Changing allocation, but too much capital gain

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Topic Author
Peter_B
Posts: 6
Joined: Tue Sep 08, 2020 7:54 am

Changing allocation, but too much capital gain

Post by Peter_B »

My wife and I had an allocation of 75% equity in a taxable account with a full service broker. We recently became worried that this allocation was too aggressive (we are both semi-retired and are concerned about over-valuation, covid, the election, etc.) So we asked our broker to reduce the equity allocation, but selling stocks has generated quite a bit of capital gains. At present, I'd estimate we'll pay about $25K in taxes due to capital gains. In order to get to a conservative 20/80 allocation, that $25K would likely double to around $50K or $60K.

So we're in the process of transferring our account to Vanguard and Schwab (50% each) and I'm trying to decide whether to swallow those taxes to get all the way to 20/80. I would be buying mostly Treasuries and ultra-short-term bonds with the proceeds from selling stock.

The other idea I have is sticking with a more aggressive allocation, maybe 50/50, and buying some bear market funds in addition to Treasuries and ultra-short-term bonds. The bear market funds I'm looking at are HDGE, DWSH and TAIL. I'd likely have a 10-15% allocation to the bear market funds and expect to hold those funds for the next 3-6 months. Thank you in advance for any recommendations!
MikeG62
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Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: Changing allocation, but too much capital gain

Post by MikeG62 »

Not a lot of details to go on in your post. Would be helpful to know the dollars you are talking about in your taxable as well as tax deferred accounts (and your AA in the tax deferred account). Seems the 75% is just looking at the taxable account. Is that right? What is it overall.

Having said that, going to 20/80 is not just conservative, it's highly conservative. Going this heavy into fixed income (especially treasuries and ultra-short-term bonds) at current yields might be a questionable strategy.

Your thought to purchase bear market funds is tantamount to market timing. You really think you can do that?

I'll stop there and leave it to others to add more.
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Topic Author
Peter_B
Posts: 6
Joined: Tue Sep 08, 2020 7:54 am

Re: Changing allocation, but too much capital gain

Post by Peter_B »

Thanks for your post, Mike. Our two IRA accounts have a much more conservative allocation (20/80 for me, and 50/50 for my wife). But they are much smaller than the taxable account, so the overall allocation is still around 70/30. The taxable account is worth over $1M.

I think you're right that I'm flirting with market timing. In my mind, though, I'm thinking of it more in terms of short-term insurance. Once we get into 2020, I would sell the bear market funds and gradually start increasing the allocation to be more aggressive. I had also looked into inverse funds, like ProShares SH, but quickly found that those are designed to be held for longer than a day. So the bear market funds (and perhaps gold) seemed like better hedge options.
sailaway
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Joined: Fri May 12, 2017 1:11 pm

Re: Changing allocation, but too much capital gain

Post by sailaway »

Do either of you have 401k or other work related account?

What is the plan if you are wrong about an impending crash and it doesn't happen for another six months?
Topic Author
Peter_B
Posts: 6
Joined: Tue Sep 08, 2020 7:54 am

Re: Changing allocation, but too much capital gain

Post by Peter_B »

We had 401k accounts that are now IRA's, but they're a lot smaller than the taxable account.

I don't the a crash is the most likely scenario in the next few months, but am interested in using a portion of the proceeds from selling equity to hedge against one. The rest would go to short and intermediate Treasurys and ultra short corporate bonds. I would then plan to gradually increase the equity allocation next year.
Chris K Jones
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Joined: Sat Jan 20, 2018 6:54 pm

Re: Changing allocation, but too much capital gain

Post by Chris K Jones »

As a general rule, I don't time the market and it sounds like that is what you are doing. I wouldn't do that. I WOULD pick an asset allocation that I am comfortable with for the long haul. I would just pay the taxes necessary to get to that point. 50/50 is fine. 60/40 is my preferred. Best wishes.
dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: Changing allocation, but too much capital gain

Post by dbr »

It is likely that 20/80 is a huge over-reaction to the case, at least if it is very costly to make the change.

It is a given that stocks undergo sharp drops many times in an investing lifetime, but trying to time when those drops happen is very difficult to do and on the whole counter productive.

It does make sense to look at how much risk you need to take. If you are taking withdrawals now 40/60 or 50/50 is probably a good choice. This also depends on how much incentive you have to increase your wealth for heirs or charity. 20/80 is actually a risky allocation for the retiree unless you aren't planning to withdraw much for spending and don't care about growing your wealth.
rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: Changing allocation, but too much capital gain

Post by rkhusky »

You can make your IRA's 100% bonds. You can stop reinvesting dividends in your taxable stock funds and direct them to cash/bonds. You can sell taxable stock shares when there are losses.

