Simplest TLH Strategy

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Simplest TLH Strategy

Post by MortgageOnBlack » Tue Feb 13, 2018 1:17 pm

My current employer doesn't offer a retirement plan. Besides maxing out my Vanguard IRA (ROTH) every year, I am forced to invest extra money in a taxable account. In a perfect world, I would have more tax-deferred space available where I can be 100% in the Vanguard LifeStrategy Growth Fund (AA: 80/20). Since this isn't an option, I have to place the more tax-efficeint Total Stock Market Fund (VTSMX) in Taxable and dice up my Tax-Deferred LifeStrategy Fund to reach my desired asset allocation (Note: although I prefer simplicity of one fund with no management, this is a good thing when I finally qualify for Admiral shares).

I have spent a good amount of time trying to better understand taxable accounts and tax loss harvesting. The point of my focus is to design a strategy I can stick with for the next 30+ years. Perhaps I'm overthinking it, but I'm not a fan of the complexity of owning an alternate fund and keeping track of dates to avoid wash-sales, etc...

How would this Tax Loss Harvest strategy serve me for the long term? Besides leaving money out of the market at certain points, any other unattended consequences?

1) Turn on Specific ID for investments made into Taxable - This will make selling specific shares easy.
2) Don't auto-invest Dividends - This will avoid triggering a wash-sale. Money will sit in Vanguard Settlement account until it becomes sizeable (atleast $500)
3) Invest every 31 days. I usually invest every month a set amount (currently $500 a month). Changing it to 31 days would allow me to sell specific lots without fear of having to sell more than necessary.
4) When I TLH, I will sell specific lots with losses into my Settlement Account. The money will be out of the market for 31 days, but will reinvest back into the same VTSMX fund.

Am I missing anything with this strategy? Anything else?


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Re: Simplest TLH Strategy

Post by climber2020 » Tue Feb 13, 2018 1:25 pm

MortgageOnBlack wrote:
Tue Feb 13, 2018 1:17 pm
4) When I TLH, I will sell specific lots with losses into my Settlement Account. The money will be out of the market for 31 days, but will reinvest back into the same VTSMX fund.
This could be a potential problem. Example:

Jan 1: market drops 20%. You sell VTSMX and put it into your settlement account.
Jan 2-4: market goes back up 25% and is at the original amount. Going forward, market either stays at this level or goes higher.

What you've done is sold at a loss and missed all the market gains that followed.

The way to avoid this is to find a fund that is similar but not identical to Vanguard Total Stock. Some good options are Vanguard 500 index and Vanguard Large Cap. When you tax loss harvest, instead of selling into your settlement fund, use that money to exchange into one of the alternative similar funds. That way if the market immediately goes back up, you haven't missed out on the gains. 31 days later you can either exchange back into the original fund if it makes sense to do so, or you can simply hold on to the new funds for the long term.

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Re: Simplest TLH Strategy

Post by livesoft » Tue Feb 13, 2018 3:00 pm

I think you are trying too hard. Just make it simple:

1. I'll TLH into another fund whenever I have a loss.

That's it. Done.
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