I’m done with index funds

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michaeljmroger
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I’m done with index funds

Post by michaeljmroger » Sun Oct 27, 2019 11:27 am

After doing quite a lot of research, I’ve decided to stop using low-cost index funds and switch to a separately managed account. This goes against the Bogleheads investment philosophy and it took me a long time to admit it was the right thing to do for me as I was genuinely convinced and passionate about the Bogleheads approach. Let me explain why I’m making the switch.

As a HNW (and presumably UHNW in the future if all goes well), I’m facing “issues” most Bogleheads don’t have to think about. For instance, I’ll likely have 7-figure capital gains to deal with in a few years, so it’s crucial for me to find ways to mitigate the upcoming taxes.

By using a separately managed account (SMA), I can roughly replicate the S&P 500 by holding individual securities rather than a single fund. The benefit is that the tax-loss harvesting opportunities are potentially immense, and they can greatly reduce my future capital gain taxes (for the record, you can only offset $3k of income, but there’s no limit in the amount of capital gains you can offset).

This strategy comes at a cost so it doesn’t make sense if you don’t have a large account, or if you don’t need to harvest significant capital gains. It does make a lot of sense for me though, despite the much higher fees (approximately 0.7%).

(Although that didn’t really influence my decision, I also like that I’ll now own individual muni bonds instead of muni bond funds.)

I realize this SMA locks me in this strategy, but it’s a trade off I’m willing to accept as I’ll presumably always have to mitigate very high taxes.

Overall, I realize I’m in an unusual (and obviously fortunate) situation, so my personal needs and optimizations don’t invalidate the Bogleheads investment philosophy as a whole; it’s just not suited to my portfolio anymore.

Thanks a lot for your help and guidance, I learned a ton along the way!

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Re: I’m done with index funds

Post by RadAudit » Sun Oct 27, 2019 11:31 am

Congrats. Glad you found something that works for you. Best of luck in the future.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

retired@50
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Re: I’m done with index funds

Post by retired@50 » Sun Oct 27, 2019 11:31 am

Perhaps you should consider gifting and/or a donor advised fund for charitable purposes... Best of luck.

alex_686
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Re: I’m done with index funds

Post by alex_686 » Sun Oct 27, 2019 11:32 am

If you are replicating the S&P 500 you are still indexing.

I personally believe that direct replication will be the next big innovation, after mutual funds and ETFs.

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LiveSimple
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Re: I’m done with index funds

Post by LiveSimple » Sun Oct 27, 2019 11:33 am

Please can you share your plan, I prefer to understand better or see if that work for me as well. As I am thinking in these lines as well

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JoMoney
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Re: I’m done with index funds

Post by JoMoney » Sun Oct 27, 2019 11:33 am

michaeljmroger wrote:
Sun Oct 27, 2019 11:27 am
... I can roughly replicate the S&P 500 by holding individual securities rather than a single fund. The benefit is that the tax-loss harvesting opportunities are potentially immense, and they can greatly reduce my future capital gain taxes...
It doesn't look like you're off the reservation to me.
Best wishes :beer
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Topic Author
michaeljmroger
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Re: I’m done with index funds

Post by michaeljmroger » Sun Oct 27, 2019 11:35 am

retired@50 wrote:
Sun Oct 27, 2019 11:31 am
Perhaps you should consider gifting and/or a donor advised fund for charitable purposes...
I’m already doing that.
alex_686 wrote:
Sun Oct 27, 2019 11:32 am
If you are replicating the S&P 500 you are still indexing.

I personally believe that direct replication will be the next big innovation, after mutual funds and ETFs.
Right, it’s a different form of indexing (and I agree with you about the innovation part).

dknightd
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Re: I’m done with index funds

Post by dknightd » Sun Oct 27, 2019 11:37 am

michaeljmroger wrote:
Sun Oct 27, 2019 11:27 am
I’ll likely have 7-figure capital gains to deal with in a few years
Bummer. It would suck to pay a tax bill bigger than what I had.

Jimsad
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Re: I’m done with index funds

Post by Jimsad » Sun Oct 27, 2019 11:38 am

Not sure I fully understand .I thought you could do tax loss harvesting being in index funds too ?

