What should I sell - need advice?

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sperry8
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What should I sell - need advice?

Post by sperry8 » Sat Apr 13, 2019 9:27 pm

Hello,

My AA calls for 70/30. Due to the run up in equities, I'm now at ~75/25. That's too much so I want to take 5% off the table.

I was thinking of selling my S&P 500 Admiral Index fund. However, it has ~$300,000 in LT cap gains so I'll owe quite the taxes. Not complaining, just saying.

Alternatively, I could sell VGHAX (Healthcare Admiral Fund). I only have ~$125,000 in LT cap gains on this fund. Either sale will culminate in me getting to my AA of 70/30.

My hesitation in selling VGHAX is that it has underperformed the past ten years and the S&P 500 has outperformed. Since I've learned that sectors don't always lead - it would seem to me the S&P 500 should be due to trail other sectors over the next 10 years (it seems unlikely to continue to be the top performer). Of course, I don't know that Healthcare beats it - but something will. Also, I've learned over the past downturns that VGHAX holds up better than the S&P 500 during downturns. Having a ballast in my portfolio is always nice.

I've held both funds since for ~20 years... but something needs to be sold.

Is it best to sell the S&P 500 fund (taking profits?) and just bite the bullet on the taxes? Or should I sell the fund with the smallest unrealized cap gains (also note that the reason VGHAX has so little unrealized cap gains is it pays out cap gains each year... and thus realizes them. It's tax cost ratio is terrible). So maybe even though I consider it a ballast, it is really costing me the same in taxes (or worse) than the S&P500 Index fund.

Thanks for your thoughts.
BH contest results: 2018: #150 of 493 | 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

Goal33
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Re: What should I sell - need advice?

Post by Goal33 » Sat Apr 13, 2019 9:33 pm

What’s your income / tax bracket? Pretty amazing to read you’d have 300k in gains to rebalance down 5%. Do you have a ~20 million dollar portfolio?
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arcticpineapplecorp.
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Re: What should I sell - need advice?

Post by arcticpineapplecorp. » Sat Apr 13, 2019 9:41 pm

Other options are:

1. let the market rebalance for you (in the next decline, your AA may reduce somewhat if not entirely)
2. add new money to the asset class (bonds) that's underweighted according to your AA.

You do realize that since stocks rise more than bonds generally speaking, you'll have to keep rebalancing out of stocks? This is not a once and one problem. So you will have to get used to rebalancing periodically if you intend to maintain your AA. You have to sell what's gone up or buy that which has gone down (or not gone up nearly as much).

An unrebalanced portfolio naturally drifts into more risky allocation over time because stocks gain so much more than bonds over time.

If you must sell something, I say sell that which is not as diversified. The health care fund is a sector bet. It may underperform the market. You know the S&P500 will not underperform the market, since it is the market.

William Sharpe has said that everyone knows that in real estate the three most important things are "location, location, location", but the three most important things in investing are "diversification, diversification, diversification". Keep your investments diversified and don't take sector bets if possible. The market includes all sectors, so you've already got it if you own the market.
"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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Stinky
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Re: What should I sell - need advice?

Post by Stinky » Sat Apr 13, 2019 9:49 pm

For future reference -

If you’re currently reinvesting dividends and capital gains distributions back into the fund that generated them, I suggest that you instead direct those items into your fixed income bucket.

This won’t help your current situation, but will help to keep you in better balance going forward. That is, assuming that stocks continue to outperform fixed income.
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sperry8
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Re: What should I sell - need advice?

Post by sperry8 » Sat Apr 13, 2019 9:53 pm

arcticpineapplecorp. wrote:
Sat Apr 13, 2019 9:41 pm
Other options are:

1. let the market rebalance for you (in the next decline, your AA may reduce somewhat if not entirely)
2. add new money to the asset class (bonds) that's underweighted according to your AA.

You do realize that since stocks rise more than bonds generally speaking, you'll have to keep rebalancing out of stocks? This is not a once and one problem. So you will have to get used to rebalancing periodically if you intend to maintain your AA. You have to sell what's gone up or buy that which has gone down (or not gone up nearly as much).

An unrebalanced portfolio naturally drifts into more risky allocation over time because stocks gain so much more than bonds over time.

If you must sell something, I say sell that which is not as diversified. The health care fund is a sector bet. It may underperform the market. You know the S&P500 will not underperform the market, since it is the market.

William Sharpe has said that everyone knows that in real estate the three most important things are "location, location, location", but the three most important things in investing are "diversification, diversification, diversification". Keep your investments diversified and don't take sector bets if possible. The market includes all sectors, so you've already got it if you own the market.
Exactly. I understand that rebalancing needs to occur periodically to stay at one's AA. I do not re-invest cap gains/dividends (use the cash proceeds) so while the market has blown up over the past 10 years, my AA hasn't gotten too out of whack. But now that it's 75/25 I'm starting to get "uncomfortable". I realize I could "wait" for the downturn to change my AA back to 70/30 (this happened last winter in fact). But it seems prudent to do it myself.

