Selling American Funds? (help, please)

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jebediahyoder
Posts: 6
Joined: Tue Mar 13, 2018 11:01 am

Selling American Funds? (help, please)

Post by jebediahyoder » Tue Mar 13, 2018 11:17 am

Hello,

This is my first post on the forum. I am relatively new to investing (25 years old); for my first couple of years out of college, I worked with a financial advisor. In August 2017, this person recommended investing a sizable chunk of money (for me at least - $23K) in American Funds Balanced (F-1 share / BALFX). This is in a taxable account.

The transaction made sense to me at the time; now, though, I've realized that there may be a better, lower-cost fund, with similar allocation style. Specifically, I've been looking at VBINX as an alternative. I have three questions I'm hoping for input on:

1.) Does the switch from BALFX to VBINX seem like a sensible one? They seem to have similar allocation & performance, but VBINX has a much lower expense cost & lower turnover/tax cost.

2.) Do you think that the gain from switching to a different fund would be worth the amount I would have to pay in taxes (on the BALFX sale)?

3.) I am looking at holding about 50% of my savings in a mutual fund with 60% stocks/40% bonds allocation. Does that seem too conservative?


Please let me know if any other information is required to answer these questions. Thank you in advance for your time.

TwstdSista
Posts: 806
Joined: Thu Nov 16, 2017 4:03 am

Re: Selling American Funds? (help, please)

Post by TwstdSista » Tue Mar 13, 2018 12:30 pm

1. Sure it seems sensible, if it works for your situation. There may be better options we could help you with if you post your entire portfolio.

2. You will owe taxes on the gains from the sold fund. So if you bought it for $15k and it is now worth $23k, you would owe taxes on $8k. The rate you pay will depend on if these are long term (held for greater than 1 year) or not.

3. It depends. What is the purpose of your savings?

jebediahyoder
Posts: 6
Joined: Tue Mar 13, 2018 11:01 am

Re: Selling American Funds? (help, please)

Post by jebediahyoder » Tue Mar 13, 2018 1:10 pm

TwstdSista wrote:
Tue Mar 13, 2018 12:30 pm
1. Sure it seems sensible, if it works for your situation. There may be better options we could help you with if you post your entire portfolio.

2. You will owe taxes on the gains from the sold fund. So if you bought it for $15k and it is now worth $23k, you would owe taxes on $8k. The rate you pay will depend on if these are long term (held for greater than 1 year) or not.

3. It depends. What is the purpose of your savings?

Thank you - my portfolio is:
--American Funds Balanced Fund (BALFX - .65% ER): $23k
--PrimeCap Odyssey Growth (POGRX - .66% ER): $11k
--Vanguard Growth Index Fund (VIGRX - .18% ER): $11k
--Cash: $5k


I originally bought $11k of BALCX in July 2016; in August 2017, my advisor stated that I could get the F-1 shares, & recommended shifting the money to that (BALFX). I took $12k from a low-interest CD & used that plus the $11k BALCX money to make the purchase. The purchase was for $23k, & it's now worth $23.7k. I'm wondering if the tax hit on selling BALFX would outweigh the benefits of shifting to something like VBINX. I'm not sure if this is relevant for tax bracket purposes, but my current yearly income is $102k.

This might be too general an answer to your 3rd question, but I'd like to preserve about 20% of my savings in guaranteed bonds; this is part of what I liked about BALFX & the 60/40 allocation category. I also wanted to aim for growth with the majority of my portfolio. I liked the POGRX approach of high growth performance with low portfolio turnover. I added VIGRX because it seemed to add a growth dimension (prominent large cap growth companies) that POGRX did not cover.

Thank you again for any insights and suggestions.
Last edited by jebediahyoder on Tue Mar 13, 2018 2:09 pm, edited 1 time in total.

TwstdSista
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Joined: Thu Nov 16, 2017 4:03 am

Re: Selling American Funds? (help, please)

Post by TwstdSista » Tue Mar 13, 2018 1:42 pm

Ticker symbols are difficult to decode, so-to-speak. It's generally best to put the entire fund name, with ticker, and with expense ratio. This helps us to know what you have, since most people don't memorize ticker symbols and aren't interested in googling a bunch of funds.

Are all of these funds in taxable? What are your retirement account options? What state are you in? Are you subject to state taxes?

The "savings" -- is this meant for retirement? Or are you saving up for something?

The $23,700 has a basis of $23,000? So you're only paying taxes on $700 (at 15% that's $105) -- I'd sell it and move on with my life.

You have pretty much exhausted my knowledge, based on the information provided. You will get a lot more responses if you post as recommended here: viewtopic.php?f=1&t=6212

GLState
Posts: 126
Joined: Wed Feb 15, 2017 10:38 am

Re: Selling American Funds? (help, please)

Post by GLState » Tue Mar 13, 2018 1:54 pm

The admiral share class of the Vanguard Balanced Index fund (VBIAX, 0.07% ER) would be a better choice than the Investor class (VBINX, 0.19%ER), You'd qualify for admiral shares with $10,000 investment.

