I’m done with index funds

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inbox788
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Re: I’m done with index funds

Post by inbox788 » Fri Nov 01, 2019 12:32 pm

nedsaid wrote:
Fri Nov 01, 2019 12:26 pm
alex_686 wrote:
Fri Nov 01, 2019 12:11 pm
I have seen this work first hand, and it worked year after year, beating the fees. Now, this was with a portfolio with massive concentrated low-basis stocks, so it was a little like shooting fish in a barrel.
If you sell a stock at a loss, don't you at some point have to buy something to replace it?
What are we talking about here? Aren't these opposite, where low cost basis is high tax cost when selling for a profit not loss?

Can you provide example of how this benefit works (shoot a few fish)? Does it depend on new money or can you repeat it over and over? I seem to be missing something.

If I bought $10,000 Amazon 5 years ago and it's now $50k, what can you do with it?
FWIW, 5 year MSFT +200%, AAPL+125%, GOOGL +120%, FB +150%, AMZN +500%, so you wouldn't have any TLH in this portion of your portfolio in 2019 and I doubt this nearly 1/3 market cap of the SP500 will have any TLH opportunity for quite a while.

https://www.cnbc.com/2019/06/26/a-group ... arket.html

(DIS +40%)
viewtopic.php?f=1&t=293531&start=150#p4819329

Correction. Top 10 stocks in SP500 is 22.7% market cap weight ( https://investor.vanguard.com/etf/profile/VOO ). Quoted article had to do with SP500 gains. Scanned the article and was puzzling seeing DIS in the top 5 let alone top 10. Here's 6-10: BRK +50, JPM+110, JNJ +20 , PG +40, XOM -25

So with XOM and occasionally with the rest, there was some TLH opportunity there, but with cost basis reduced and significant apperciation, I don't see how you can find much more without a huge drop. Even market corrections of 10 or 20% won't trigger further opportunities in most of these megacaps.

wolf359
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Re: I’m done with index funds

Post by wolf359 » Fri Nov 01, 2019 2:46 pm

H-Town wrote:
Tue Oct 29, 2019 3:56 pm
michaeljmroger wrote:
Sun Oct 27, 2019 11:27 am
After doing quite a lot of research, I’ve decided to stop using low-cost index funds and switch to a separately managed account. This goes against the Bogleheads investment philosophy and it took me a long time to admit it was the right thing to do for me as I was genuinely convinced and passionate about the Bogleheads approach. Let me explain why I’m making the switch.

As a HNW (and presumably UHNW in the future if all goes well), I’m facing “issues” most Bogleheads don’t have to think about. For instance, I’ll likely have 7-figure capital gains to deal with in a few years, so it’s crucial for me to find ways to mitigate the upcoming taxes.

By using a separately managed account (SMA), I can roughly replicate the S&P 500 by holding individual securities rather than a single fund. The benefit is that the tax-loss harvesting opportunities are potentially immense, and they can greatly reduce my future capital gain taxes (for the record, you can only offset $3k of income, but there’s no limit in the amount of capital gains you can offset).

This strategy comes at a cost so it doesn’t make sense if you don’t have a large account, or if you don’t need to harvest significant capital gains. It does make a lot of sense for me though, despite the much higher fees (approximately 0.7%).

(Although that didn’t really influence my decision, I also like that I’ll now own individual muni bonds instead of muni bond funds.)

I realize this SMA locks me in this strategy, but it’s a trade off I’m willing to accept as I’ll presumably always have to mitigate very high taxes.

Overall, I realize I’m in an unusual (and obviously fortunate) situation, so my personal needs and optimizations don’t invalidate the Bogleheads investment philosophy as a whole; it’s just not suited to my portfolio anymore.

Thanks a lot for your help and guidance, I learned a ton along the way!
I think you might choose active management for the wrong reason. From what I see: you can afford the cost of active management in exchange for the benefit of someone else manages your portfolio.

If you know what you're doing, the scale of portfolio should not make any difference.

From my experience, active management will cost you more than index funds. You won't know about this until you receive your consolidated 1099's next year. They will buy/sell stocks/funds like there is no tomorrow and they don't even need your permission. Out of nowhere, you will get an even bigger tax bill and the brokerage house won't care. They make money off of broker fees on those transactions.