Topic Author
michaeljmroger
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Re: I’m done with index funds

Post by michaeljmroger » Sun Oct 27, 2019 11:43 am

Jimsad wrote:
Sun Oct 27, 2019 11:38 am
Not sure I fully understand .I thought you could do tax loss harvesting being in index funds too ?
It’s a lot more limited. If the fund is up, there’s nothing you can do about it. But if you hold individual stocks instead, there’s basically always at least one loss you can harvest. If you’re doing this aggressively and all the time, the difference becomes huge over time.

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Re: I’m done with index funds

Post by alex_686 » Sun Oct 27, 2019 11:43 am

Jimsad wrote:
Sun Oct 27, 2019 11:38 am
Not sure I fully understand .I thought you could do tax loss harvesting being in index funds too ?
With direct indexing the S&P 500 you have 500 choices instead of 1. This allows higher optimization in terms of timing. This can really cut your long term capital gains. Not sure if it justifies a .7% fee - that seems on the high side to make this work. But the last time I was involved in something like this was the 90s.

bgf
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Re: I’m done with index funds

Post by bgf » Sun Oct 27, 2019 11:44 am

have you backtested this strategy? how much would you actually be able to TLH under this new strategy compared to index funds?

certainly there will be individual positions that lose in index up years, but they'll likely be very small positions... if it is enough to offset then dramatically higher expense ratio, how much do you gain?
Last edited by bgf on Sun Oct 27, 2019 11:49 am, edited 2 times in total.
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Topic Author
michaeljmroger
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Re: I’m done with index funds

Post by michaeljmroger » Sun Oct 27, 2019 11:47 am

bgf wrote:
Sun Oct 27, 2019 11:44 am
how much would you actually be able to TLH under this new strategy compared to index funds?
On average, $50k annually for every million invested.

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goingup
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Re: I’m done with index funds

Post by goingup » Sun Oct 27, 2019 11:48 am

I think it's a good move for you.

While I think index funds are generally scalable, you do face more challenges than most of us. Congratulations. Allow this decision to simplify your life! :beer

UpperNwGuy
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Re: I’m done with index funds

Post by UpperNwGuy » Sun Oct 27, 2019 11:49 am

OP, you’ve been changing your investment strategy a number of times recently. I sure hope you can find a plan that will motivate you to stay the course. If not, your portfolio will suffer.

anon_investor
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Re: I’m done with index funds

Post by anon_investor » Sun Oct 27, 2019 11:49 am

Would the .7% aum fee overtime potential negate the tlh benefits?

bgf
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Re: I’m done with index funds

Post by bgf » Sun Oct 27, 2019 11:51 am

anon_investor wrote:
Sun Oct 27, 2019 11:49 am
Would the .7% aum fee overtime potential negate the tlh benefits?
he said he'll gain $50k per year on every million, which is 5%... which is huge. im kind of stunned.
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bgf
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Re: I’m done with index funds

Post by bgf » Sun Oct 27, 2019 11:53 am

i guess now its easy to see how buffett and bezos dont have any tax issues. no divies and borrow against your holdings. mo money no problems.

op, do you have the ability to do that? borrow rather than sell?
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Wiggums
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Re: I’m done with index funds

Post by Wiggums » Sun Oct 27, 2019 11:55 am

I’m having a hard time picturing how this would work. Can you provide more info? I’d love to hear the details.

My concern is that your time is valuable plus the additional overheard of managing this. Isn’t there a limit to how much TLH write offs you can take each year?

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Re: I’m done with index funds

Post by Iorek » Sun Oct 27, 2019 11:57 am

michaeljmroger wrote:
Sun Oct 27, 2019 11:47 am
bgf wrote:
Sun Oct 27, 2019 11:44 am
how much would you actually be able to TLH under this new strategy compared to index funds?
On average, $50k annually for every million invested.
From tlh of individual securities? I wish the OP the best but count me as very sceptical this is possible

bgf
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Re: I’m done with index funds

Post by bgf » Sun Oct 27, 2019 11:59 am

its my understanding that if you want to take a billion dollar capital loss you can. no limit when it comes to offsetting other capital gains.
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GoldenFinch
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Re: I’m done with index funds

Post by GoldenFinch » Sun Oct 27, 2019 12:03 pm

Since you are telling us this info, please report back to tell how it works out. Best of luck!

feehater
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Re: I’m done with index funds

Post by feehater » Sun Oct 27, 2019 12:03 pm

alex_686 wrote:
Sun Oct 27, 2019 11:43 am
Jimsad wrote:
Sun Oct 27, 2019 11:38 am
Not sure I fully understand .I thought you could do tax loss harvesting being in index funds too ?
With direct indexing the S&P 500 you have 500 choices instead of 1. This allows higher optimization in terms of timing. This can really cut your long term capital gains. Not sure if it justifies a .7% fee - that seems on the high side to make this work. But the last time I was involved in something like this was the 90s.
OK, but what do you buy to replace the individual stock that you just sold? Or do you just have to sit out 30 days and buy the same stock back? Seems like TLH with funds instead of stocks is easier to find a pair with.

