We’ve won the game...but how do we stop playing?

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simplesauce
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We’ve won the game...but how do we stop playing?

Post by simplesauce » Thu May 16, 2019 12:48 pm

Hi all. I love William Bernstein’s quote “If you’ve won the game, stop playing.” But here is the issue:

My grandmother has held seceral sector funds at Vanguard for decades (Healthcare, etc.) She has done extraordinarily well over many many years. (She has a very low portion in bonds. She is probably 80/20.)

As I’ve learned and adopted the Boglehead way, I’ve explained to her that I would prefer she hold Total Stock Market/Total Bond Market (I am not a fan of the sectors.) Or even sell the investments completely since she has won the game.

But her concern is taxes. If she sells, she will have a huge tax bill. Her preference is to continue holding these funds forever, and then give them to the family when she passes. As beneficiaries, there will be no tax consequence (correct?)

So how does she stop playing the game?

marcopolo
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Re: We’ve won the game...but how do we stop playing?

Post by marcopolo » Thu May 16, 2019 12:51 pm

simplesauce wrote:
Thu May 16, 2019 12:48 pm
Hi all. I love William Bernstein’s quote “If you’ve won the game, stop playing.” But here is the issue:

My grandmother has held seceral sector funds at Vanguard for decades (Healthcare, etc.) She has done extraordinarily well over many many years. (She has a very low portion in bonds. She is probably 80/20.)

As I’ve learned and adopted the Boglehead way, I’ve explained to her that I would prefer she hold Total Stock Market/Total Bond Market (I am not a fan of the sectors.) Or even sell the investments completely since she has won the game.

But her concern is taxes. If she sells, she will have a huge tax bill. Her preference is to continue holding these funds forever, and then give them to the family when she passes. As beneficiaries, there will be no tax consequence (correct?)

So how does she stop playing the game?
It's a nice pithy quote, but I don't think it really has any useful meaning.
What "game" are you supposed to stop playing? Life still happens.
A lot of people interpret this to mean "lower your exposure to equity risks", but then you are just taking on different kinds of risk, inflation being a significant one.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: We’ve won the game...but how do we stop playing?

Post by Grt2bOutdoors » Thu May 16, 2019 12:52 pm

simplesauce wrote:
Thu May 16, 2019 12:48 pm
Hi all. I love William Bernstein’s quote “If you’ve won the game, stop playing.” But here is the issue:

My grandmother has held seceral sector funds at Vanguard for decades (Healthcare, etc.) She has done extraordinarily well over many many years. (She has a very low portion in bonds. She is probably 80/20.)

As I’ve learned and adopted the Boglehead way, I’ve explained to her that I would prefer she hold Total Stock Market/Total Bond Market (I am not a fan of the sectors.) Or even sell the investments completely since she has won the game.

But her concern is taxes. If she sells, she will have a huge tax bill. Her preference is to continue holding these funds forever, and then give them to the family when she passes. As beneficiaries, there will be no tax consequence (correct?)

So how does she stop playing the game?
Listen to your grandmother. She won, but it's her money and her right to determine what is right for her. It doesn't matter what you prefer, it's not your money. If she passes the holdings to beneficiaries, under current law the beneficiaries will receive a stepped up basis in the equity - no capital gains taxes under federal law, can't comment on state taxes as they may be different.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

b42
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Re: We’ve won the game...but how do we stop playing?

Post by b42 » Thu May 16, 2019 12:52 pm

A small first step is to direct dividends to the Total Stock Market/Total Bond Market instead of the sector funds (assuming that is what she wants to do).

Second, does she have "space" available to sell any amount of funds at a 0% capital gains rate?

Third, does she donate to any charities/organizations? If they accept it, she could gift appreciated stock instead and hold onto the cash.

SovereignInvestor
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Re: We’ve won the game...but how do we stop playing?

Post by SovereignInvestor » Thu May 16, 2019 12:54 pm

This is a common issue. It doesn't have to be all or nothing. If one has 1M in various sectoe funds. Selling 1M may be equally foolish as selling none and remaining concentrated.

Maybe slowly scale out of them each year to limit the tax hit. Or just plan to reduce the concentrations by 50%.

Covered calls may also be helpful...but I don't think they're ETFS. I've been using them to scale out of individual stocks to index..if they rise enough then they are called which means they're high which offsets the tax hit. At a high enough price the gains likely offset tax hit.

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willthrill81
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Re: We’ve won the game...but how do we stop playing?

Post by willthrill81 » Thu May 16, 2019 12:55 pm

marcopolo wrote:
Thu May 16, 2019 12:51 pm
simplesauce wrote:
Thu May 16, 2019 12:48 pm
Hi all. I love William Bernstein’s quote “If you’ve won the game, stop playing.” But here is the issue:

My grandmother has held seceral sector funds at Vanguard for decades (Healthcare, etc.) She has done extraordinarily well over many many years. (She has a very low portion in bonds. She is probably 80/20.)

