rebalancing - now or wait?

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joe_leviente
Posts: 5
Joined: Tue Apr 24, 2018 1:18 am

rebalancing - now or wait?

Post by joe_leviente » Thu Dec 06, 2018 9:34 pm

Hi everyone,

I am non-resident in my home country (the UK), and am living full-time in a different country.

When I set up my portfolio and decided on my desired allocations, I wasn't sure where I was going to retire. So, I thought I'd give myself a home-country bias just in case I did go back there to retire. My stocks were allocated 50% in VWRL (global), 25% in VUKE (FTSE 100) and 25% in VMID (FTSE 250).

Over this year, I decided that I didn't like having such a huge bias to a single country's market, and that I probably wouldn't retire in the UK anyway - so there was no need to risk that much on one country. I decided that when it came to my annual rebalancing at the end of the year (now), I would sell all of my UK stocks and put my whole stock allocation in the world stock ETF. Even after doing this, I would still have a home-country bias because my account and all the funds in it are bought in GBP. I figured it would be more stable than the emerging economy currency I'm currently being paid in.

However, a few silly people in the UK decided to have a little vote a couple of years ago which would drastically change the course of the country's future. And a few more silly people have been making a right dog's dinner of the whole thing over the past few months. So, at the moment I'm down quite a bit on the FTSE 100 and down even more on the FTSE 250.

The question now is, should I stick to my plan of rebalancing and take the losses for peace of mind - or should I stick to the original allocations and keep investing into the UK ETFs each month while they're down, then rebalance when they get back into the green? OR, third option, should I just keep investing into the global ETF and ignore the UK ETFs until they get themselves back into the green, then rebalance the account?

Thanks for your inputs!

bluquark
Posts: 92
Joined: Mon Oct 22, 2018 2:30 pm

Re: rebalancing - now or wait?

Post by bluquark » Thu Dec 06, 2018 10:33 pm

joe_leviente wrote:
Thu Dec 06, 2018 9:34 pm
The question now is, should I (1) stick to my plan of rebalancing and take the losses for peace of mind or should (2) I stick to the original allocations and keep investing into the UK ETFs each month while they're down, then rebalance when they get back into the green? OR, (3) third option, should I just keep investing into the global ETF and ignore the UK ETFs until they get themselves back into the green, then rebalance the account?
Options 2 and 3 are both market timing, so I wouldn't recommend them. You don't know how long you might be waiting.

Personally it sounds to me like you're considering this upside down. If it were in the green relative to your cost basis, then a giant rebalance would cause you to pay taxes. As it is, you get to register a loss which can be carried over indefinitely to eventually cancel out taxes of a future capital gain, so the tax consequence is neutral instead. (Unfortunately you cannot deduct the loss against your income as we can in the US so this cannot exactly be called a "tax loss harvest" as there is nothing to harvest, but it's at least tax neutral.)
Even after doing this, I would still have a home-country bias because my account and all the funds in it are bought in GBP.
No, you will have essentially no exposure to UK currency. You are holding a number of ETF shares, not a number of pounds. The number of pounds you see displayed on your Vanguard account page is a slightly fictional "mark-to-market" number -- the predicted amount of pounds you would receive if you sold all your shares at the latest market price. With very liquid securities it's almost as good as holding pounds, but still not the same, especially when it comes to currency risk.

joe_leviente
Posts: 5
Joined: Tue Apr 24, 2018 1:18 am

Re: rebalancing - now or wait?

Post by joe_leviente » Fri Dec 07, 2018 12:06 am

Thanks for the advice.

I might be misunderstanding this again, but I don't plan on selling any gains this year. When I sell the UK ETFs I'll put the proceeds into the world ETF (which is in the positive), and won't be selling any of it. So, I won't have any gains to be taxed on or any tax to be offset by taking the loss, and the loss will just be a loss.

My current tax status is such that I don't pay tax in the UK on gains or dividends made overseas (the funds are domiciled in Ireland), and I don't pay tax on dividends in my country of residence unless I bring them into the country (which I don't, I just reinvest them).

Basically as I understand it, there isn't a tax benefit of taking the loss - so is it still worth taking the loss just to avoid a potentially long wait until the markets come back up again?

bluquark
Posts: 92
Joined: Mon Oct 22, 2018 2:30 pm

Re: rebalancing - now or wait?

Post by bluquark » Fri Dec 07, 2018 12:22 am

Capital losses are one of the rare things in the tax code that doesn’t apply only to the current year. The loss can be carried over to a future tax year, and there doesn’t appear to be a time limit, so you could carry it all the way to retirement. Your tax software should keep track. See https://www.gov.uk/capital-gains-tax/losses
joe_leviente wrote:
Fri Dec 07, 2018 12:06 am
My current tax status is such that I don't pay tax in the UK on gains or dividends made overseas (the funds are domiciled in Ireland), and I don't pay tax on dividends in my country of residence unless I bring them into the country (which I don't, I just reinvest them).
Hmm OK, I just read this more closely, this seems unusual. So you couldn’t apply UK tax loss on any of the funds you’d be rebalancing into, ever? Are the funds you’re considering selling now also domiciled in Ireland, in which case perhaps Irish tax code would apply? Because this is a US-centric forum, maybe you’d get a better answer on this if you asked on a UK-centric financial forum, as this situation is perhaps over my head...

I think that regardless of the situation, if you’ve fully decided you want to change AA for life, you probably shouldn’t wait indefinitely, but move your AA to what you’re comfortable holding sooner rather than later. Perhaps there are some games you could play with choosing fund domicile to make sure you do so in the most tax-efficient manner, though.

joe_leviente
Posts: 5
Joined: Tue Apr 24, 2018 1:18 am

Re: rebalancing - now or wait?

Post by joe_leviente » Fri Dec 07, 2018 3:01 am

OK thanks.

I agree - regardless of whether or not there will be a tax benefit to selling, it should be the underlying philosophy that guides the decision.

DJN
Posts: 163
Joined: Mon Nov 20, 2017 12:30 am

Re: rebalancing - now or wait?

Post by DJN » Fri Dec 07, 2018 3:14 am

Hi,
Consideration of your current country of residence seems important. I am not in my home country either but like you I am aware of considerations of residency were I to return there. Your current bias to the UK doesn't reflect a diverse folio and I would just re evaluate and consider a folio that is diversified and would suit your current and next location. The tax position in your current and next locations are most important unless you are tied to the UK tax system. I couldn't find a mention of your age and I would carefully consider your next move in the context of capital preservation if you are close to retirement whatever advice you get about staying the course.
good luck,
DJN

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