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Re: I’m done with index funds

Post by nedsaid » Sun Oct 27, 2019 12:04 pm

I am test driving a portfolio management service but mainly because I also receive retirement planning services as part of the package. The questions that I would have regarding your new strategy are these: 1) Can tax savings overcome the fee drag of 0.70% a year? and 2) will you really receive customized management of your assets? Not sure that you will really get the customized tax loss selling strategy that you want as there are certain economies of scale to asset management. How much time are your advisors really going to spend helping you?
A fool and his money are good for business.

bgf
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Re: I’m done with index funds

Post by bgf » Sun Oct 27, 2019 12:06 pm

feehater wrote:
Sun Oct 27, 2019 12:03 pm
alex_686 wrote:
Sun Oct 27, 2019 11:43 am
Jimsad wrote:
Sun Oct 27, 2019 11:38 am
Not sure I fully understand .I thought you could do tax loss harvesting being in index funds too ?
With direct indexing the S&P 500 you have 500 choices instead of 1. This allows higher optimization in terms of timing. This can really cut your long term capital gains. Not sure if it justifies a .7% fee - that seems on the high side to make this work. But the last time I was involved in something like this was the 90s.
OK, but what do you buy to replace the individual stock that you just sold? Or do you just have to sit out 30 days and buy the same stock back? Seems like TLH with funds instead of stocks is easier to find a pair with.
this is where the management comes in. they probably replicate the index with far fewer holdings. this allows them to swap into other new positions while still fairly tracking the index. what surprised me is how these tiny positions can save OP so much, $50k per million EVERY years. stunning.
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KlangFool
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Re: I’m done with index funds

Post by KlangFool » Sun Oct 27, 2019 12:08 pm

OP,

Good luck to you! I hope that it is worth your time and effort. If I am at your level of wealth, the last thing that I would do is spend my time worrying about paying taxes and making more money. My time would be more precious than that incremental amount of money.

KlangFool

bgf
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Re: I’m done with index funds

Post by bgf » Sun Oct 27, 2019 12:08 pm

nedsaid wrote:
Sun Oct 27, 2019 12:04 pm
I am test driving a portfolio management service but mainly because I also receive retirement planning services as part of the package. The questions that I would have regarding your new strategy are these: 1) Can tax savings overcome the fee drag of 0.70% a year? and 2) will you really receive customized management of your assets? Not sure that you will really get the customized tax loss selling strategy that you want as there are certain economies of scale to asset management. How much time are your advisors really going to spend helping you?
take a look at what 0.7% of 50m, 75m, 100+m comes to per year. wont that get you personalized treatment?
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bgf
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Re: I’m done with index funds

Post by bgf » Sun Oct 27, 2019 12:09 pm

KlangFool wrote:
Sun Oct 27, 2019 12:08 pm
OP,

Good luck to you! I hope that it is worth your time and effort. If I am at your level of wealth, the last thing that I would do is spend my time worrying about paying taxes and making more money. My time would be more precious than that incremental amount of money.

KlangFool
thats why OP is getting someone else to do it!!!
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

MotoTrojan
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Re: I’m done with index funds

Post by MotoTrojan » Sun Oct 27, 2019 12:11 pm

michaeljmroger wrote:
Sun Oct 27, 2019 11:47 am
bgf wrote:
Sun Oct 27, 2019 11:44 am
how much would you actually be able to TLH under this new strategy compared to index funds?
On average, $50k annually for every million invested.
So you're paying 0.7% annually (and not getting the compound growth on that) to save closer to 1.5% (assumes 30% tax on long-term gain) when you start withdrawing; not a compound-growth savings. Are you sure you are coming out ahead? Even if you had a 100% effective tax rate the 0.7% drag wouldn't take long to offset a 5% one-time savings.

Please think long and hard about this. I think you are making a huge mistake.
Last edited by MotoTrojan on Sun Oct 27, 2019 12:14 pm, edited 3 times in total.