As I’ve learned and adopted the Boglehead way, I’ve explained to her that I would prefer she hold Total Stock Market/Total Bond Market (I am not a fan of the sectors.) Or even sell the investments completely since she has won the game.

But her concern is taxes. If she sells, she will have a huge tax bill. Her preference is to continue holding these funds forever, and then give them to the family when she passes. As beneficiaries, there will be no tax consequence (correct?)

So how does she stop playing the game?
It's a nice pithy quote, but I don't think it really has any useful meaning.
What "game" are you supposed to stop playing? Life still happens.
A lot of people interpret this to mean "lower your exposure to equity risks", but then you are just taking on different kinds of risk, inflation being a significant one.
+1

You can't know that you've "won the game" until you're dead.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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celia
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Re: We’ve won the game...but how do we stop playing?

Post by celia » Thu May 16, 2019 12:59 pm

I suggest she stops "playing the game" by not touching her investments any more, except for discontinuing re-investment of dividends/capital gains that the funds generate. Those can either be spent or be invested in something stable.

She could also donate the riskier assets to charity in-kind and not have to pay taxes on them. Let the charity sell them.

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whodidntante
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Re: We’ve won the game...but how do we stop playing?

Post by whodidntante » Thu May 16, 2019 12:59 pm

Derivatives solve this problem. She can take a short position to reduce or eliminate exposure to her long position. Find the most liquid options market among the same ETF or a competing ETF that has a better options market. And then buy a long-dated put option at a level of loss you can live with, or even one in the money if she can't stand any loss. She can also sell S&P500 futures to gain very cheap short exposure, but that would only cancel the market exposure, not the sector exposure. And she has to roll the position more often that way.

She can also outright short the underlying by borrowing shares and selling them immediately, but that would probably be the most expensive approach.

She should seek education on derivatives before using them, but honestly, it's not that bad if you are motivated and interested.

DonIce
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Re: We’ve won the game...but how do we stop playing?

Post by DonIce » Thu May 16, 2019 1:00 pm

willthrill81 wrote:
Thu May 16, 2019 12:55 pm
You can't know that you've "won the game" until you're dead.
Dying seems like a poor definition of winning.

pennywise
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Re: We’ve won the game...but how do we stop playing?

Post by pennywise » Thu May 16, 2019 1:01 pm

simplesauce wrote:
Thu May 16, 2019 12:48 pm
Hi all. I love William Bernstein’s quote “If you’ve won the game, stop playing.” But here is the issue:

My grandmother has held seceral sector funds at Vanguard for decades (Healthcare, etc.) She has done extraordinarily well over many many years. (She has a very low portion in bonds. She is probably 80/20.)

As I’ve learned and adopted the Boglehead way, I’ve explained to her that I would prefer she hold Total Stock Market/Total Bond Market (I am not a fan of the sectors.) Or even sell the investments completely since she has won the game.

But her concern is taxes. If she sells, she will have a huge tax bill. Her preference is to continue holding these funds forever, and then give them to the family when she passes. As beneficiaries, there will be no tax consequence (correct?)

So how does she stop playing the game?
Why should she? Sounds like you have an opinion and she has the money as well as the investment strategy she prefers. As long as she is capable of managing her financial affairs how she does so is really none of your business just because you think X is better than Y.

Not to mention, if the funds are not needed immediately the logic of leaving things alone to be passed on to beneficiaries with a favorable tax implication seems to be a pretty good plan.

In other words, if it ain't broke and it ain't yours to fix anyway, leave it alone.

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willthrill81
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Re: We’ve won the game...but how do we stop playing?

Post by willthrill81 » Thu May 16, 2019 1:03 pm

DonIce wrote:
Thu May 16, 2019 1:00 pm
willthrill81 wrote:
Thu May 16, 2019 12:55 pm
You can't know that you've "won the game" until you're dead.
Dying seems like a poor definition of winning.
I didn't say that dying was winning. I said that you can't know that you've "won the game" (i.e. didn't run out of needed money in your lifetime) until you're life is over.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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alpenglow
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Re: We’ve won the game...but how do we stop playing?

Post by alpenglow » Thu May 16, 2019 1:06 pm

I'd just leave it alone. Respect her wishes and be thankful for what you might inherit with stepped up basis.

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Time2Quit
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Re: We’ve won the game...but how do we stop playing?

Post by Time2Quit » Thu May 16, 2019 1:08 pm

simplesauce wrote:
Thu May 16, 2019 12:48 pm
As I’ve learned and adopted the Boglehead way, I’ve explained to her that I would prefer she hold Total Stock Market/Total Bond Market (I am not a fan of the sectors.) Or even sell the investments completely since she has won the game.
The Boglehead way is one way to reach your objective, there are many other methods that work. As you state, she has “won the game” doing something that works for her. Its her money let her be.
"It is not the man who has too little, but the man who craves more, that is poor." --Seneca

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gilgamesh
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Re: We’ve won the game...but how do we stop playing?