There's nothing wrong with having money and paying money to someone else to do the work. It's a nice luxury to have. But you seem to be unaware of the actual cost of active management.

If you are sensitive about tax, stick to index funds. Use roboadvisor if you want some hands-off.
This thread got really long, so you may have not read all of it. OP is still passive indexing, just not using index FUNDS. They're using an account that buys every stock in the index individually, then tax loss harvests the individual stocks over time. The way they're doing it is paying an SMA to do this for them automatically (like a roboadvisor.) In fact, WealthFront (a roboadvisor) actually offers this service.

schrute
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Re: I’m done with index funds

Post by schrute » Sat Nov 30, 2019 4:12 pm

michaeljmroger wrote:
Sun Oct 27, 2019 3:31 pm
schrute wrote:
Sun Oct 27, 2019 3:16 pm
Who are you going with?
I’m 90% sure to go with Morgan Stanley, but I’m still considering other firms like Schwab and Bessemer Trust which both offer the same strategy.

Surprisingly enough, Schwab is actually more expensive than Morgan Stanley, so I’ll probably pass on them.

Bessemer offers interesting services in addition to this separately managed account (such as estate planning) but it’s also the most expensive option (1% fees, even at $50m) so I’ll likely not go with them either.
What's the min you have to deposit?

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michaeljmroger
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Re: I’m done with index funds

Post by michaeljmroger » Sat Nov 30, 2019 4:39 pm

schrute wrote:
Sat Nov 30, 2019 4:12 pm
michaeljmroger wrote:
Sun Oct 27, 2019 3:31 pm
schrute wrote:
Sun Oct 27, 2019 3:16 pm
Who are you going with?
I’m 90% sure to go with Morgan Stanley, but I’m still considering other firms like Schwab and Bessemer Trust which both offer the same strategy.

Surprisingly enough, Schwab is actually more expensive than Morgan Stanley, so I’ll probably pass on them.

Bessemer offers interesting services in addition to this separately managed account (such as estate planning) but it’s also the most expensive option (1% fees, even at $50m) so I’ll likely not go with them either.
What's the min you have to deposit?
$10m. Pretty steep.

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dmcmahon
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Re: I’m done with index funds

Post by dmcmahon » Sat Nov 30, 2019 5:13 pm

michaeljmroger wrote:
Sun Oct 27, 2019 11:43 am
Jimsad wrote:
Sun Oct 27, 2019 11:38 am
Not sure I fully understand .I thought you could do tax loss harvesting being in index funds too ?
It’s a lot more limited. If the fund is up, there’s nothing you can do about it. But if you hold individual stocks instead, there’s basically always at least one loss you can harvest. If you’re doing this aggressively and all the time, the difference becomes huge over time.
How so? You can only deduct $3000 agains other income. After that point you just accumulate carry-forwards. Sure, you can use losses to net against gains, but then again, why are you realizing the gains at all?

sambb
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Re: I’m done with index funds

Post by sambb » Sat Nov 30, 2019 5:19 pm

amazes me that an intellignet HNW / UHNW investor woudl consider this for TLH. The benefit is small and the risk of being taken advantage of, is high. Not worth it. i bet the investor can just take his dividends in cash and live off it later in life if needed, esp since they are adding 500k per year. I cant believe the TLH course is even being considered. Worried for the individual.

Theseus
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Re: I’m done with index funds

Post by Theseus » Sat Nov 30, 2019 5:36 pm

sambb wrote:
Sat Nov 30, 2019 5:19 pm
amazes me that an intellignet HNW / UHNW investor woudl consider this for TLH. The benefit is small and the risk of being taken advantage of, is high. Not worth it. i bet the investor can just take his dividends in cash and live off it later in life if needed, esp since they are adding 500k per year. I cant believe the TLH course is even being considered. Worried for the individual.
I have gone through majority of the responses on this thread. I must disagree with this statement. I don’t feel I am being taken advantage of.

I have broken up my s&p 500 investment allocation in two parts. One is invested in fidelity spartan 500 index fund. And other part is in fidelity SMA that is supposed to generate s&p 500 like return before taxes and outperform after taxes. Based on two years of my experience with this the SMA is offsetting much of my capital gain and dividend distribution from my index fund. So my overall portfolio is giving me s&p500 returns (my goal) but still helping me offset with capital gain and dividend distributions.