So your advice has nothing to do with taxes and everything to do with the "bet" I've placed. I can hear your argument. It is a bet I placed 20 years ago and while the past 10 haven't worked, since inception (~20 years ago) it's been a winning bet. I'm still up vs the S&P 500 since I acquired it. VGHAX is (or perhaps was) a heck of a fund back then. Maybe it's time to remove said bet.

Should I be considering anything else when deciding to sell - or solely the fact that Bogleheads prefer index funds? For example, higher unrealized cap gains, S&P 500 high in comparison to everything else, Health Care Admiral underperforming for past 10 years and provides ballast during downturns, etc?
BH contest results: 2018: #150 of 493 | 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

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Re: What should I sell - need advice?

Post by Lafder » Sat Apr 13, 2019 10:36 pm

Can you rebalance within retirement accounts so capital gains taxes are not an issue?

I agree with the question asked above, if you have to sell with 300k in capital gains to change your AA by 5%, your entire portfolio is large enough you may reconsider your AA, or be sure you are calculating capital gains correctly. :)

If you MUST sell one of those to rebalance, I would go with the lower capital gains tax option.

lafder

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Re: What should I sell - need advice?

Post by ohai » Sat Apr 13, 2019 10:40 pm

I think he means that the fund overall has $300k in capital gains. Anyway, I don't think it's a big deal 70/30 or 75/25... it sounds like the same thing to me. You can just put any future savings into bonds, and you'll get back to 70/30 in no time. Also, don't reinvest dividends in the same fund - send them to your bank account and put them somewhere else.

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Re: What should I sell - need advice?

Post by grabiner » Sun Apr 14, 2019 10:56 am

I use a 5% tolerance band. Thus, according to my Investment Policy Statement, if I went outside the band and needed to sell in a taxable account, I would only sell back to the edge of the band, not the target. If your 70/30 has become 77/23, then selling back to 75/25 will reduce the tax bill. (This has never happened to me in 22 years of taxable investing, although I came close with Emerging Markets Index in 2007.)

If you do sell. I would suggest selling the healthcare fund, because it is costing you every year to continue to hold it. If you want to hold the fund, it's better in an IRA. Alternatively, if you want to hold a separate healthcare fund in your taxable account, you can use an ETF VHT. See Paying a tax cost to switch funds on the wiki; it might actually be a net benefit to switch the actively managed healthcare fund to the ETF, paying tax on all of the gains.
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delamer
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Re: What should I sell - need advice?

Post by delamer » Sun Apr 14, 2019 12:36 pm

You have set this decision up as an either/or.

Why not sell some of both positions?

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arcticpineapplecorp.
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Re: What should I sell - need advice?

Post by arcticpineapplecorp. » Sun Apr 14, 2019 5:44 pm

sperry8 wrote:
Sat Apr 13, 2019 9:53 pm
So your advice has nothing to do with taxes and everything to do with the "bet" I've placed. I can hear your argument. It is a bet I placed 20 years ago and while the past 10 haven't worked, since inception (~20 years ago) it's been a winning bet. I'm still up vs the S&P 500 since I acquired it. VGHAX is (or perhaps was) a heck of a fund back then. Maybe it's time to remove said bet.

Should I be considering anything else when deciding to sell - or solely the fact that Bogleheads prefer index funds? For example, higher unrealized cap gains, S&P 500 high in comparison to everything else, Health Care Admiral underperforming for past 10 years and provides ballast during downturns, etc?
This post has been interesting. I wasn't aware of the returns over the past 10 years. I owned this fund when I started investing in 1998 and exchanged it for S&P500 a couple years later when learning about diversification and then eventually for total stock market index fund. Now and again I'd read from bogleheads about how well this fund has done for them and I had mild regret not holding it, though it was a very small amount investing then and I would have had to keep adding to it, which I had already been sold on the notion of diversification.

Still, though the fund perhaps hasn't done as well as you expected of late, it hasn't underperformed the total stock market over the last 10 years. It's edged it out:
4/14/09 - 4/14/19 starting $10,000 investment became:
total stock market : $42,100.28
health care fund: $42,857.56

so you weren't rewarded for the extra risk you took over the past 10 years.

source:
https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D

But if you had it over the past 20 years...