Post by gilgamesh » Thu May 16, 2019 1:09 pm

marcopolo wrote:
Thu May 16, 2019 12:51 pm
simplesauce wrote:
Thu May 16, 2019 12:48 pm
Hi all. I love William Bernstein’s quote “If you’ve won the game, stop playing.” But here is the issue:

My grandmother has held seceral sector funds at Vanguard for decades (Healthcare, etc.) She has done extraordinarily well over many many years. (She has a very low portion in bonds. She is probably 80/20.)

As I’ve learned and adopted the Boglehead way, I’ve explained to her that I would prefer she hold Total Stock Market/Total Bond Market (I am not a fan of the sectors.) Or even sell the investments completely since she has won the game.

But her concern is taxes. If she sells, she will have a huge tax bill. Her preference is to continue holding these funds forever, and then give them to the family when she passes. As beneficiaries, there will be no tax consequence (correct?)

So how does she stop playing the game?
It's a nice pithy quote, but I don't think it really has any useful meaning.
What "game" are you supposed to stop playing? Life still happens.
A lot of people interpret this to mean "lower your exposure to equity risks", but then you are just taking on different kinds of risk, inflation being a significant one.
Did you read what William Bernstein said along with that...it breaks it down into several risks, Inflation was easily dealt with. It was not a stand alone phrase.

DonIce
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Re: We’ve won the game...but how do we stop playing?

Post by DonIce » Thu May 16, 2019 1:10 pm

willthrill81 wrote:
Thu May 16, 2019 1:03 pm
I didn't say that dying was winning. I said that you can't know that you've "won the game" (i.e. didn't run out of needed money in your lifetime) until you're life is over.
Right, I got that. Personally though I'd rather be able to claim victory a little earlier and enjoy having won the game for a bit while still alive haha.

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willthrill81
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Re: We’ve won the game...but how do we stop playing?

Post by willthrill81 » Thu May 16, 2019 1:12 pm

gilgamesh wrote:
Thu May 16, 2019 1:09 pm
marcopolo wrote:
Thu May 16, 2019 12:51 pm
simplesauce wrote:
Thu May 16, 2019 12:48 pm
Hi all. I love William Bernstein’s quote “If you’ve won the game, stop playing.” But here is the issue:

My grandmother has held seceral sector funds at Vanguard for decades (Healthcare, etc.) She has done extraordinarily well over many many years. (She has a very low portion in bonds. She is probably 80/20.)

As I’ve learned and adopted the Boglehead way, I’ve explained to her that I would prefer she hold Total Stock Market/Total Bond Market (I am not a fan of the sectors.) Or even sell the investments completely since she has won the game.

But her concern is taxes. If she sells, she will have a huge tax bill. Her preference is to continue holding these funds forever, and then give them to the family when she passes. As beneficiaries, there will be no tax consequence (correct?)

So how does she stop playing the game?
It's a nice pithy quote, but I don't think it really has any useful meaning.
What "game" are you supposed to stop playing? Life still happens.
A lot of people interpret this to mean "lower your exposure to equity risks", but then you are just taking on different kinds of risk, inflation being a significant one.
Did you read what William Bernstein said along with that...it breaks it down into several risks, Inflation was easily dealt with. It was not a stand alone phrase.
How can we easily deal with inflation? Own a lot of TIPS and I-bonds?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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gilgamesh
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Re: We’ve won the game...but how do we stop playing?

Post by gilgamesh » Thu May 16, 2019 1:12 pm

alpenglow wrote:
Thu May 16, 2019 1:06 pm
I'd just leave it alone. Respect her wishes and be thankful for what you might inherit with stepped up basis.
This will be my advice to OP as well.

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gilgamesh
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Re: We’ve won the game...but how do we stop playing?

Post by gilgamesh » Thu May 16, 2019 1:12 pm

willthrill81 wrote:
Thu May 16, 2019 1:12 pm
gilgamesh wrote:
Thu May 16, 2019 1:09 pm
marcopolo wrote:
Thu May 16, 2019 12:51 pm
simplesauce wrote:
Thu May 16, 2019 12:48 pm
Hi all. I love William Bernstein’s quote “If you’ve won the game, stop playing.” But here is the issue:

My grandmother has held seceral sector funds at Vanguard for decades (Healthcare, etc.) She has done extraordinarily well over many many years. (She has a very low portion in bonds. She is probably 80/20.)

As I’ve learned and adopted the Boglehead way, I’ve explained to her that I would prefer she hold Total Stock Market/Total Bond Market (I am not a fan of the sectors.) Or even sell the investments completely since she has won the game.

But her concern is taxes. If she sells, she will have a huge tax bill. Her preference is to continue holding these funds forever, and then give them to the family when she passes. As beneficiaries, there will be no tax consequence (correct?)

