Specific Lot tracking for vanguard funds. How complicated?

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neurosphere
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Specific Lot tracking for vanguard funds. How complicated?

Post by neurosphere » Tue Jan 31, 2012 10:07 am

I have a new bond fund at Vanguard that I intend to keep as a sort of stash for e-fund money, and as a sweep account of sorts for the few shares of taxable international funds I own.

I'm reading up on the new law regarding post-2012 cost-basis reporting, which has me thinking about which cost-basis method I wish to use. I have always assumed I would just use average cost to keep things simple. I had some bad experiences with sales from several DRIP accounts I started when I was new to investing.

However, I figure that if I don't immediately reinvest the dividends from the bond fund, and instead put them into MM fund, I can reduce the number of transactions. Perhaps quarterly or twice a year, rather than monthly.

Does anyone have an opinion regarding average cost vs. specific lots for bond funds? Much ado about nothing? Will Vanguard keep good info for me forever? Or someday when I'm 84 years old will I need to dig up my 2012 annual statement to find out what my cost basis was for the $32 lot I just sold?

It seems I should select specific lots to preserve flexibility, but...

NS
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

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rob
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Re: Specific Lot tracking for vanguard funds. How complicate

Post by rob » Tue Jan 31, 2012 10:16 am

Many will disagree....
- Yes specific id is worth it
- No vanguard will not help - they will actually make life far harder due to their poor service in this area
- V will do nothing pre 2012 and as little as legally required for 2012 forward
- Yes, you will need to track the stuff forever
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

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Toons
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Re: Specific Lot tracking for vanguard funds. How complicate

Post by Toons » Tue Jan 31, 2012 10:16 am

I currently reinvest the dividends in a Vanguard Bond fund and have chose average cost as basis calculation.
Vanguard takes on the responsibility of calculating cost basis ,so that when I sell shares they report basis to me via
the 1099-B at end of year.

To answer your questions
Much ado about nothing?
I think Yes :D

Will Vanguard keep good info for me forever?
Yes :D
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Toons
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Re: Specific Lot tracking for vanguard funds. How complicate

Post by Toons » Tue Jan 31, 2012 10:19 am

rob wrote:Many will disagree....
- Yes specific id is worth it
- No vanguard will not help - they will actually make life far harder due to their poor service in this area
- V will do nothing pre 2012 and as little as legally required for 2012 forward
- Yes, you will need to track the stuff forever
From Vanguard Website

"Why you might want to use average cost

Simple to use. If your focus is on simplicity, the average cost method is easy to understand. It's automated, so you don't have to choose which shares to sell.

Less recordkeeping. You don't need to keep detailed records of all your share acquisitions and sales. Vanguard has complete average cost information for all mutual fund shares you own."
:peace
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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rob
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Re: Specific Lot tracking for vanguard funds. How complicate

Post by rob » Tue Jan 31, 2012 11:26 am

Toons wrote:
rob wrote:Many will disagree....
- Yes specific id is worth it
- No vanguard will not help - they will actually make life far harder due to their poor service in this area
- V will do nothing pre 2012 and as little as legally required for 2012 forward
- Yes, you will need to track the stuff forever
From Vanguard Website

"Why you might want to use average cost

Simple to use. If your focus is on simplicity, the average cost method is easy to understand. It's automated, so you don't have to choose which shares to sell.

Less recordkeeping. You don't need to keep detailed records of all your share acquisitions and sales. Vanguard has complete average cost information for all mutual fund shares you own."
:peace
Right... for average cost. My comments are about specific id. IMO it's a better method - at least for those that have or will have sizable taxable investments, but it's NOT easier.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

sscritic
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Re: Specific Lot tracking for vanguard funds. How complicate

Post by sscritic » Tue Jan 31, 2012 11:59 am

It's a bond fund. Why not have a little fun?

Reinvest dividends. Get checks. Write 10 checks a month. At the end of the year, you will have 120 sales to report on your schedule D (well, really on your form 8949). You will have gains and losses offsetting each other. Use average basis; note that the average basis will most likely be different at the time of each sale.* Since you just bought the fund, all the gains and losses will be short term, but next year most will be long term (FIFO) assuming you haven't spent all of your initial investment.

I did that for a couple of years (but not 10 checks a month). It helps to spice up your tax return. Go for it!