Having said that, I am concerned that if market keeps going up, the opportunity for tax loss harvesting while trying to keep it close to s&p 500 is not going to be possible.

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heart_in_san_francisco
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Re: I’m done with index funds

Post by heart_in_san_francisco » Sat Nov 30, 2019 11:00 pm

michaeljmroger wrote:
Sun Oct 27, 2019 11:27 am
After doing quite a lot of research, I’ve decided to stop using low-cost index funds and switch to a separately managed account. This goes against the Bogleheads investment philosophy and it took me a long time to admit it was the right thing to do for me as I was genuinely convinced and passionate about the Bogleheads approach. Let me explain why I’m making the switch.

As a HNW (and presumably UHNW in the future if all goes well), I’m facing “issues” most Bogleheads don’t have to think about. For instance, I’ll likely have 7-figure capital gains to deal with in a few years, so it’s crucial for me to find ways to mitigate the upcoming taxes.

By using a separately managed account (SMA), I can roughly replicate the S&P 500 by holding individual securities rather than a single fund. The benefit is that the tax-loss harvesting opportunities are potentially immense, and they can greatly reduce my future capital gain taxes (for the record, you can only offset $3k of income, but there’s no limit in the amount of capital gains you can offset).

This strategy comes at a cost so it doesn’t make sense if you don’t have a large account, or if you don’t need to harvest significant capital gains. It does make a lot of sense for me though, despite the much higher fees (approximately 0.7%).

(Although that didn’t really influence my decision, I also like that I’ll now own individual muni bonds instead of muni bond funds.)

I realize this SMA locks me in this strategy, but it’s a trade off I’m willing to accept as I’ll presumably always have to mitigate very high taxes.

Overall, I realize I’m in an unusual (and obviously fortunate) situation, so my personal needs and optimizations don’t invalidate the Bogleheads investment philosophy as a whole; it’s just not suited to my portfolio anymore.

Thanks a lot for your help and guidance, I learned a ton along the way!
First, I have to ask a tax question. Can the capital gains losses you harvest be carried forward years into the future and offset an arbitrary amount of capital gains when your windfall arrives, and do you expect that amount to be greater than the 0.7% * number of years implementing this? If the answer to my tax question is “yes”, ignore the rest of my post, as I wrote it before I re-read your post and better understood what you are doing. Best of luck to you and congrats 🎈

——————
I recommend against this. You may have been sold a bill of goods by a clever salesman on the benefits of tax loss harvesting, which is overrated[1] for most financial situations.

Ask yourself if you would buy an S&P fund with an ER ratio closer to 1% than 0%. And it’ll be a devil to unwind your position should you get tired of paying ten(s) of thousands of dollars a year in portfolio management fees. I have an account with one of these robo-trading tax loss harvesting schemes and all it has generated so far is a headache and a desire to unwind. Tax loss harvesting should be a tactical tool you use in the course of your investing strategy, it shouldn’t be the impetus for your whole strategy. Please rethink your decision. Indexing scales. Because markets generally go up, tax loss harvesting loses effectiveness quickly, plus it incurs trading fees, volatility drag, trade execution risks, bid/ask spreads, and tracking error.

Tl;dr, tax loss harvesting is a nice tool, but it’s not worth 0.7% per year for most people. Maybe your financial situation is different.

[1] https://basonasset.com/2017/03/17/tax-l ... is-enough/

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michaeljmroger
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Re: I’m done with index funds

Post by michaeljmroger » Sat Nov 30, 2019 11:11 pm

heart_in_san_francisco wrote:
Sat Nov 30, 2019 11:00 pm
michaeljmroger wrote:
Sun Oct 27, 2019 11:27 am
After doing quite a lot of research, I’ve decided to stop using low-cost index funds and switch to a separately managed account. This goes against the Bogleheads investment philosophy and it took me a long time to admit it was the right thing to do for me as I was genuinely convinced and passionate about the Bogleheads approach. Let me explain why I’m making the switch.