Sounds like a pure market timing play, which may or may not work out. Usually it doesn’t, but you might get lucky.
Last edited by rkhusky on Tue Sep 08, 2020 9:59 am, edited 1 time in total.
Impatience
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Joined: Thu Jul 23, 2020 3:15 pm

Re: Changing allocation, but too much capital gain

Post by Impatience »

rkhusky wrote: Tue Sep 08, 2020 9:54 am You can make your IRA's 100% bonds. You can stop reinvesting dividends in your taxable stock funds and direct them to cash/bonds. You can sell taxable stock shares when there are losses.
I like this. You can make your tax advantaged accounts even more or entirely conservative. That will get your total AA (which is what matters) to your desired allocation without having to realize those cap gains. Also I would second what others have cautioned about overreacting toward conservatism/“hedging”. The time to hedge was a week ago. The time now is: let it ride.
Topic Author
Peter_B
Posts: 6
Joined: Tue Sep 08, 2020 7:54 am

Re: Changing allocation, but too much capital gain

Post by Peter_B »

Thank you Chris, dbr, rkhusky & Impatience. I think all of you gave me some very good advice.

I'm going to change my mindset and try to be less drastic about things... will aim for a 30/70 or 40/60 allocation. If I do buy any bear funds or gold, I'll keep that allocation under 10% and not get carried away!
medic
Posts: 119
Joined: Thu Jul 18, 2019 11:30 am

Re: Changing allocation, but too much capital gain

Post by medic »

Anytime your AA changes dramatically (>10%), you have to question if your estimate of your risk tolerance was wrong or if you're reacting the news. Sounds like the latter, especially given the reasons you list. You were perfectly fine with this AA over the summer and are likely reacting now due to the tech selloff in play over the last few days.

Another way to look at this, what's your portfolio size and will it support your lifestyle with the new projected returns of your new AA? If no, then you either need to get comfortable with a lower lifestyle or with more risk. If yes, then why were you so aggressive before? Also, you can shift some of the AA in taxable. Stay below your marginal tax cutoff, and depending on income, below phase outs for applicable deductions and Obamacare taxes.

Another alternative to reset your allocation, if you donate money or plan to, consider a donor advised fund. You can donate a load of appreciated stock to the fund, take the deduction this year, and then distribute the proceeds at some point in the future. Bundle a few years of donations into this one so itemizing makes sense.
Topic Author
Peter_B
Posts: 6
Joined: Tue Sep 08, 2020 7:54 am

Re: Changing allocation, but too much capital gain

Post by Peter_B »

medic: You're correct, I'm mostly changing the AA because of worries over the current environment. But until recently I didn't think much about allocation and let the full service brokerage handle our assets as they saw fit. So it had drifted higher without much thought about it on my part. In the long run, I know we do need more risk in the portfolio to support our expenses and lifestyle - so will probably need to get back to 60/40 or so. Thanks for your reply and tip on a donor advised fund!
jimkinny
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Joined: Sun Mar 14, 2010 1:51 pm

Re: Changing allocation, but too much capital gain

Post by jimkinny »

The current pricing is the market price. What do you know that has remained hidden from the markets?

Find an asset allocation that you can stick with without trying to figure out what might happen next month/year, because you will not beat the markets in the long term. You may guess right this time but it is just luck.

I would get away from from a full service broker but do it as tax efficiently as I could even if that took a year or two. You may feel differently though which would not be that unreasonable.
hudson
Posts: 3257
Joined: Fri Apr 06, 2007 9:15 am

Re: Changing allocation, but too much capital gain

Post by hudson »

Peter_B wrote: Tue Sep 08, 2020 8:10 am My wife and I had an allocation of 75% equity in a taxable account with a full service broker. We recently became worried that this allocation was too aggressive (we are both semi-retired and are concerned about over-valuation, covid, the election, etc.) So we asked our broker to reduce the equity allocation, but selling stocks has generated quite a bit of capital gains. At present, I'd estimate we'll pay about $25K in taxes due to capital gains. In order to get to a conservative 20/80 allocation, that $25K would likely double to around $50K or $60K.

So we're in the process of transferring our account to Vanguard and Schwab (50% each) and I'm trying to decide whether to swallow those taxes to get all the way to 20/80. I would be buying mostly Treasuries and ultra-short-term bonds with the proceeds from selling stock.

The other idea I have is sticking with a more aggressive allocation, maybe 50/50, and buying some bear market funds in addition to Treasuries and ultra-short-term bonds. The bear market funds I'm looking at are HDGE, DWSH and TAIL. I'd likely have a 10-15% allocation to the bear market funds and expect to hold those funds for the next 3-6 months. Thank you in advance for any recommendations!
Peter_B,

Around 2008, I moved from equities to fixed income until I got down to my "sleep level."
You may want to consider doing the same.
Now 12 or so years later, I'm still there at 0/100. I'm not recommending that for you; that's totally up to you.
Capital gains give me heartburn; if you decide to sell in taxable, maybe do 1/2 in 2020 and the other half in 2021.
Or 1/3 in 2020, 1/3 in 2021, and 1/3 in 2022?

Have you read any Boglehead books? Maybe consider these 3: viewtopic.php?p=5372762#p5372762
Topic Author
Peter_B
Posts: 6
Joined: Tue Sep 08, 2020 7:54 am

Re: Changing allocation, but too much capital gain

Post by Peter_B »

jimkinny & hudson: thanks for your replies... I agree with both of you that I should spread out the capital gains over the next year or two (even though I'm tempted to do it all in 2020!) I'll check out those books, Hudson. thank you
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