Acitvely managed funds -> index funds

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kingmountain
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Joined: Sat Jan 12, 2019 3:52 pm

Acitvely managed funds -> index funds

Post by kingmountain » Sat Jan 12, 2019 4:19 pm

Hello Bogleheads community,

First I'd just like to thank everyone who regularly contributes to this site. Reading this site has given me the confidence to transfer my investment accounts from a high-priced brokerage to Vanguard and self-manage my investments. I have several actively managed mutual funds in my taxable account listed below that I intend to exchange for index funds when there is a market downturn so I can tax loss harvest. I was wondering if anyone has suggestions for how to prioritize this exchange? Would you prioritize exchanging funds by 1) highest to lowest fees, 2) highest to lowest turnover (to minimize capital gain taxes) or 3) something else? If it's helpful for the analysis my current tax bracket is 24% federal, 9.3% state (California). Also, I'm sure the answer will be "no" but I'm also curious if anyone recommends keeping any of these actively managed funds long-term.

BlackRock California Municipal Opportunities Fund Institutional shares (MACMX)
BlackRock Health Sciences Opportunities Portfolio Institutional Shares (SHSSX)
First Eagle Overseas Fund Class I (SGOIX)
American Funds New Perspective Fund® Class F-2 (ANWFX)
American Funds American Balanced Fund® Class F-2 (AMBFX)

mhalley
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Re: Acitvely managed funds -> index funds

Post by mhalley » Sat Jan 12, 2019 4:58 pm

You need to look at it all. A lower fee fund that spits out lots of cap gains and dividends may cost more than a higher fee fund with lower distributions. You might look at getting rid of the balanced fund first as you are less likely to be able to tlh with it. And will give taxable interest. You can click on the tax button at Morningstar.com to get some info on your funds. It also gives a potential capital gains exposure number.
http://www.morningstar.com/InvGlossary/ ... osure.aspx

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grabiner
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Re: Acitvely managed funds -> index funds

Post by grabiner » Sat Jan 12, 2019 9:35 pm

Welcome to the forum!
kingmountain wrote:
Sat Jan 12, 2019 4:19 pm
I have several actively managed mutual funds in my taxable account listed below that I intend to exchange for index funds when there is a market downturn so I can tax loss harvest.
It's better to sell everything now, rather than waiting for a downturn.

If you pay capital-gains tax now and there is a downturn in the future, you will be able to harvest your losses. If the market drops in 2019, the losses will cancel out the gains, so you are just as well off as if you had waited (and actually better off since you reduced your expenses and taxes). If the market drops in 2020, your harvested losses can offset ordinary income, which could be even better since capital losses can be deducted at your full tax rate.

And if the market doesn't drop soon, you will have higher expenses from the active funds, and will have to pay a higher capital-gains tax when you switch.
BlackRock California Municipal Opportunities Fund Institutional shares (MACMX)
This fund isn't likely to have much of a capital gain, but it's still worth replacing. It holds lower-quality bonds than Vanguard's funds, so that it has about the same yield as Vanguard CA Long-Term Tax-Exempt, but with more risk.

My own preference for munis in CA is half Vanguard CA Long-Term Tax-Exempt and half Vanguard Limited-Term Tax-Exempt, which gives you an intermediate duration, only half your bonds in CA, and more than half your income exempt from CA tax.

Note that these Vanguard funds are not index funds, but that is not important for bond funds, since bond funds don't generate much in capital gains. What is important is that the funds are low-cost.
American Funds American Balanced Fund® Class F-2 (AMBFX)
Besides the other issues, this fund holds taxable bonds, which you do not want to hold in your tax bracket. You should either hold mostly CA munis, and I-Bonds in your taxable account, or taxable bonds in your IRA.
Wiki David Grabiner

venkman
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Re: Acitvely managed funds -> index funds

Post by venkman » Sun Jan 13, 2019 12:07 am

kingmountain wrote:
Sat Jan 12, 2019 4:19 pm
I have several actively managed mutual funds in my taxable account listed below that I intend to exchange for index funds when there is a market downturn so I can tax loss harvest.
Um, are you waiting for a BIGGER market downturn than the ~20% drop we just had?

elainet7
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Re: Acitvely managed funds -> index funds

Post by elainet7 » Sun Jan 13, 2019 9:31 am

JUST DO IT!!!!!!!!!!! VANGUARD is the best of the best
who sold you these active funds?

Topic Author
kingmountain
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Joined: Sat Jan 12, 2019 3:52 pm

Re: Acitvely managed funds -> index funds

Post by kingmountain » Mon Jan 14, 2019 2:47 pm

Thanks all for the input. I have about $35K in unrealized gains so I'm hesitant to sell it all and pay all those taxes. But I will prioritize selling MACMX and AMBFX first.

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grabiner
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Re: Acitvely managed funds -> index funds

Post by grabiner » Mon Jan 14, 2019 3:18 pm

kingmountain wrote:
Mon Jan 14, 2019 2:47 pm
Thanks all for the input. I have about $35K in unrealized gains so I'm hesitant to sell it all and pay all those taxes.
Those taxes need to be paid. If you don't sell the funds now, but sell them later, you will probably have to pay taxes on even larger capital gains.

The alternative is to never sell the funds (until you need to spend the money in retirement, or leave them to your heirs). This would give a tax benefit on the capital gains, but it would be outweighed by the expense and tax cost of continuing to hold the funds. If you lose 1% per year to higher expenses and taxes, and your capital gain is 1/3 of the fund value, then waiting eight years to sell will cost you as much money as the capital gain due if you sell now (at 24.3% combined federal and state tax). And if you sell now, you'll be ahead after eight years, because you will have a higher cost basis and thus a lower tax cost when you do sell the replacement funds.

One alternative for avoiding the capital gains is to donate the funds to charity. You shouldn't do this just for the tax benefit, but if you want to donate $10,000 to a charity, donating $10,000 of a mutual fund for which you paid $5000 allows you to avoid tax on the $5000 long-term capital gain.
Wiki David Grabiner

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kingmountain
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Re: Acitvely managed funds -> index funds

Post by kingmountain » Mon Jan 14, 2019 5:33 pm

Do you think it would make sense to wait to sell until the end of the year when all the gains become long-term? I have about 3K in short-term capital gains right now. I turned off automatic dividend and capital gain reinvestments in Vanguard so no new money will go into these funds.

pdavi21
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Re: Acitvely managed funds -> index funds

Post by pdavi21 » Mon Jan 14, 2019 5:45 pm

kingmountain wrote:
Mon Jan 14, 2019 5:33 pm
Do you think it would make sense to wait to sell until the end of the year when all the gains become long-term? I have about 3K in short-term capital gains right now. I turned off automatic dividend and capital gain reinvestments in Vanguard so no new money will go into these funds.
Yes. If you bought at different times, use First In First Out to sell as soon as you hit long term for each bundle.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

megabad
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Re: Acitvely managed funds -> index funds

Post by megabad » Mon Jan 14, 2019 6:14 pm

kingmountain wrote:
Mon Jan 14, 2019 5:33 pm
Do you think it would make sense to wait to sell until the end of the year when all the gains become long-term? I have about 3K in short-term capital gains right now. I turned off automatic dividend and capital gain reinvestments in Vanguard so no new money will go into these funds.
It may or may not make sense depending on your tax rate and current fees and expenses. I would definitely not wait any longer (than after they become long term). Personally, if total fees/expenses are over 1% in your case, I wouldn't hesitate to realize those gains today (as I suspect most are long term). Heck, some of those funds are already spinning off capital gains distributions anyway.

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