Your American Funds Balanced Fund has done well for you. I would prefer the lower expenses of the Vanguard funds over past performance.
Last edited by GLState on Tue Mar 13, 2018 2:02 pm, edited 1 time in total.

jebediahyoder
Posts: 6
Joined: Tue Mar 13, 2018 11:01 am

Re: Selling American Funds? (help, please)

Post by jebediahyoder » Tue Mar 13, 2018 1:57 pm

GLState wrote:
Tue Mar 13, 2018 1:54 pm
The admiral share class of the Vanguard Balanced Index fund (VBIAX, 0.07% ER) would be a better choice than the Investor class (VBINX, 0.19%ER), You'd qualify for admiral shares with $10,000 investment.

Thank you, I did not realize that - is there a way to tell if a fund charges a penalty for selling before a set period of time?


Also, am I correct in thinking that funds with lower turnover ratio would be preferable since they'd be in a taxable account?
Last edited by jebediahyoder on Tue Mar 13, 2018 2:05 pm, edited 1 time in total.

jebediahyoder
Posts: 6
Joined: Tue Mar 13, 2018 11:01 am

Re: Selling American Funds? (help, please)

Post by jebediahyoder » Tue Mar 13, 2018 2:02 pm

TwstdSista wrote:
Tue Mar 13, 2018 1:42 pm
Ticker symbols are difficult to decode, so-to-speak. It's generally best to put the entire fund name, with ticker, and with expense ratio. This helps us to know what you have, since most people don't memorize ticker symbols and aren't interested in googling a bunch of funds.

Are all of these funds in taxable? What are your retirement account options? What state are you in? Are you subject to state taxes?

The "savings" -- is this meant for retirement? Or are you saving up for something?

The $23,700 has a basis of $23,000? So you're only paying taxes on $700 (at 15% that's $105) -- I'd sell it and move on with my life.

You have pretty much exhausted my knowledge, based on the information provided. You will get a lot more responses if you post as recommended here: viewtopic.php?f=1&t=6212

Thank you - my portfolio is:
--American Funds Balanced Fund (BALFX - .65% ER): $23k
--PrimeCap Odyssey Growth (POGRX - .66% ER): $11k
--Vanguard Growth Index Fund (VIGRX - .18% ER): $11k
--Cash: $5k

All of these funds are in a taxable account; BALFX has an ER of .65% & a turnover rate of 95% - this is not ideal for a taxable account holding, right?

I currently have an IRA that is geared around long-term, low expense funds; I'd have to check the specifics of that account. I live in New Jersey & am subject to state taxes as far as I know. The savings is a general life savings account, for lack of better phrasing. I'm not saving for anything in particular, but would like to see continued steady growth.

Yes, if I sold BALFX, I'd pay taxes on $700. I thought it better to sell & move on, but wanted to consult this forum first.

krow36
Posts: 1771
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: Selling American Funds? (help, please)

Post by krow36 » Tue Mar 13, 2018 2:50 pm

jebediahyoder wrote:
Tue Mar 13, 2018 2:02 pm
Thank you - my portfolio is:
--American Funds Balanced Fund (BALFX - .65% ER): $23k
--PrimeCap Odyssey Growth (POGRX - .66% ER): $11k
--Vanguard Growth Index Fund (VIGRX - .18% ER): $11k
--Cash: $5k

All of these funds are in a taxable account; BALFX has an ER of .65% & a turnover rate of 95% - this is not ideal for a taxable account holding, right? That's correct. A high turnover rate means you will be getting a lot of capital gain distributions. In a taxable account they are taxed at a 15% rate. It would be better to have your bonds funds in a tax deferred account--maybe your 403k? Bond funds in a taxable account produce dividends that are taxed at your income tax bracket rate. The bond funds in a balanced fund do the same, so balanced funds in taxable is not ideal. Also you can't tax loss harvest the equity part of the balanced fund without also selling the bond part.

I currently have an IRA that is geared around long-term, low expense funds; I'd have to check the specifics of that account. I live in New Jersey & am subject to state taxes as far as I know. The savings is a general life savings account, for lack of better phrasing. I'm not saving for anything in particular, but would like to see continued steady growth.

Yes, if I sold BALFX, I'd pay taxes on $700. I thought it better to sell & move on, but wanted to consult this forum first. Not necessarily on $700. You need to find out the "unrealized capital gain" of the fund. If you have been reinvesting cap gain distributions and dividends, you may have very little capital gains to pay taxes on.

GLState
Posts: 126
Joined: Wed Feb 15, 2017 10:38 am

Re: Selling American Funds? (help, please)

Post by GLState » Tue Mar 13, 2018 3:01 pm

You can see the long term capital gains that BALFX has paid out on this Morningstar page (near the bottom left). http://www.morningstar.com/funds/XNAS/BALFX/quote.html

Vanguard's Balanced Index hasn't paid out any long term capital gains in that period.