4/14/99 - 4/14/19 starting $10,000 investment became:
total stock market : $35,209.10
health care fund: $82,196.45

source: https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D

I'd say congratulations are in order. Time to take some winnings off the table. 15% or 20% of long term capital gains taxes is not the end of the world...likely lower than taxes on your ordinary income, right?

be sure to read the wiki to know how much you'll pay:

https://www.bogleheads.org/wiki/Capital ... stribution

as well as when not to harvest gains:
https://www.bogleheads.org/wiki/Tax_gain_harvesting
"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: What should I sell - need advice?

Post by drk » Sun Apr 14, 2019 6:03 pm

sperry8 wrote:
Sat Apr 13, 2019 9:27 pm
My hesitation in selling VGHAX is that it has underperformed the past ten years and the S&P 500 has outperformed. Since I've learned that sectors don't always lead - it would seem to me the S&P 500 should be due to trail other sectors over the next 10 years (it seems unlikely to continue to be the top performer).
The bolded phrase is not true. Nothing mandates that some sectors will perform better than others, or that any given sector will occasionally outperform the others. On top of that, VGHAX is an actively managed fund focused on healthcare companies, so there's even less of a guarantee that it will have predictable performance relative to the S&P 500.

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Re: What should I sell - need advice?

Post by sperry8 » Wed Apr 17, 2019 12:32 pm

ohai wrote:
Sat Apr 13, 2019 10:40 pm
I think he means that the fund overall has $300k in capital gains. Anyway, I don't think it's a big deal 70/30 or 75/25... it sounds like the same thing to me. You can just put any future savings into bonds, and you'll get back to 70/30 in no time. Also, don't reinvest dividends in the same fund - send them to your bank account and put them somewhere else.
Yes, that is correct. $300k in cap gains overall for the S&P500 fund. Total assets in that fund are larger.
grabiner wrote:
Sun Apr 14, 2019 10:56 am
I use a 5% tolerance band. Thus, according to my Investment Policy Statement, if I went outside the band and needed to sell in a taxable account, I would only sell back to the edge of the band, not the target. If your 70/30 has become 77/23, then selling back to 75/25 will reduce the tax bill. (This has never happened to me in 22 years of taxable investing, although I came close with Emerging Markets Index in 2007.)

If you do sell. I would suggest selling the healthcare fund, because it is costing you every year to continue to hold it. If you want to hold the fund, it's better in an IRA. Alternatively, if you want to hold a separate healthcare fund in your taxable account, you can use an ETF VHT. See Paying a tax cost to switch funds on the wiki; it might actually be a net benefit to switch the actively managed healthcare fund to the ETF, paying tax on all of the gains.
Thank you for those links. In my case I am living in Florida (a tax free State) but don't anticipate staying here long term. So rebalancing now (harvesting gains) at least doesn't incur State taxes today. In the future any sales would.
delamer wrote:
Sun Apr 14, 2019 12:36 pm
You have set this decision up as an either/or.

Why not sell some of both positions?
Agreed. I've considered/am considering this as well. I suppose part of my issue/desire is attempting to remove the fund that has gone up the most and is basically at all time highs (S&P500). Getting to my AA is a very boglehead thing to do - but since I should sell to stay true to being a boglehead, I have to figure out the best thing to sell. On the surface it appears to me selling what is up most is the smartest thing to do - but of course that means I incur the most taxable gains. Which may not be the smartest thing to do.
arcticpineapplecorp. wrote:
Sun Apr 14, 2019 5:44 pm
sperry8 wrote:
Sat Apr 13, 2019 9:53 pm
So your advice has nothing to do with taxes and everything to do with the "bet" I've placed. I can hear your argument. It is a bet I placed 20 years ago and while the past 10 haven't worked, since inception (~20 years ago) it's been a winning bet. I'm still up vs the S&P 500 since I acquired it. VGHAX is (or perhaps was) a heck of a fund back then. Maybe it's time to remove said bet.

Should I be considering anything else when deciding to sell - or solely the fact that Bogleheads prefer index funds? For example, higher unrealized cap gains, S&P 500 high in comparison to everything else, Health Care Admiral underperforming for past 10 years and provides ballast during downturns, etc?
This post has been interesting. I wasn't aware of the returns over the past 10 years. I owned this fund when I started investing in 1998 and exchanged it for S&P500 a couple years later when learning about diversification and then eventually for total stock market index fund. Now and again I'd read from bogleheads about how well this fund has done for them and I had mild regret not holding it, though it was a very small amount investing then and I would have had to keep adding to it, which I had already been sold on the notion of diversification.

Still, though the fund perhaps hasn't done as well as you expected of late, it hasn't underperformed the total stock market over the last 10 years. It's edged it out:
4/14/09 - 4/14/19 starting $10,000 investment became:
total stock market : $42,100.28
health care fund: $42,857.56

so you weren't rewarded for the extra risk you took over the past 10 years.

source:
https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D

But if you had it over the past 20 years...