As a HNW (and presumably UHNW in the future if all goes well), I’m facing “issues” most Bogleheads don’t have to think about. For instance, I’ll likely have 7-figure capital gains to deal with in a few years, so it’s crucial for me to find ways to mitigate the upcoming taxes.

By using a separately managed account (SMA), I can roughly replicate the S&P 500 by holding individual securities rather than a single fund. The benefit is that the tax-loss harvesting opportunities are potentially immense, and they can greatly reduce my future capital gain taxes (for the record, you can only offset $3k of income, but there’s no limit in the amount of capital gains you can offset).

This strategy comes at a cost so it doesn’t make sense if you don’t have a large account, or if you don’t need to harvest significant capital gains. It does make a lot of sense for me though, despite the much higher fees (approximately 0.7%).

(Although that didn’t really influence my decision, I also like that I’ll now own individual muni bonds instead of muni bond funds.)

I realize this SMA locks me in this strategy, but it’s a trade off I’m willing to accept as I’ll presumably always have to mitigate very high taxes.

Overall, I realize I’m in an unusual (and obviously fortunate) situation, so my personal needs and optimizations don’t invalidate the Bogleheads investment philosophy as a whole; it’s just not suited to my portfolio anymore.

Thanks a lot for your help and guidance, I learned a ton along the way!
Can the capital gains losses you harvest be carried forward years into the future and offset an arbitrary amount of capital gains when your windfall arrives, and do you expect that amount to be greater than the 0.7% * number of years implementing this? If the answer to my tax question is “yes”, ignore the rest of my post
The answer is “yes”.

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heart_in_san_francisco
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Re: I’m done with index funds

Post by heart_in_san_francisco » Sat Nov 30, 2019 11:25 pm

sambb wrote:
Sat Nov 30, 2019 5:19 pm
amazes me that an intellignet HNW / UHNW investor woudl consider this for TLH. The benefit is small and the risk of being taken advantage of, is high. Not worth it. i bet the investor can just take his dividends in cash and live off it later in life if needed, esp since they are adding 500k per year. I cant believe the TLH course is even being considered. Worried for the individual.
Salespeople are clever, and the comfort of a human reassuring you that you’re doing the right thing, and that your financial situation is different (even if it isn’t) can be powerful. And for newly HNW/UHNW individuals, they are prime targets for these schemes. And depending on tax law, this may be ever-so-marginally better than an index fund (not sure about that on a risk-adjusted basis) for OP, due to the large upcoming tax event happening. Although on a complexity basis, I’m against this. How is OP going to unwind after the huge capital gains event arrives? Is OP going to pay 0.7% forever, or is OP going to realize capital gains to simplify their portfolio?

0.7% is a hell of a fee. I’m not sure I’d invest with these TLH robo-trading platforms for a 0% fee.

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heart_in_san_francisco
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Re: I’m done with index funds

Post by heart_in_san_francisco » Sat Nov 30, 2019 11:30 pm

deleted
Last edited by heart_in_san_francisco on Sun Dec 01, 2019 1:09 am, edited 1 time in total.

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heart_in_san_francisco
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Re: I’m done with index funds

Post by heart_in_san_francisco » Sun Dec 01, 2019 1:08 am

michaeljmroger wrote:
Tue Oct 29, 2019 10:33 am
EddyB wrote:
Tue Oct 29, 2019 9:20 am
Stinky wrote:
Tue Oct 29, 2019 9:01 am
birdog wrote:
Tue Oct 29, 2019 8:35 am

OP, it appears the consensus here is overwhelmingly against your proposed strategy. I'm curious if your mind has been swayed by the responses or if you still plan to go ahead with your strategy?
I'm also interested in OP's updated decision process, if it's changed.

I can't get over the 70bp per year fee drag. That seems like a huge headwind to the strategy. I'm also intrigued by how the fund being quoted above has returned higher than TSM for 1,3, and 5 year periods, when 95% of fund managers don't beat their benchmarks over the long haul (another recent BH thread).

But maybe there is something here, at least for folks who have a large enough portfolio to replicate the total market with individual stocks.