So how does she stop playing the game?
It's a nice pithy quote, but I don't think it really has any useful meaning.
What "game" are you supposed to stop playing? Life still happens.
A lot of people interpret this to mean "lower your exposure to equity risks", but then you are just taking on different kinds of risk, inflation being a significant one.
Did you read what William Bernstein said along with that...it breaks it down into several risks, Inflation was easily dealt with. It was not a stand alone phrase.
How can we easily deal with inflation? Own a lot of TIPS and I-bonds?
Yes...he recommends even a certain percentage of gold if the monetary system collapses.

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mhadden1
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Re: We’ve won the game...but how do we stop playing?

Post by mhadden1 » Thu May 16, 2019 1:21 pm

whodidntante wrote:
Thu May 16, 2019 12:59 pm
Derivatives solve this problem. She can take a short position to reduce or eliminate exposure to her long position. Find the most liquid options market among the same ETF or a competing ETF that has a better options market. And then buy a long-dated put option at a level of loss you can live with, or even one in the money if she can't stand any loss. She can also sell S&P500 futures to gain very cheap short exposure, but that would only cancel the market exposure, not the sector exposure. And she has to roll the position more often that way.

She can also outright short the underlying by borrowing shares and selling them immediately, but that would probably be the most expensive approach.

She should seek education on derivatives before using them, but honestly, it's not that bad if you are motivated and interested.
Pretty salty stuff for my grandma.
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

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Re: We’ve won the game...but how do we stop playing?

Post by marcopolo » Thu May 16, 2019 1:31 pm

gilgamesh wrote:
Thu May 16, 2019 1:12 pm
willthrill81 wrote:
Thu May 16, 2019 1:12 pm
gilgamesh wrote:
Thu May 16, 2019 1:09 pm
marcopolo wrote:
Thu May 16, 2019 12:51 pm
simplesauce wrote:
Thu May 16, 2019 12:48 pm
Hi all. I love William Bernstein’s quote “If you’ve won the game, stop playing.” But here is the issue:

My grandmother has held seceral sector funds at Vanguard for decades (Healthcare, etc.) She has done extraordinarily well over many many years. (She has a very low portion in bonds. She is probably 80/20.)

As I’ve learned and adopted the Boglehead way, I’ve explained to her that I would prefer she hold Total Stock Market/Total Bond Market (I am not a fan of the sectors.) Or even sell the investments completely since she has won the game.

But her concern is taxes. If she sells, she will have a huge tax bill. Her preference is to continue holding these funds forever, and then give them to the family when she passes. As beneficiaries, there will be no tax consequence (correct?)

So how does she stop playing the game?
It's a nice pithy quote, but I don't think it really has any useful meaning.
What "game" are you supposed to stop playing? Life still happens.
A lot of people interpret this to mean "lower your exposure to equity risks", but then you are just taking on different kinds of risk, inflation being a significant one.
Did you read what William Bernstein said along with that...it breaks it down into several risks, Inflation was easily dealt with. It was not a stand alone phrase.
How can we easily deal with inflation? Own a lot of TIPS and I-bonds?
Yes...he recommends even a certain percentage of gold if the monetary system collapses.
So, TIPs, maybe some gold, derivatives, annuities, etc.
Hardly seems like you have "stopped playing the game".
Just maybe making different moves.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Sandtrap
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Re: We’ve won the game...but how do we stop playing?

Post by Sandtrap » Thu May 16, 2019 1:38 pm

simplesauce wrote:
Thu May 16, 2019 12:48 pm
Hi all. I love William Bernstein’s quote “If you’ve won the game, stop playing.” But here is the issue:

My grandmother has held seceral sector funds at Vanguard for decades (Healthcare, etc.) She has done extraordinarily well over many many years. (She has a very low portion in bonds. She is probably 80/20.)

As I’ve learned and adopted the Boglehead way, I’ve explained to her that I would prefer she hold Total Stock Market/Total Bond Market (I am not a fan of the sectors.) Or even sell the investments completely since she has won the game.

But her concern is taxes. If she sells, she will have a huge tax bill. Her preference is to continue holding these funds forever, and then give them to the family when she passes. As beneficiaries, there will be no tax consequence (correct?)

So how does she stop playing the game?
Grandmother has a good point. She's doing fine on her own. Loves the game. No reason to stop.
Wiki Bogleheads Wiki: Everything You Need to Know

Tamalak
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Re: We’ve won the game...but how do we stop playing?

Post by Tamalak » Thu May 16, 2019 1:39 pm

Your grandma kicked butt, she deserves to enjoy her victory, not be lectured by her upstart grandkid armed with a bumper sticker.

Unless you think her retirement will be endangered by her current AA, and it doesn't sound like it is, back off :sharebeer

SovereignInvestor
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Re: We’ve won the game...but how do we stop playing?

Post by SovereignInvestor » Thu May 16, 2019 1:41 pm

whodidntante wrote:
Thu May 16, 2019 12:59 pm
Derivatives solve this problem. She can take a short position to reduce or eliminate exposure to her long position. Find the most liquid options market among the same ETF or a competing ETF that has a better options market. And then buy a long-dated put option at a level of loss you can live with, or even one in the money if she can't stand any loss. She can also sell S&P500 futures to gain very cheap short exposure, but that would only cancel the market exposure, not the sector exposure. And she has to roll the position more often that way.