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Gort
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Re: I’m done with index funds

Post by Gort » Sun Oct 27, 2019 12:11 pm

Shouldn't the title of your post be "I'm done with MUTUAL funds"? The original title implies a negative feeling towards indexing when in reality it seems that your intent is to convey to the readers that you would rather buy individual securities instead of a mutual fund, indexed or not.

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Re: I’m done with index funds

Post by KlangFool » Sun Oct 27, 2019 12:13 pm

bgf wrote:
Sun Oct 27, 2019 12:09 pm
KlangFool wrote:
Sun Oct 27, 2019 12:08 pm
OP,

Good luck to you! I hope that it is worth your time and effort. If I am at your level of wealth, the last thing that I would do is spend my time worrying about paying taxes and making more money. My time would be more precious than that incremental amount of money.

KlangFool
thats why OP is getting someone else to do it!!!
bgf,

1) If you need to pay someone 0.7% per year to do it, it is not simple enough.

2) 50K per million (~ 15K of tax-saving before fees) is not good enough to convince me at that wealth level.

To each its own.

Some people have enough money. They spend money to live their lives. Some people keep on chasing more money. They spend more of their lives/time making more money even when they have a lot of money.

KlangFool
Last edited by KlangFool on Sun Oct 27, 2019 12:16 pm, edited 1 time in total.

BuddyJet
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Re: I’m done with index funds

Post by BuddyJet » Sun Oct 27, 2019 12:15 pm

For stocks, I went in the other direction. The extra ER on a large portfolio is a tough yearly nut to overcome. I decided to DAF my biggest gains and just pay the $400k gains tax to move away from individual stocks. The other thing is that the fee is not deductible.

A catch in the TLH argument is that, to the extent you do TLH, you no longer track the S&P. Once you start on that path, you are effectively stock picking with a higher ER.

On Muni bonds, I agree on individual bonds rather than funds since the account is large enough to allow geographic and maturity diversification if you intend to be a buy and hold bond investor. I use Fidelity for muni bonds since they offer the most transparent platform.
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livesoft
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Re: I’m done with index funds

Post by livesoft » Sun Oct 27, 2019 12:17 pm

I hope the OP keeps us informed about the outcomes and the true amounts of TLH every year.

There is a difference of creating $50,000 of losses each year and saving $50,000 on taxes each year. :)
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lack_ey
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Re: I’m done with index funds

Post by lack_ey » Sun Oct 27, 2019 12:19 pm

Gort wrote:
Sun Oct 27, 2019 12:11 pm
Shouldn't the title of your post be "I'm done with MUTUAL funds"? The original title implies a negative feeling towards indexing when in reality it seems that your intent is to convey to the readers that you would rather buy individual securities instead of a mutual fund, indexed or not.
Well, it does say index funds. So it could readily be the index part or the fund part, or both.

Clearer would be "I'm done with index funds [SMA instead for tax-loss harvesting]", I guess (or done with mutual funds). There are robo-advisers who do this.

Where there are statistics on indexing as a percentage of the total market, I wonder if that captures money invested with this kind of style, near-indexing that's not really seeking to disagree with market pricing.

wawoodjr
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Re: I’m done with index funds

Post by wawoodjr » Sun Oct 27, 2019 12:20 pm

michaeljmroger wrote:
Sun Oct 27, 2019 11:27 am

As a HNW (and presumably UHNW in the future if all goes well), I’m facing “issues” most Bogleheads don’t have to think about. For instance, I’ll likely have 7-figure capital gains to deal with in a few years, so it’s crucial for me to find ways to mitigate the upcoming taxes.

This strategy comes at a cost so it doesn’t make sense if you don’t have a large account, or if you don’t need to harvest significant capital gains. It does make a lot of sense for me though, despite the much higher fees (approximately 0.7%).
I believe you may underestimate the net worth of many on this forum. I've been indexing a good part of my life. I have unrealized capital gains north of what you refer to. Its very manageable in the decumulation phase. With healthy positions in taxable, tax deferred, and Roth its easy to withdraw tax efficiently and pay little tax. Remember you don't pay capital gains taxes until they are realized by selling. Not to mention the step up in basis to your heirs, erasing your unrealized gains.

You say your on the way to UHNW ($30 million). Lets just say along the way at around $10 million in AUM you'll be paying $70,000 each and every year in fees. I guarantee you with favorable cap gains tax rates, I will never ever have a tax bill anywhere near that.