4/14/99 - 4/14/19 starting $10,000 investment became:
total stock market : $35,209.10
health care fund: $82,196.45

source: https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D

I'd say congratulations are in order. Time to take some winnings off the table. 15% or 20% of long term capital gains taxes is not the end of the world...likely lower than taxes on your ordinary income, right?

be sure to read the wiki to know how much you'll pay:

https://www.bogleheads.org/wiki/Capital ... stribution

as well as when not to harvest gains:
https://www.bogleheads.org/wiki/Tax_gain_harvesting
Yes, thanks. HC is an excellent fund although as it's grown and attracted more assets its performance has come down. I thought it had underperformed the S&P500 index (and by a lot). But your numbers show that's not the case. I was likely looking at 3/5/10 yr returns which may not include reinvested dividends. I should check M* like you did to be sure. Assuming your data is correct it may shift my thinking. Which is currently that I prefer to sell what is up the most. If HC outperformed the S&P500 over the past 10 years while also having lower unrealized cap gains taxes and costs more to hold (due to annual ST & LT cap gains distributions making it have a harsh tax cost ratio) then it becomes the no brainer to get me back to my AA.
drk wrote:
Sun Apr 14, 2019 6:03 pm
sperry8 wrote:
Sat Apr 13, 2019 9:27 pm
My hesitation in selling VGHAX is that it has underperformed the past ten years and the S&P 500 has outperformed. Since I've learned that sectors don't always lead - it would seem to me the S&P 500 should be due to trail other sectors over the next 10 years (it seems unlikely to continue to be the top performer).
The bolded phrase is not true. Nothing mandates that some sectors will perform better than others, or that any given sector will occasionally outperform the others. On top of that, VGHAX is an actively managed fund focused on healthcare companies, so there's even less of a guarantee that it will have predictable performance relative to the S&P 500.
I agree with you, surely there is no mandate. But sectors simply do not lead over time. Things shift. Sometimes Growth beats Value. Other times Value beats Growth. Sometimes domestic beats foreign and other times vice versa. My point is - the S&P 500 has led for 10 years. Could it continue for longer? Absolutely. But the shift will come. When? Nobody knows. But I guarantee that it will fail eventually and something else (foreign, e.g.,) will have it's day in the sun. Just seemed prudent to sell on the way up rather than on the way down. But as the prior poster is making me aware, it may be that Health Care has outperformed the S&P500 in which case it would be HC that I'd prefer to sell so I can rebalance.

One theme I'm noticing on this thread is that most people do not rebalance to get back to their AA. I'm surprised to hear it. I too do not reinvest dividends, but with this 10 year run up even that was not enough to keep my AA stable. Everyone here seems content to allow their AA to drift substantively knowing the next bear will "fix" it. But my AA was reset after 08/09 (prior I was ~80% equities) and had trouble sleeping at nights. Getting back down to 70% allowed me much less stress. Now sitting at 75% and rising, I find that "anxiety" creeping back in. Isn't the point of a setting an AA to allow us to sleep at night and stay the course? It's interesting to see you all just "let it ride" and let bear markets reset for you. As long as you can stay the course I suppose it doesn't matter at the end of the day, but is it also true you don't have sleepless nights during said bear? Are you all so confident believing that when the next bear hits and takes your AA lower that it will bounce back during the next bull? I'm jealous of such zen centeredness if so.
BH contest results: 2018: #150 of 493 | 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

dh
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Re: What should I sell - need advice?

Post by dh » Wed Apr 17, 2019 12:44 pm

It sounds as if you are intent on rebalancing as you are 5% off your IPS target. It seems that you have a great deal of exposure to stocks in your taxable accounts. There are significant advantages by retaining your equities in taxable (possible TLH, long cap gains taxes, lower dividend taxes, etc.) and then selling equities for fixed income in your tax deferred accounts to hit your IPS target.

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Re: What should I sell - need advice?

Post by sperry8 » Wed Apr 17, 2019 10:50 pm

dh wrote:
Wed Apr 17, 2019 12:44 pm
It sounds as if you are intent on rebalancing as you are 5% off your IPS target. It seems that you have a great deal of exposure to stocks in your taxable accounts. There are significant advantages by retaining your equities in taxable (possible TLH, long cap gains taxes, lower dividend taxes, etc.) and then selling equities for fixed income in your tax deferred accounts to hit your IPS target.
I don't have much in my tax deferred accounts. A very small amount.

As for my intent, bogleheads and others have taught me to rebalance to stay at AA. I continue to be surprised by this thread which seems to be offering me advice counter to what I've read over the years here on Bogleheads.
BH contest results: 2018: #150 of 493 | 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

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