She can also outright short the underlying by borrowing shares and selling them immediately, but that would probably be the most expensive approach.

She should seek education on derivatives before using them, but honestly, it's not that bad if you are motivated and interested.
I think this violates IRS code. If you're hedging a long term positing with gains which mimics selling it..then you dont get benefits of the hedge or something like that. There's rules against this...

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Re: We’ve won the game...but how do we stop playing?

Post by KyleAAA » Thu May 16, 2019 1:41 pm

It doesn't sound like she wants to stop playing the game. I would leave it be. You are correct that heirs would get a step-up in basis when she passes, but depending on the size of the estate it may be subject to the estate tax.

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willthrill81
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Re: We’ve won the game...but how do we stop playing?

Post by willthrill81 » Thu May 16, 2019 1:45 pm

SovereignInvestor wrote:
Thu May 16, 2019 1:41 pm
whodidntante wrote:
Thu May 16, 2019 12:59 pm
Derivatives solve this problem. She can take a short position to reduce or eliminate exposure to her long position. Find the most liquid options market among the same ETF or a competing ETF that has a better options market. And then buy a long-dated put option at a level of loss you can live with, or even one in the money if she can't stand any loss. She can also sell S&P500 futures to gain very cheap short exposure, but that would only cancel the market exposure, not the sector exposure. And she has to roll the position more often that way.

She can also outright short the underlying by borrowing shares and selling them immediately, but that would probably be the most expensive approach.

She should seek education on derivatives before using them, but honestly, it's not that bad if you are motivated and interested.
I think this violates IRS code. If you're hedging a long term positing with gains which mimics selling it..then you dont get benefits of the hedge or something like that. There's rules against this...
I don't think so. There's nothing I'm aware of that prevents you from holding an asset while also using a futures contract to effectively zero out that position.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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simplesauce
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Re: We’ve won the game...but how do we stop playing?

Post by simplesauce » Thu May 16, 2019 1:46 pm

pennywise wrote:
Thu May 16, 2019 1:01 pm
simplesauce wrote:
Thu May 16, 2019 12:48 pm
Hi all. I love William Bernstein’s quote “If you’ve won the game, stop playing.” But here is the issue:

My grandmother has held seceral sector funds at Vanguard for decades (Healthcare, etc.) She has done extraordinarily well over many many years. (She has a very low portion in bonds. She is probably 80/20.)

As I’ve learned and adopted the Boglehead way, I’ve explained to her that I would prefer she hold Total Stock Market/Total Bond Market (I am not a fan of the sectors.) Or even sell the investments completely since she has won the game.

But her concern is taxes. If she sells, she will have a huge tax bill. Her preference is to continue holding these funds forever, and then give them to the family when she passes. As beneficiaries, there will be no tax consequence (correct?)

So how does she stop playing the game?
Why should she? Sounds like you have an opinion and she has the money as well as the investment strategy she prefers. As long as she is capable of managing her financial affairs how she does so is really none of your business just because you think X is better than Y.

Not to mention, if the funds are not needed immediately the logic of leaving things alone to be passed on to beneficiaries with a favorable tax implication seems to be a pretty good plan.

In other words, if it ain't broke and it ain't yours to fix anyway, leave it alone.
Solid answer, and probably the easiest solution for everyone. Some of these other answers seem too complicated.

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simplesauce
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Re: We’ve won the game...but how do we stop playing?

Post by simplesauce » Thu May 16, 2019 1:49 pm

Tamalak wrote:
Thu May 16, 2019 1:39 pm
Your grandma kicked butt, she deserves to enjoy her victory, not be lectured by her upstart grandkid armed with a bumper sticker.

Unless you think her retirement will be endangered by her current AA, and it doesn't sound like it is, back off :sharebeer
Cheers! Fair point!

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Re: We’ve won the game...but how do we stop playing?

Post by goodenyou » Thu May 16, 2019 2:13 pm

Success from passive and naive investing is success nonetheless. Many folks amass a fortune by living below their means and by being prodigious savers. Not everyone is in pursuit of the "Efficient Frontier"of investing like many Bogleheads. When family is involved , it can be very frustrating. It is often not your place to interject with proof that their investing style is unnecessary or foolish. I have several very smart people in my family that behave foolishly with investing. Stock picking, advisors (a "Guy"), foolish asset allocations etc. They avoid the subject with me because they don't want to feel foolish that they have been wasting money. They avoid the simple education of personal finance and pay a dear penalty for it. They will not suffer any consequences because they have way more than enough and live way below their means. They are helping their advisors retire. You shouldn't try to fix it.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

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Re: We’ve won the game...but how do we stop playing?

Post by Cody6136 » Thu May 16, 2019 2:20 pm

Tamalak wrote:
Thu May 16, 2019 1:39 pm
Your grandma kicked butt, she deserves to enjoy her victory, not be lectured by her upstart grandkid armed with a bumper sticker.