* If you want to have a lot of fun, see if you can duplicate the average cost at the time of each of your 120 sales. Trusting Vanguard will work, but that's not as much fun as doing it for yourself.

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neurosphere
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Re: Specific Lot tracking for vanguard funds. How complicate

Post by neurosphere » Tue Jan 31, 2012 12:11 pm

sscritic wrote:It's a bond fund. Why not have a little fun?
That's your idea of fun? :shock:

I am TEMPTED to use lot identification. I estimate (if I don't automatically reinvest dividends), that I can keep it down to 3-4 total transactions a year. Maybe I will always use nice round numbers for purchases/withdrawals to make it easier later. No 'odd lots'.

I can always switch to average cost in the future, right? :|

NS

P.S. Is it MORE complicated or LESS complicated that it's a tax-exempt state-specific muni fund?
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

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Re: Specific Lot tracking for vanguard funds. How complicate

Post by jebmke » Tue Jan 31, 2012 12:14 pm

neurosphere wrote: Maybe I will always use nice round numbers for purchases/withdrawals to make it easier later. No 'odd lots'.
It is no more or less complicated to use "odd" lots than round numbers. It all still has to get onto the tax form -- either keystrokes or download.
When you discover that you are riding a dead horse, the best strategy is to dismount.

sscritic
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Re: Specific Lot tracking for vanguard funds. How complicate

Post by sscritic » Tue Jan 31, 2012 12:55 pm

neurosphere wrote:
sscritic wrote:It's a bond fund. Why not have a little fun?
That's your idea of fun? :shock:

I am TEMPTED to use lot identification. I estimate (if I don't automatically reinvest dividends), that I can keep it down to 3-4 total transactions a year. Maybe I will always use nice round numbers for purchases/withdrawals to make it easier later. No 'odd lots'.
Now what would be really fun is using specific ID with a check. You write a check for $50, say, and then send Vanguard an email telling it which lot to sell to come up with the $50. The problem is that neither you nor Vanguard know what the price per share will be the day your check clears. In short, you can't use specific ID for fixed dollar amounts. This is something that has been bothering Doc - see this, for example,
http://www.bogleheads.org/forum/viewtop ... 9#p1272729

The point is that your nice round numbers have to be nice round numbers of shares for specific ID, not nice round numbers of dollars. Now I suppose if you had a lot that you had purchased for $10,000 that still had $9,000 in it, you would be able to sell $50 of the remaining $9,000, assuming the value didn't drop by 99.5% in a single day (that would take your balance down to $45). But Doc says that Vanguard won't even let you do that, and Rebecca Katz didn't dispute his assertion as I read the thread. [As always, I could have missed something and be wrong about all of this.]

brianH
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Re: Specific Lot tracking for vanguard funds. How complicate

Post by brianH » Tue Jan 31, 2012 1:17 pm

It's worth it...or it sure was for me at the end of last year when I sold some older, stinky lots for a loss instead of using AC which would've resulted in taxable gains. Since you need to send a letter to Vanguard explaining the lots you are selling out of, just hang on to that letter for later reference. I might also recommend, if at all possible, selling full lots to close them out. This is going to be much less of a PITA later on.

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neurosphere
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Re: Specific Lot tracking for vanguard funds. How complicate

Post by neurosphere » Tue Jan 31, 2012 1:32 pm

brianH wrote: I might also recommend, if at all possible, selling full lots to close them out.
I guess that's what I meant when I wrote 'even amounts'. To somehow make it easy to sell full lots when needed, perhaps by purchasing small enough lots that it would be rare to have to 'break it up' when selling?

NS
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

brianH
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Re: Specific Lot tracking for vanguard funds. How complicate

Post by brianH » Tue Jan 31, 2012 1:37 pm

neurosphere wrote:
brianH wrote: I might also recommend, if at all possible, selling full lots to close them out.
I guess that's what I meant when I wrote 'even amounts'. To somehow make it easy to sell full lots when needed, perhaps by purchasing small enough lots that it would be rare to have to 'break it up' when selling?

NS
A good idea. Also the option you mentioned to not reinvest divs helps keep things clean.

Where it gets messy is when VG automatically converts you to Admiral shares with a very small difference in basis.

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