I remain a skeptic, but am interested in hearing more.
I’m a skeptic that it will be a huge savings at that rate, but think a lot (not all) of the posts here have failed to understand what’s happening, so I’m not sure the weight of the number of votes is compelling. While I hope the OP is thinking about the points raised, if he’s facing approximately a 35% tax rate on capital gains and expects his heirs to be able to wipe away his unrealized gains, I don’t think it’s an unreasonable bet. I am influenced by having seen (not used) index-tracking SMAs that closely follow the index using sampling only.
You’re absolutely right. Most of the responses completely miss the point, so I gave up trying to explain the rationale (heck, even the cold hard facts I provided such as the net annual returns are dismissed). If people are genuinely interested to learn about the approach, they can read this article from ETF.com’s Dave Nadig.

I love the Bogleheads, and I appreciate the skepticism, but I don’t think it’s unfair for me to say that there’s often a dogmatic attitude when it comes to anything that’s not the one and only 3-fund portfolio.
Ok, Michael. I'm gonna be straight with you. You're making it basically impossible for people to give you accurate personal advice, by being dodgy about your exact financial situation in this thread. So people are giving you general advice, which applies to most people in your situation: this is a bad idea.

Hey, maybe those nice "private client" people took you to lunch, maybe you had a long conversation with them on the phone and felt like you had a "connection", maybe they invited you to a private downtown city party with free booze, food, and entertainment. Maybe they sent you a birthday card, or a free iPad. Doesn't matter. 0.7% is 0.7%. In the vast majority of situations, you're underwater with your approach, not even accounting for the other expenses of such a strategy. Bogleheads aren't criticizing you because you don't have a 3-fund portfolio. Hell, some of the best supportive replies I've seen were in response to a guy doing a leveraged ETF strategy. Bogleheads are criticizing your strategy because it is a bad idea in the sense that some ideas are so clearly inferior to others that it's not even a question of asset allocation.

In another post, you mentioned that the SMA had a higher return than the index it was tracking, and you actually put that down as a reason in favor of the SMA. No. That is just performance chasing, and possibly data-mining by the salespeople to make sure they get 0.7% of whatever windfall you're about to receive. The fact you listed such tracking error as a "positive" tells me everything I need to know. You like the special treatment you're getting from the salespeople. That's fine. Private parties are cool, but you still aren't obligated to give those salespeople your money. You're going to be rich. Perhaps instead of seeking dodgy schemes that charge you 0.7% to play with your money (with no refunds if they screw up!), there are more productive things you could be doing. Such as taking the near-unanimous advice of the Boglehead forum...

Again, you haven't answered critical questions that would allow any good-faith individual to endorse this investing strategy. You've also insinuated that this forum isn't open minded towards alternative approaches. So I'm left to conclude you are here for validation, not honest feedback. So, congrats on the future tech IPO, it's a great feeling, and you've probably worked very hard for it. Best of luck. Spend some time considering what you're going to do once you're financially independent.

krb
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Re: I’m done with index funds

Post by krb » Sun Dec 01, 2019 5:11 am

Hi everyone. Stupid question. It's 1AM so I'm not thinking clearly too...
Tax harvesting ...
Isn't that when your stock goes down you sell it, lock in the loss, then purchase a similar equity (eg SP500 goes down, sell it and buy VTSAX at the current level), then you've locked in a loss (but you own essentially the same equities) and you can either sell another stock that has gained and not pay capital gains taxes, or lock in the money for tax purposes as a loss?

That's what it seemed to me.

Except the problem is now you bought a stock (or fund) at a lower valuation. So at some point when you sell it, you have to pay more capital gains. You're just deferring the capital gains for now, and lowering your basis?

I'm sorry but it's really late and I'm not clearheaded but isn't that the benefit? It seems like not really very much benefit. You'd be better off just working an extra shift.

krb
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Re: I’m done with index funds

Post by krb » Sun Dec 01, 2019 5:17 am

alex_686 wrote:
Sun Oct 27, 2019 11:43 am
Jimsad wrote:
Sun Oct 27, 2019 11:38 am
Not sure I fully understand .I thought you could do tax loss harvesting being in index funds too ?
With direct indexing the S&P 500 you have 500 choices instead of 1. This allows higher optimization in terms of timing. This can really cut your long term capital gains. Not sure if it justifies a .7% fee - that seems on the high side to make this work. But the last time I was involved in something like this was the 90s.
I obviously don't understand this. If you sell your loser stock at a loss to lock in the loss, then sell a winner so the capital gain is offset ... isn't that a wash? Wouldn't you be better off with all winners and pay the capital gains? Doesn't the loss just offset the gain, whether it's in an index or not? If you sell one loser stock individually (not in an index fund) and a winner stock individually, how is that significantly different than just selling the index, where the loser and winner are automatically canceling each other out?

