simplify it all at once and pay the extra taxes just to get it done (but perhaps next year, depending on potential tax reform). No matter how slowly you go, you are going to pay significant taxes. Are you going to miss an extra $500k? Is that worth taking 5-10 years to sell off your unwanted positions (it would take a long time if you are trying to spread out seven figures of cap gains)? I doubt it.

Alternatively, leave it all until there is a market correction. 200 securities must be broadly diversified, though possibly with a large cap tilt. With no ER, there is no harm in sitting on these for a while unless you demand immediate simplicity. Maybe just sell the high-cost funds for now and wait on the rest. Then, at the appropriate time, take care of it all at once.

MotoTrojan
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Re: Active to Passive - but how to get there?

Post by MotoTrojan » Wed Nov 29, 2017 8:14 pm

Just sell $1M of these a year to fund your expenses, turn off dividend reinvestment, and invest current cash per new AA.

psteinx
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Re: Active to Passive - but how to get there?

Post by psteinx » Wed Nov 29, 2017 9:30 pm

You should figure out your approximate total marginal tax rate on long term capital gains.

There's a good chance it's something like 20% basic fed, plus 3.8% ACA fed, plus 13% Cali, less perhaps some amount of the Cali that can be deducted on your fed. Though if you're an AMT payer, any deduction for Cali taxes paid may be moot. Also, I'm not sure how Cali taxes work - if there's any preference for cap gains, etc.

Anyways, if the above WERE right (again, I'm kinda guessing), then your total marginal rate on cap gains is perhaps 36.8%, if you're an AMT payer, and perhaps 32%ish if you're not. Perhaps talk to an accountant and or closely examine recent tax filings to zero in on this a little more. And things won't likely be precisely the same from year to year anyways.

OK, so let's pick a number - say 36.8%.

So now, you're got to weigh the benefit of simplification versus the cost of realized capital gains. For things at a loss, no problem. For things flat-ish, still no problem. But for things where the basis is only 30-60% (say) of the current value, then selling would incur a significant capital gain. What's your pain threshold on a complex, cluttered portfolio? That said, an advantage of many small positions versus a handful of larger, diversified funds is that there will likely be more of a mix of winners and losers in the former, and so you can sell from the losers or the flat positions, for cash needs or other purposes.

There are some other options. You could talk to one of the major brokerages about a separately managed account (SMA). Assuming you could fund it with your mish-mash, transferring it in kind, you could let someone ELSE do the management of it. They likely wouldn't sell much off, but rather mostly hold it. They'd charge a fee, but likely well under 1%, assuming this is something like $10M in assets.

If you really want to simplify your life, then yeah, sell basically all of that mish-mash, suck up the capital gains, and put it in index funds or whatever. You could hold out a couple of the home runs. It might be that 10% of the positions account for >50% of the net gains, so that by holding onto just a few of those, you could simplify a bunch but not take the full tax hit.

Another advantage of holding on to some winning positions is that you can donate these to charity.

There are some other options too, especially considering the overall size of your portfolio. And if estate planning is an issue, well, that complicates things more.

It sounds like you should seek out tax advice, perhaps legal advice (especially on the estate side), and perhaps even investment advice, albeit probably from a source that won't charge you 1%/year. There are many such options, including advisers who charge hourly, and various brokerages who may offer either free, or moderate cost options for such services.

If you've really got $100M total, and $10M in "problem investments", then spending a couple grand here and there (accountant, lawyer, etc), for some ala carte advice is probably a wise idea.

Keep in mind that you may be bumping into a variety of issues that are less common for most folks on this forum, and that some may not know about or think about much. That doesn't mean you NEED expensive velvet glove service, constantly, but have realistic expectations of the level of advice folks on this forum can offer.

EDIT - minor tweak...

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