I suspect some slick money manager has convinced you to let the tax tail wag the dog and get a big fee in the meantime. Of course I realize you not really asking for opinions on your post. Best of luck. Hope it works out.

bgf
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Re: I’m done with index funds

Post by bgf » Sun Oct 27, 2019 12:23 pm

MotoTrojan wrote:
Sun Oct 27, 2019 12:11 pm
michaeljmroger wrote:
Sun Oct 27, 2019 11:47 am
bgf wrote:
Sun Oct 27, 2019 11:44 am
how much would you actually be able to TLH under this new strategy compared to index funds?
On average, $50k annually for every million invested.
So you're paying 0.7% annually (and not getting the compound growth on that) to save closer to 1.5% (assumes 30% tax on long-term gain) when you start withdrawing; not a compound-growth savings. Are you sure you are coming out ahead? Even if you had a 100% effective tax rate the 0.7% drag wouldn't take long to offset a 5% one-time savings.

Please think long and hard about this. I think you are making a huge mistake.
wait, wouldnt the amount capable of being TLHd increase as well? i get that the ER loss will compound, but OP wont just be getting the same $50k 15 years from now... or am i not following you?
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Re: I’m done with index funds

Post by nedsaid » Sun Oct 27, 2019 12:24 pm

bgf wrote:
Sun Oct 27, 2019 12:08 pm
nedsaid wrote:
Sun Oct 27, 2019 12:04 pm
I am test driving a portfolio management service but mainly because I also receive retirement planning services as part of the package. The questions that I would have regarding your new strategy are these: 1) Can tax savings overcome the fee drag of 0.70% a year? and 2) will you really receive customized management of your assets? Not sure that you will really get the customized tax loss selling strategy that you want as there are certain economies of scale to asset management. How much time are your advisors really going to spend helping you?
take a look at what 0.7% of 50m, 75m, 100+m comes to per year. wont that get you personalized treatment?
There are tax managed products out there, Vanguard used to have a few of them. The original poster has to not only jump the hurdle of higher expenses but also do better than the cheaper tax managed products. I suppose the customization comes in as the Original Poster takes money out of the portfolio, one can sell the individual stocks that have losses to offset the gains from other stocks. If the money is just left in index funds or in tax managed products, there would probably be no advantage to a managed account. Sounds to me like the Original Poster is going to do some selling, hence the perceived need for help with a tax loss selling strategy. The thing is, he will generate a significant tax bill converting his index fund holdings to the individual securities in a managed account. It seems a lot like pay me now or pay me later.

The original poster might have large amounts of stock options or company stock, my suspicion is that he might work for a high tech company and will be liquidating those investments in the future. My guess is that his potential large capital gains are from that and not from his investment portfolio. He might be looking to generate capital losses to offset gains from stock options/company stock. My further guess is that he is nearing retirement and will have to realize some or all of those gains upon leaving his company.

I am just guessing. It doesn't make sense to me to liquidate a lot of index funds to generate a big tax bill now to buy individual securities in a managed account unless something else is in play here. We don't have enough information here.
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skeptical
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Re: I’m done with index funds

Post by skeptical » Sun Oct 27, 2019 12:29 pm

michaeljmroger wrote:
Sun Oct 27, 2019 11:47 am
bgf wrote:
Sun Oct 27, 2019 11:44 am
how much would you actually be able to TLH under this new strategy compared to index funds?
On average, $50k annually for every million invested.
This is interesting. How long have you been doing this, and do you have data during up and down market cycles, even if they are short ? For example, there have been a couple of pullbacks over the past few years.

Is 5% the amount of:
- equity sold that produces a loss ?,if so what is the percent of actual loss (indirectly asking what is your % basis of the portfolio) ?
- amount of loss generated per year, if so what is the ratio of long term vs short term losses ?
- amount of money you actually save each year by paying less taxes ?

There is also the question of how this works as your average basis shrinks due to increase in portfolio value (and TLH) and how that eventually limits how often and how much you can TLH. Eventually, there will be few stocks that will present TLH opportunities, even in the event of a big market drawdown.