Next question is - it's really late and I'm incoherent - I think capital gains is only 20%. If your net worth is that great and you are paying that much - I assume you're in california - wouldn't it be cheaper to buy a house in Nevada or Wyoming or one of the zero state tax states, move there for a period, and then halve your taxes? If federal capital gains is 20% and CA is around 13 (?) (CA taxes CG as income), why not divide your time between a no-tax state and CA and declare yourself free of CA? It sounds like you'd be getting a free house based on tax savings that you could pass on to your kids.

krb
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Re: I’m done with index funds

Post by krb » Sun Dec 01, 2019 5:19 am

feehater wrote:
Sun Oct 27, 2019 12:03 pm
alex_686 wrote:
Sun Oct 27, 2019 11:43 am
Jimsad wrote:
Sun Oct 27, 2019 11:38 am
Not sure I fully understand .I thought you could do tax loss harvesting being in index funds too ?
With direct indexing the S&P 500 you have 500 choices instead of 1. This allows higher optimization in terms of timing. This can really cut your long term capital gains. Not sure if it justifies a .7% fee - that seems on the high side to make this work. But the last time I was involved in something like this was the 90s.
OK, but what do you buy to replace the individual stock that you just sold? Or do you just have to sit out 30 days and buy the same stock back? Seems like TLH with funds instead of stocks is easier to find a pair with.
Except when you buy the stock back your basis is that much lower. So you get the tax loss harvest but when you sell the stock your capital gains are exactly that much greater, correct? I'm not sure what the advantage is except you lock in a loss now that you will have to pay back in greater capital gains taxes when you sell the security you purchased at a lower price.

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unclescrooge
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Re: I’m done with index funds

Post by unclescrooge » Sun Dec 01, 2019 7:43 am

nedsaid wrote:
Wed Oct 30, 2019 10:42 pm
...

It just seems too much like a winning by losing "Springtime with Hitler" strategy. It won't put you in jail but it could leave a bitter aftertaste of subpar performance. Not saying what you are proposing is impossible but I am pretty skeptical. Is there academic research to back up what you are trying to do?
What a great movie that was! I usually avoid musicals but that movie is one of my favorites.

I'm also struggling to comprehend how you come out ahead by losing.

Personal Capital tried to sell me on their TLH strategy several months ago. I was incredibly skeptical, especially after the advisor I spoke to didn't know that ETFs have tax advantages over mutual funds, and more so when I realized I literally have 95% of my investments in tax deferred accounts anyway.

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Re: I’m done with index funds

Post by grabiner » Sun Dec 01, 2019 10:00 am

krb wrote:
Sun Dec 01, 2019 5:11 am
Hi everyone. Stupid question. It's 1AM so I'm not thinking clearly too...
Tax harvesting ...
Isn't that when your stock goes down you sell it, lock in the loss, then purchase a similar equity (eg SP500 goes down, sell it and buy VTSAX at the current level), then you've locked in a loss (but you own essentially the same equities) and you can either sell another stock that has gained and not pay capital gains taxes, or lock in the money for tax purposes as a loss?

That's what it seemed to me.

Except the problem is now you bought a stock (or fund) at a lower valuation. So at some point when you sell it, you have to pay more capital gains. You're just deferring the capital gains for now, and lowering your basis?
There are three benefits which make this better than break-even.

You may deduct the loss at a higher tax rate than the tax you pay on the gain. If you deduct a $30K capital loss now, in a 24% tax bracket, you can save $720 each year for the next ten years. Then, in ten years, when you sell for a $30K capital gain, you pay $4500 tax on the long-term gain at 15%.