Unless you think her retirement will be endangered by her current AA, and it doesn't sound like it is, back off :sharebeer
Yes she did, and she is probably about the same age as my mother. My mom was ruled by fear, stuffed her late husband's winnings into savings accounts, where it was eroded by inflation. :oops:

They say that it takes three generations to squander wealth, but my family managed to do it in record time! :beer

ohai
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Re: We’ve won the game...but how do we stop playing?

Post by ohai » Thu May 16, 2019 2:29 pm

OP. Here is the important question - does she need the money? If she X million and needs that much or close to fund the lifestyle she wants, then she should de risk. However, if she has 5x more money than she actually will spend, then might as well let the market ride and make it an inheritance question.

SovereignInvestor
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Re: We’ve won the game...but how do we stop playing?

Post by SovereignInvestor » Thu May 16, 2019 2:32 pm

willthrill81 wrote:
Thu May 16, 2019 1:45 pm
SovereignInvestor wrote:
Thu May 16, 2019 1:41 pm
whodidntante wrote:
Thu May 16, 2019 12:59 pm
Derivatives solve this problem. She can take a short position to reduce or eliminate exposure to her long position. Find the most liquid options market among the same ETF or a competing ETF that has a better options market. And then buy a long-dated put option at a level of loss you can live with, or even one in the money if she can't stand any loss. She can also sell S&P500 futures to gain very cheap short exposure, but that would only cancel the market exposure, not the sector exposure. And she has to roll the position more often that way.

She can also outright short the underlying by borrowing shares and selling them immediately, but that would probably be the most expensive approach.

She should seek education on derivatives before using them, but honestly, it's not that bad if you are motivated and interested.
I think this violates IRS code. If you're hedging a long term positing with gains which mimics selling it..then you dont get benefits of the hedge or something like that. There's rules against this...
I don't think so. There's nothing I'm aware of that prevents you from holding an asset while also using a futures contract to effectively zero out that position.
https://www.thetaxadviser.com/issues/20 ... ry-05.html

SovereignInvestor
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Re: We’ve won the game...but how do we stop playing?

Post by SovereignInvestor » Thu May 16, 2019 2:33 pm

I trade futures, and at tax season every year Turbo tax asks me if it is a hedging transaction

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willthrill81
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Re: We’ve won the game...but how do we stop playing?

Post by willthrill81 » Thu May 16, 2019 2:37 pm

SovereignInvestor wrote:
Thu May 16, 2019 2:32 pm
willthrill81 wrote:
Thu May 16, 2019 1:45 pm
SovereignInvestor wrote:
Thu May 16, 2019 1:41 pm
whodidntante wrote:
Thu May 16, 2019 12:59 pm
Derivatives solve this problem. She can take a short position to reduce or eliminate exposure to her long position. Find the most liquid options market among the same ETF or a competing ETF that has a better options market. And then buy a long-dated put option at a level of loss you can live with, or even one in the money if she can't stand any loss. She can also sell S&P500 futures to gain very cheap short exposure, but that would only cancel the market exposure, not the sector exposure. And she has to roll the position more often that way.

She can also outright short the underlying by borrowing shares and selling them immediately, but that would probably be the most expensive approach.

She should seek education on derivatives before using them, but honestly, it's not that bad if you are motivated and interested.
I think this violates IRS code. If you're hedging a long term positing with gains which mimics selling it..then you dont get benefits of the hedge or something like that. There's rules against this...
I don't think so. There's nothing I'm aware of that prevents you from holding an asset while also using a futures contract to effectively zero out that position.
https://www.thetaxadviser.com/issues/20 ... ry-05.html
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ThrustVectoring
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Re: We’ve won the game...but how do we stop playing?

Post by ThrustVectoring » Thu May 16, 2019 2:44 pm

Does your grandmother intend to leave significant amounts of money to charity? If so, donating appreciated securities to a donor-advised fund or directly to charities can be a fantastic way to manage exposure while achieving charitable goals.

Alternatively, you can just manually market-cap weight the sector holdings. You pay more in expenses and have additional complexity, but Vanguard's sector funds are cheap enough that it'll likely work out better than realizing a bunch of capital gains. If she still has Roth or tax-deferred accounts, she can do some tax-free rebalancing there to improve things.

Perfect is kind of the enemy of good here, too. She's saved enough money and invested it in low-cost diversified stock funds. Over-weighting healthcare and other sectors isn't the best choice, but it's honestly not all that bad.
Current portfolio: 60% VTI / 40% VXUS

rasta
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Re: We’ve won the game...but how do we stop playing?

Post by rasta » Thu May 16, 2019 2:54 pm

it's not your call what your grandmother does with her money.

so she's not a boglehead, so what. many people do very well in the market owning individual stocks/sectors.

reln
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Re: We’ve won the game...but how do we stop playing?