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Re: I’m done with index funds

Post by MotoTrojan » Sun Oct 27, 2019 12:33 pm

bgf wrote:
Sun Oct 27, 2019 12:23 pm
MotoTrojan wrote:
Sun Oct 27, 2019 12:11 pm
michaeljmroger wrote:
Sun Oct 27, 2019 11:47 am
bgf wrote:
Sun Oct 27, 2019 11:44 am
how much would you actually be able to TLH under this new strategy compared to index funds?
On average, $50k annually for every million invested.
So you're paying 0.7% annually (and not getting the compound growth on that) to save closer to 1.5% (assumes 30% tax on long-term gain) when you start withdrawing; not a compound-growth savings. Are you sure you are coming out ahead? Even if you had a 100% effective tax rate the 0.7% drag wouldn't take long to offset a 5% one-time savings.

Please think long and hard about this. I think you are making a huge mistake.
wait, wouldnt the amount capable of being TLHd increase as well? i get that the ER loss will compound, but OP wont just be getting the same $50k 15 years from now... or am i not following you?
I am not talking about $50K, I am speaking in percentages. Every year the OP will pay 0.7% in fees, and accumulate a future 1.5% tax-savings (5% loss, assumes 30% LTCG rate). That 1.5% tax-savings does not compound, each year's 1.5% of total portfolio gets added to the last one. The 0.7% fee though is an actual compound drag. I am struggling to see any scenario where this comes out ahead long-term. If we assume the market doubles every 10 years, only the last 10 years of tax-savings are a net gain (0.7% is ~1/2 of 1.5%), while all prior 0.7% saved fees would've continued compounding and netting well above double their initial value.

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michaeljmroger
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Re: I’m done with index funds

Post by michaeljmroger » Sun Oct 27, 2019 12:33 pm

nedsaid wrote:
Sun Oct 27, 2019 12:24 pm
The original poster might have large amounts of stock options or company stock, my suspicion is that he might work for a high tech company and will be liquidating those investments in the future. My guess is that his potential large capital gains are from that and not from his investment portfolio. He might be looking to generate capital losses to offset gains from stock options/company stock.
All your guesses are right :wink:
nedsaid wrote:
Sun Oct 27, 2019 12:24 pm
It doesn't make sense to me to liquidate a lot of index funds to generate a big tax bill now to buy individual securities in a managed account unless something else is in play here.
I only started investing in index funds a year ago, so the tax bill won’t be too bad (I have about $200k in capital gains from these funds). I’d rather fix it now than letting the problem get worse.

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Re: I’m done with index funds

Post by JoinToday » Sun Oct 27, 2019 12:34 pm

I am not buying the $50K per million every year unless the OP is still buying a lot of stock.

1. I had a lot of opportunities to tax loss harvest when I initially bought index funds. But eventually, stock prices go up, and now my cost basis is low compared to the current value. I no longer have the opportunity to do TLH.

2. If the OP is really high net worth or UHNW, he must be getting a lot of dividends (2% is what I use). If the new worth is $10M or $20M, that is $200K-$400K dividends per year. At that point, do you really need to be selling assets for living expenses?

3. Vanguard lends securities and uses heart beat trades to improve returns and lower capital gains distributions. Probably not available to OP

4. Warren Buffet's instructions to his heirs/money managers is to put 90% of the inheritance into Vanguard S&P 500. I wonder what the OP knows that WB doesn't know? Does the OP think WB has never considered individual stocks? Maybe OP should give Warren a few tips.

I am with Klang Fool. Not worth the time & effort, even if it works, but I am really skeptical.
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Re: I’m done with index funds

Post by 123 » Sun Oct 27, 2019 12:34 pm

There has been prior discussion on this board about a service offered by either Betterment and/or Wealthfront that replicated (often sampled) the S&P 500 in an individual account for the purposes of automated strategic TLH. Depending on the size of the individual's account the number of positions replicated would vary.

With a large number of individual stock holdings such mechanisms could be a little unwieldy to unwind from when/if the individual becomes uncomfortable with the tax reporting issues. In addition to the service or AUM fee (depending on the firm handling it) the individual could face significantly higher tax preparation fees. Even though tax reporting and tracking can be largely automated it might be hard to argue with a tax preparer who wants a higher fee for including hundreds of additional securities transaction on the tax return each year.

Hopefully the OP is trying his newly preferred method on a portion of his holding for a single tax year or longer to see how it actually works for him. It would be sad to incur immediate capital gains taxation on a large account to transition to a new system that doesn't work as expected or that introduces excessive complexity on the management of his assets by his survivors or his estate.
Last edited by 123 on Sun Oct 27, 2019 12:41 pm, edited 1 time in total.
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Re: I’m done with index funds

Post by randomguy » Sun Oct 27, 2019 12:39 pm

livesoft wrote:
Sun Oct 27, 2019 12:17 pm
I hope the OP keeps us informed about the outcomes and the true amounts of TLH every year.