As others have said it is hard to make suggestions without knowing more. If you are planning on using this money within the next couple of years for houses, cars, weddings, etc., 60/40 is much too aggressive in my opinion. Don't count on the next few years to be as kind to investors as the last few. You've just started investing and have not seen bad times. If, on the other hand, if this is money that you plan to have invested for 20 or 30 years, 60/40 might be too conservation for a 25 year old ... if you can handle the bad times and "stay the course".

jebediahyoder
Posts: 6
Joined: Tue Mar 13, 2018 11:01 am

Re: Selling American Funds? (help, please)

Post by jebediahyoder » Tue Mar 13, 2018 4:31 pm

GLState wrote:
Tue Mar 13, 2018 3:01 pm
You can see the long term capital gains that BALFX has paid out on this Morningstar page (near the bottom left). http://www.morningstar.com/funds/XNAS/BALFX/quote.html

Vanguard's Balanced Index hasn't paid out any long term capital gains in that period.

Can you expand on this point a bit? What does the fact that Vanguard Balanced hasn't paid long term capital gains indicate?

Thank you.

KSActuary
Posts: 369
Joined: Fri Jan 13, 2012 10:53 pm

Re: Selling American Funds? (help, please)

Post by KSActuary » Tue Mar 13, 2018 4:54 pm

VBINX has no exposure to international, if that matters.

Otherwise, the change is reasonable.

jebediahyoder
Posts: 6
Joined: Tue Mar 13, 2018 11:01 am

Re: Selling American Funds? (help, please)

Post by jebediahyoder » Tue Mar 13, 2018 9:59 pm

Bumping - any additional insight would be very much appreciated.

Miriam2
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Joined: Fri Nov 14, 2014 11:51 am

Re: Selling American Funds? (help, please)

Post by Miriam2 » Tue Mar 13, 2018 11:15 pm

jebediahyoder wrote: I am relatively new to investing (25 years old); for my first couple of years out of college, I worked with a financial advisor. In August 2017, this person recommended investing a sizable chunk of money (for me at least - $23K) in American Funds Balanced (F-1 share / BALFX). This is in a taxable account.
Where was this financial advisor and do you still use him?

Do you have any retirement accounts such as a 401k? What's in it?

I currently have an IRA that is geared around long-term, low expense funds; I'd have to check the specifics of that account.
Yes, what's in it? Same advisor?
Most Bogleheads look at all accounts as a single portfolio, so the entire package works best for you.
The transaction made sense to me at the time; now, though, I've realized that there may be a better, lower-cost fund, with similar allocation style. Specifically, I've been looking at VBINX (Vanguard Balanced Index Fund) as an alternative. I have three questions I'm hoping for input on:

1.) Does the switch from BALFX to VBINX seem like a sensible one? They seem to have similar allocation & performance, but VBINX has a much lower expense cost & lower turnover/tax cost.
They are both "balanced funds" with both stocks and bonds, but are different funds under the hood. My son has the American Balanced Fund RLBGX in his tax-deferred 401k - but it is the R6 class with no loads and low ER .29. He's delighted with all the capital gains and dividends :D You, however, probably paid a load and you may still pay fees, and because it's not very tax efficient in a taxable account, you pay taxes on it.

American Balanced is actively managed and may not stay at 60/40. The managers invest in mostly large cap, blue chip stocks, some mid caps, some international, only 113 stocks. They hold 1148 bonds including government, investment grade corporate and securitized, some foreign, from AAA down to high yield junk bonds. The fund holds some 6-7% cash. Their prospectus says they can have a minimum of 50% stock to a maximum of 75% stocks, which means some years your fund will be a 75/25 and other years closer to a 55/45. Most Bogleheads who have the fund in their 401k like the solid, good performance of the fund.

The Vanguard Balanced Index Fund is different. It is always a 60% stock and 40% bond fund, tracking the total stock market index (with over 3,600 U.S. stocks, no international) and the total bond index (holding over 8,000 investment grade government and corporate bonds, no high yield junk bonds & no international) and virtually no cash. Many Bogleheads own it and like it.

Here is a forum thread that discusses American Balanced Fund viewtopic.php?f=1&t=231254
3.) I am looking at holding about 50% of my savings in a mutual fund with 60% stocks/40% bonds allocation. Does that seem too conservative?
Where is the other 50% of your savings?

Yes it is too conservative for a 25-year-old - if your total portfolio is 60/40. You'll have to save more money during your lifetime to reach the same financial goal than if you were 90/10 or even 80/20. My millennial kids, and many young Bogleheads, are 90/10.
My portfolio is: . . .
--PrimeCap Odyssey Growth (POGRX - .66% ER): $11k
All of these funds are in a taxable account
Here's a forum thread on PrimeCap Odyssey Growth POGRX (I own it in my Roth IRA :happy ) viewtopic.php?f=1&t=218916

Jebe - use our www.bogleheads.org/wiki for articles on getting started in investing and on specific questions 8-)

Doug E. Dee
Posts: 75
Joined: Sun Jan 08, 2017 7:18 pm

Re: Selling American Funds? (help, please)

Post by Doug E. Dee » Wed Mar 14, 2018 6:45 am

Jeb,
How is your adviser being paid? You can buy these funds on your own and avoid any adviser fees. You can buy BALFX through Fidelity without fees, for example.

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