Buy-And-Hold vs Tax Loss Harvesting

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BolderBoy
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Buy-And-Hold vs Tax Loss Harvesting

Post by BolderBoy » Mon Oct 22, 2018 4:24 pm

A friend pointed out what seems to be opposing BH wisdoms:

1) "Harvest losses as they accrue".

2) "Buy and Hold forever".

Do these ideas conflict? Am I misunderstanding something?

Puzzled (not hard to do to me)
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

StrangePenguin
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Re: Buy-And-Hold vs Tax Loss Harvesting

Post by StrangePenguin » Mon Oct 22, 2018 4:31 pm

They are compatible because when we advocate Tax Loss Harvesting, we are advocating changing your position into something that is "nearly but not substantially" identical to your original position. We are not saying to get out of the market or engage in market timing. For example, you might Tax Loss Harvest a Total Stock index fund and immediately buy an S&P500 fund + Extended Market fund in its place. You will be holding more or less equivalent positions at the end, but they are different enough that the government will give you a tax break.

Tax Loss Harvesting is a mechanical thing you do to gain a tax advantage, without compromising your basic "buy and hold -- always be in the market" investing philosophy.

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JoMoney
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Re: Buy-And-Hold vs Tax Loss Harvesting

Post by JoMoney » Mon Oct 22, 2018 4:31 pm

"Harvest losses as they accrue". would also conflict with "buy low, sell high".
I'm pretty sure that people who advocate for tax loss harvesting aren't just selling, they suggest moving to an alternative asset that is expected to have equivalent returns going forward. Most seem to look for an asset that is as substantially equivalent as possible without running afoul of the IRS rules prohibiting such.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

le_sacre
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Re: Buy-And-Hold vs Tax Loss Harvesting

Post by le_sacre » Mon Oct 22, 2018 4:33 pm

I hope and am sure someone will correct me if I'm mistaken, but I think most BHs advocate TLH by using the proceeds from the sale to immediately purchase another security that is not "substantially identical", but is most likely part of a common TLH pair (e.g., two index funds that track similar but not identical indices, like total US market and S&P500).

Thus, you are never out of the market (i.e. you are still holding), but have harvested a capital loss that is useful at tax time.

alex_686
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Re: Buy-And-Hold vs Tax Loss Harvesting

Post by alex_686 » Mon Oct 22, 2018 4:35 pm

Yes and No. Think of it as "basic" verse "intermediate" investment theory and practice.

Bogleheads emphasis simplicity. Hence "Buy and Hold". Holding the "market basket" is a very efficient way to generate "economic" gain.

Tax Loss Harvesting is a active trading technique to generate "tax" gain. Active trading implies extra complexity. However, the extra complexity and divergence from the market basket is minimal.

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BolderBoy
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Re: Buy-And-Hold vs Tax Loss Harvesting

Post by BolderBoy » Mon Oct 22, 2018 4:45 pm

Thank you all. I'd forgotten those pieces of the puzzle. Just so much to remember...
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

retiredjg
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Re: Buy-And-Hold vs Tax Loss Harvesting

Post by retiredjg » Mon Oct 22, 2018 4:46 pm

It confused me at first as well. But as I learned more, it seemed to me that "buy and hold" does not have to mean "hold onto every share" forever. The real purpose of "buy and hold" is to avoid day trading and to avoid selling stocks in a market crash - the very worst possible time to sell.

People who are tax loss harvesting are usually reinvesting in the same asset class they just sold. The character of the portfolio does not change much. I see it as a different kind of "buy and hold".

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BolderBoy
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Re: Buy-And-Hold vs Tax Loss Harvesting

Post by BolderBoy » Mon Oct 22, 2018 5:35 pm

Thank you for the additional confirmation that TLH is a correct thing to do, when possible.

The reason the issue came up for my friend is that I am finishing up an addition to the Excel spreadsheet I use to take care of figuring my quarterly taxes and year-end tax planning. I was keeping him apprised of my progress in that regard. Heretofore I've only been using rough estimations of the effects of ST/LT CapGains / CapLosses on taxes due this year, ST/LT losses deductible this year and ST/LT loss carry forward amounts into next year.

I figured that since my Vanguard webpage provides all the data needed to do the specific calculations, I may as well be more precise about it with my spreadsheet. Finally, success!

(as an aside, I scoured the internet looking for Excel formulas to deal with this and finding none, spent the last few days creating them myself)
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

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