There is a difference of creating $50,000 of losses each year and saving $50,000 on taxes each year. :)
Wealthfront has a bunch of white papers on this. You can question some of their assumptions (they tend to assume a lot of money coming it and they so the time period of 2000- on (i.e. 2000-2 and 2008-9 gave lots of opportunity) but they are generating decent tax alpha.

I am a bit suspect about the long term performance of these schemes. After 20-30 years, you are going to have so much embedded gains that only a small part of the portfolio will ever have losses to harvest. There is also the risk of some big capital gains distributions (i.e. buyouts, companies you don't want to track) that vanguard can get rid of by distributing shares where you get stuck with the costs. And you also probably are doing stock lending.

Honestly if I could buy just the wealthfront direct indexing fund (i.e. I don't want the rest of them) for a .25% ER, I would seriously think about it. .7% is getting up to the levels where I think the upside might not be worth it.

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Re: I’m done with index funds

Post by skeptical » Sun Oct 27, 2019 12:47 pm

BuddyJet wrote:
Sun Oct 27, 2019 12:15 pm

On Muni bonds, I agree on individual bonds rather than funds since the account is large enough to allow geographic and maturity diversification if you intend to be a buy and hold bond investor. I use Fidelity for muni bonds since they offer the most transparent platform.
I have enough in muni bonds to have a custom ladder/portfolio done for me. I had several specific proposals put together, letting them know I would use VWIUX (Vanguard Intermediate Muni) as a benchmark. None of the proposals were able to match, never mind beat VWIUX, and there was acknowledgement that "VWIUX is tough to beat".

There was also a non answer to the question "How do I feel comfortable that this bond portfolio you picked is not the result of you putting in more work now and finding exceptional bond deals, and that in the future less time will be spent identifying the best deals, and/or giving them to a bigger customer to keep them happy".

There is also the related issue of getting bonds that need to be moved, for whatever reason, and that you as a custom bond client are simply an easy customer.

Bonds are very complex, and there is a lot more than simply duration/rates/maturity/convexity/etc. No matter how much you trust the person who is managing your bond portfolio they will always have to make decisions on who to give the "best bonds" to, and they will always be under pressure to keep things moving.

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Re: I’m done with index funds

Post by 1789 » Sun Oct 27, 2019 12:51 pm

KlangFool wrote:
Sun Oct 27, 2019 12:08 pm
OP,

Good luck to you! I hope that it is worth your time and effort. If I am at your level of wealth, the last thing that I would do is spend my time worrying about paying taxes and making more money. My time would be more precious than that incremental amount of money.

KlangFool
+1. This is it.
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Re: I’m done with index funds

Post by KyleAAA » Sun Oct 27, 2019 12:55 pm

This doesn’t at all go against the bogleheads investment philosophy. Keep expenses low and invest tax efficiently. Direct indexing has long been discussed here as making sense for investors with very high net worths. Just make sure the tax benefits are worth the expenses incurred. I would question getting 0.7% per year out of the strategy, but who knows. Once your portfolio reaches a certain size, you’ll probably never need to sell shares anyway, so there would be no practical tax to avoid.
Last edited by KyleAAA on Sun Oct 27, 2019 12:59 pm, edited 2 times in total.

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Re: I’m done with index funds

Post by Jebediah » Sun Oct 27, 2019 12:56 pm

MotoTrojan wrote:
Sun Oct 27, 2019 12:33 pm
bgf wrote:
Sun Oct 27, 2019 12:23 pm
MotoTrojan wrote:
Sun Oct 27, 2019 12:11 pm
michaeljmroger wrote:
Sun Oct 27, 2019 11:47 am
bgf wrote:
Sun Oct 27, 2019 11:44 am
how much would you actually be able to TLH under this new strategy compared to index funds?
On average, $50k annually for every million invested.
So you're paying 0.7% annually (and not getting the compound growth on that) to save closer to 1.5% (assumes 30% tax on long-term gain) when you start withdrawing; not a compound-growth savings. Are you sure you are coming out ahead? Even if you had a 100% effective tax rate the 0.7% drag wouldn't take long to offset a 5% one-time savings.