Post by reln » Thu May 16, 2019 4:14 pm

Grt2bOutdoors wrote:
Thu May 16, 2019 12:52 pm
simplesauce wrote:
Thu May 16, 2019 12:48 pm
Hi all. I love William Bernstein’s quote “If you’ve won the game, stop playing.” But here is the issue:

My grandmother has held seceral sector funds at Vanguard for decades (Healthcare, etc.) She has done extraordinarily well over many many years. (She has a very low portion in bonds. She is probably 80/20.)

As I’ve learned and adopted the Boglehead way, I’ve explained to her that I would prefer she hold Total Stock Market/Total Bond Market (I am not a fan of the sectors.) Or even sell the investments completely since she has won the game.

But her concern is taxes. If she sells, she will have a huge tax bill. Her preference is to continue holding these funds forever, and then give them to the family when she passes. As beneficiaries, there will be no tax consequence (correct?)

So how does she stop playing the game?
Listen to your grandmother. She won, but it's her money and her right to determine what is right for her. It doesn't matter what you prefer, it's not your money. If she passes the holdings to beneficiaries, under current law the beneficiaries will receive a stepped up basis in the equity - no capital gains taxes under federal law, can't comment on state taxes as they may be different.
Sounds good to me.

dbr
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Re: We’ve won the game...but how do we stop playing?

Post by dbr » Thu May 16, 2019 4:53 pm

Aside from one attempt to actually answer the question (and I don't know enough about derivatives to comment) one of the rules of the game is that you have to pay to get out. But knowing that when you started, I don't see a problem with that. The more you have to pay the bigger you won. I don't have a specific solution other than to study your tax position and work through the lowest cost options.

Quaestner
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Re: We’ve won the game...but how do we stop playing?

Post by Quaestner » Thu May 16, 2019 5:15 pm

Maybe you and grandma share some quality time playing with some Monte Carlo sims?

If she's rich enough to whether the storm, and she really has the goal of helping out future generations, maybe 80/20 is indeed the correct asset allocation?

latak215
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Re: We’ve won the game...but how do we stop playing?

Post by latak215 » Thu May 16, 2019 8:17 pm

My vote is to your grandma

thx1138
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Re: We’ve won the game...but how do we stop playing?

Post by thx1138 » Thu May 16, 2019 8:39 pm

@SovereignInvestor and @whodidntante:

I think you may be talking past each other. Futures and options have different tax treatment but both can be used to hedge.

@SovereignInvestor is saying you can’t hedge without a tax hit from the offsetting gains being treated as ordinary income. That’s not universally true but it does apply to certain futures which appear to be the kind he’s familiar with. But you can hedge with options and not have that problem.

@whodidntante mentions both options and futures. Later says doesn’t think futures have a tax problem in response to @SovereignInvestor. Futures can in fact have a tax problem but more broadly you can hedge other ways without the ordinary income issue.

Suffice to say one probably shouldn’t get too fancy in their portfolio without clearly understanding the implications taxwise of what they are investing in nor should one assume two similar investment tools have the same tax treatment.

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Re: We’ve won the game...but how do we stop playing?

Post by dbr » Thu May 16, 2019 8:43 pm

simplesauce wrote:
Thu May 16, 2019 12:48 pm

Her preference is to continue holding these funds forever, and then give them to the family when she passes. As beneficiaries, there will be no tax consequence (correct?)
Well, we constantly talk about the supposed tax efficiency of equities in taxable accounts and one potentially big factor in that is the basis step-up, so actually that is one of the answers. The same thing can be done in effect by donating appreciated securities to a qualified charity. It is also true that securities gifted to someone could be sold by them and the gains taxed at their tax rates, if those are less.

Answering you actual question how to quit playing with equity risk and not pay taxes is a different discussion which a couple of posters are debating as we go on.
Last edited by dbr on Thu May 16, 2019 8:44 pm, edited 1 time in total.

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Re: We’ve won the game...but how do we stop playing?

Post by SevenBridgesRoad » Thu May 16, 2019 8:43 pm

marcopolo wrote:
Thu May 16, 2019 12:51 pm
It's a nice pithy quote, but I don't think it really has any useful meaning.
What "game" are you supposed to stop playing? Life still happens.
A lot of people interpret this to mean "lower your exposure to equity risks", but then you are just taking on different kinds of risk, inflation being a significant one.
Its more than a quote and I think it can be useful. It's just a metaphor, and a pretty good one at that. Metaphors are stories which help guide us. They are guides, not physics. And I think you are exactly right in the last part of your explanation.

Using this metaphor, I can think of my financial plan as a poker game. I like my pile of winnings. I've scooped them up and left the table. In reality, not totally...but I've taken enough off the table and turned it into a liability matched funds portion and two income annuities and VTINX (target date retirement income fund). OK, and a bunch of pesky individual stocks in taxable still leftover from my Fidelity advisory mistake days.

I think it's an excellent metaphor. Not perfect. Think poker game. Using Marcopolo's intepretation, I've lowered my risk substantially.
Retired 2018 | Every day I choose how I spend my energy | One Vanguard TDF except for bunch of individual stocks...still recovering from my Fidelity AUM days years ago | Now sleeping well at night

dbr
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Re: We’ve won the game...but how do we stop playing?

Post by dbr » Thu May 16, 2019 8:50 pm

SevenBridgesRoad wrote:
Thu May 16, 2019 8:43 pm
marcopolo wrote:
Thu May 16, 2019 12:51 pm
It's a nice pithy quote, but I don't think it really has any useful meaning.
What "game" are you supposed to stop playing? Life still happens.
A lot of people interpret this to mean "lower your exposure to equity risks", but then you are just taking on different kinds of risk, inflation being a significant one.
Its more than a quote and I think it can be useful. It's just a metaphor, and a pretty good one at that. Metaphors are stories which help guide us. They are guides, not physics. And I think you are exactly right in the last part of your explanation.

Using this metaphor, I can think of my financial plan as a poker game. I like my pile of winnings. I've scooped them up and left the table. In reality, not totally...but I've taken enough off the table and turned it into a liability matched funds portion and two income annuities and VTINX (target date retirement income fund). OK, and a bunch of pesky individual stocks in taxable still leftover from my Fidelity advisory mistake days.

I think it's an excellent metaphor. Not perfect. Think poker game. Using Marcopolo's intepretation, I've lowered my risk substantially.
Bernstein means that the game is amassing enough wealth to meet your objectives by investing in stocks and that when a person has accumulated the wealth he needs, then he shouldn't hold stocks anymore. I don't know why one needs a metaphor rather than just saying so in plain English.

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SevenBridgesRoad
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Re: We’ve won the game...but how do we stop playing?

Post by SevenBridgesRoad » Thu May 16, 2019 9:00 pm

dbr wrote:
Thu May 16, 2019 8:50 pm
SevenBridgesRoad wrote:
Thu May 16, 2019 8:43 pm
marcopolo wrote:
Thu May 16, 2019 12:51 pm
It's a nice pithy quote, but I don't think it really has any useful meaning.
What "game" are you supposed to stop playing? Life still happens.
A lot of people interpret this to mean "lower your exposure to equity risks", but then you are just taking on different kinds of risk, inflation being a significant one.

I think it's an excellent metaphor. Not perfect. Think poker game. Using Marcopolo's intepretation, I've lowered my risk substantially.
Bernstein means that the game is amassing enough wealth to meet your objectives by investing in stocks and that when a person has accumulated the wealth he needs, then he shouldn't hold stocks anymore. I don't know why one needs a metaphor rather than just saying so in plain English.
I'm certain some people don't benefit from metaphors. But it seems many (most?) people do. If you get a chance and are interested, read up on metaphors. Fascinating topic.
Retired 2018 | Every day I choose how I spend my energy | One Vanguard TDF except for bunch of individual stocks...still recovering from my Fidelity AUM days years ago | Now sleeping well at night

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Re: We’ve won the game...but how do we stop playing?

Post by WildBill » Thu May 16, 2019 9:00 pm

Howdy

Sounds like Grandma knows what she is doing. Maybe you could learn something from her.

Happy step ups on the basis

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

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Re: We’ve won the game...but how do we stop playing?

Post by arcticpineapplecorp. » Thu May 16, 2019 9:00 pm

b42 wrote:
Thu May 16, 2019 12:52 pm
A small first step is to direct dividends to the Total Stock Market/Total Bond Market instead of the sector funds (assuming that is what she wants to do).

Second, does she have "space" available to sell any amount of funds at a 0% capital gains rate?

Third, does she donate to any charities/organizations? If they accept it, she could gift appreciated stock instead and hold onto the cash.
To the OP: these are good recommendations above. Start there.

nice job b42.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: We’ve won the game...but how do we stop playing?

Post by paveldatsyuk44 » Thu May 16, 2019 9:01 pm

My interpretation of Bernstein’s metaphor, which i believe is correct, assumes an investor has a target nest egg. You run the simulations with your withdrawal amount/rate/etc, various AAs, lock in a few assumptions, and play it out for your desired timeframe. If you don’t run out of money before that timeframe, you “have won the game”. Yes, the world could blow up, markets can crash, but if these events are far worse than what we’ve already experienced, the last thing i’m worrying about is my portfolio.....

But a serious concern is assuming too much risk near or just after retirement. I believe this is what Bernstein is emphasizing.

hudson
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Re: We’ve won the game...but how do we stop playing?

Post by hudson » Thu May 16, 2019 9:06 pm

If I were in your shoes, I would wait until grandmother asked for my opinion or guidance.

skierrex
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Re: We’ve won the game...but how do we stop playing?

Post by skierrex » Thu May 16, 2019 9:12 pm

How many sectors do you need before you are invested in the total market?

GoldenFinch
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Re: We’ve won the game...but how do we stop playing?

Post by GoldenFinch » Thu May 16, 2019 9:14 pm

Your grandma sounds like a smart lady who has done really well. She may be a good example of someone who had a plan and “stayed the course” and it worked out for the best.

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