Please think long and hard about this. I think you are making a huge mistake.
wait, wouldnt the amount capable of being TLHd increase as well? i get that the ER loss will compound, but OP wont just be getting the same $50k 15 years from now... or am i not following you?
I am not talking about $50K, I am speaking in percentages. Every year the OP will pay 0.7% in fees, and accumulate a future 1.5% tax-savings (5% loss, assumes 30% LTCG rate). That 1.5% tax-savings does not compound, each year's 1.5% of total portfolio gets added to the last one. The 0.7% fee though is an actual compound drag. I am struggling to see any scenario where this comes out ahead long-term. If we assume the market doubles every 10 years, only the last 10 years of tax-savings are a net gain (0.7% is ~1/2 of 1.5%), while all prior 0.7% saved fees would've continued compounding and netting well above double their initial value.
I agree it doesn't seem like a great bet. 0.7% in fees for a potential 1.5% in benefit plus added tracking risk, and a nightmare to unwind if you change your mind. If you're U/HNW what do you care about the 0.8% anyway? There's not much utility there.

Not to mention, your bogey is whatever TLH benefit you can get from funds-- suppose it is 0.3% pa average over time. So your "upside" in this strategy is something like 0.5% at best.
Last edited by Jebediah on Sun Oct 27, 2019 1:03 pm, edited 1 time in total.

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Total stock market or individual stocks?

Post by Taylor Larimore » Sun Oct 27, 2019 12:58 pm

michaeljmroger:

I find it difficult to believe that it can be advantageous to sell a very tax-efficient total stock market index fund (plus pay the capital-gain tax) and then attempt to replicate a total stock market fund by buying individual stocks. Please run this by a reliable tax-accounting firm (not a financial advisor) before making changes. Be aware that the Vanguard Total Stock Market Index Fund has not paid a capital-gain tax in many years and that nearly all it's dividends are qualified for lower rates. It is very tax-efficient.

I have a close friend in a high tax-bracket with over $10M in Vanguard's Three-Fund Portfolio. She faced the same decision you are making. After extensive study, she chose total market index funds.

Under current tax-laws taxable gains are eliminated at death for most taxpayers.

https://www.bogleheads.org/wiki/Vanguar ... tributions

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Taxable investors owe it to themselves to emphasize passive index funds."
Last edited by Taylor Larimore on Sun Oct 27, 2019 1:38 pm, edited 1 time in total.
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Re: I’m done with index funds

Post by TomatoTomahto » Sun Oct 27, 2019 1:00 pm

michaeljmroger wrote:
Sun Oct 27, 2019 12:33 pm
nedsaid wrote:
Sun Oct 27, 2019 12:24 pm
The original poster might have large amounts of stock options or company stock, my suspicion is that he might work for a high tech company and will be liquidating those investments in the future. My guess is that his potential large capital gains are from that and not from his investment portfolio. He might be looking to generate capital losses to offset gains from stock options/company stock.
All your guesses are right :wink:
Oh, that makes sense now. It didn’t make sense to me for any HNW family without forced realization of capital gains. For us, and I expect a good number of BH, this approach wouldn't work because our taxable accounts are intended for heirs or charity, so TLH is of limited value. The tax deferred accounts don’t benefit from TLH, nor do the tax free accounts.

Doing this for $3k of losses isn’t worth the ER, but if I had some big capital gains that I couldn’t avoid, I’d consider it. Let us know how it works out OP.
Last edited by TomatoTomahto on Sun Oct 27, 2019 1:01 pm, edited 1 time in total.
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Re: I’m done with index funds

Post by whodidntante » Sun Oct 27, 2019 1:01 pm

I think it's great you found a strategy that works for you. But let me be the ghost of a non-religious winter holiday future.

Tax-loss harvesting while maintaining stock exposure does not necessarily eliminate taxes, especially so for you because you are HNW=rich and will usually have an extremely high income. So, if your manager is always selling losers and holding winners, you'll eventually run out of losers to sell. And the ones you have left may have done very well.

You'll eventually have a momentum portfolio, possibly with negative value loading, far different than the market. And with tax doom for selling it or very rich heirs. And there is no guarantee that the currently favorable tax treatment of LTCG will last your whole lifetime. But it will be OK because you're rich. If you want to help society, make a lot of money and pay a lot of tax.

Sorry that I'm not a more impressive ghost.

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