You pay tax later. If you have a $30K capital gain and a $30K harvested loss in the same year, you pay no tax. Then, when you sell the replacement shares from the loss, you pay tax on a $30K gain. Without the harvest, you would have paid $4500 tax on the gain this year, and lost any future returns on it.

You may never sell the replacement shares. If you buy replacement shares and eventually donate them to charity, or die and leave them to your heirs, you deducted the loss and never paid tax on the gain.
Wiki David Grabiner

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nedsaid
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Re: I’m done with index funds

Post by nedsaid » Sun Dec 01, 2019 11:18 am

unclescrooge wrote:
Sun Dec 01, 2019 7:43 am
nedsaid wrote:
Wed Oct 30, 2019 10:42 pm
...

It just seems too much like a winning by losing "Springtime with Hitler" strategy. It won't put you in jail but it could leave a bitter aftertaste of subpar performance. Not saying what you are proposing is impossible but I am pretty skeptical. Is there academic research to back up what you are trying to do?
What a great movie that was! I usually avoid musicals but that movie is one of my favorites.

I'm also struggling to comprehend how you come out ahead by losing.

Personal Capital tried to sell me on their TLH strategy several months ago. I was incredibly skeptical, especially after the advisor I spoke to didn't know that ETFs have tax advantages over mutual funds, and more so when I realized I literally have 95% of my investments in tax deferred accounts anyway.
In another thread, a poster shared about his experience with Fidelity which offers a very similar service. He was pleased with the results. A big key is getting the sell/buy decisions right, pretty much you match the characteristics of what you sell with the characteristics of what you are buying to replace to avoid the "Nedsaid effect." Sort of like selling Exxon and buying Chevron in its place. The drag seems to be less than I thought but I am still not 100% certain how this works. Even in a bull market, you have stocks that head south, so there are always losses to be harvested. Lots of turnover as small losses are harvested. From reading what others have said, this seems to be very possible. I remember Mr. Bogle's comments that 100% turnover costs 0.50% to 1.00% a year in an active portfolio from commissions, bid/ask spreads, and market impact costs. Today, turnover costs are probably much reduced. They work around the wash sale rules too. You also have to overcome the fees charged for the tax harvesting service. I would have to see more examples of this working.
A fool and his money are good for business.

krb
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Re: I’m done with index funds

Post by krb » Sun Dec 01, 2019 11:53 am

grabiner wrote:
Sun Dec 01, 2019 10:00 am
krb wrote:
Sun Dec 01, 2019 5:11 am
Hi everyone. Stupid question. It's 1AM so I'm not thinking clearly too...
Tax harvesting ...
Isn't that when your stock goes down you sell it, lock in the loss, then purchase a similar equity (eg SP500 goes down, sell it and buy VTSAX at the current level), then you've locked in a loss (but you own essentially the same equities) and you can either sell another stock that has gained and not pay capital gains taxes, or lock in the money for tax purposes as a loss?

That's what it seemed to me.

Except the problem is now you bought a stock (or fund) at a lower valuation. So at some point when you sell it, you have to pay more capital gains. You're just deferring the capital gains for now, and lowering your basis?
There are three benefits which make this better than break-even.

You may deduct the loss at a higher tax rate than the tax you pay on the gain. If you deduct a $30K capital loss now, in a 24% tax bracket, you can save $720 each year for the next ten years. Then, in ten years, when you sell for a $30K capital gain, you pay $4500 tax on the long-term gain at 15%.

You pay tax later. If you have a $30K capital gain and a $30K harvested loss in the same year, you pay no tax. Then, when you sell the replacement shares from the loss, you pay tax on a $30K gain. Without the harvest, you would have paid $4500 tax on the gain this year, and lost any future returns on it.

You may never sell the replacement shares. If you buy replacement shares and eventually donate them to charity, or die and leave them to your heirs, you deducted the loss and never paid tax on the gain.
Yes that’s exactly what it seemed to me was the advantage. I thought I must be missing something. But if your tax rate in retirement is likely to be similar (or at least unlikely to be dramatically better) as compared to now it seems like a lot of work for only a little gain. In his case it’s likely his tax rate will be no less in retirement and he will have a lot of money left over for inheritance. So it sounds like a lot of work for not a huge benefit. I don’t know that I’d spend the time. I was wondering what I was missing.

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2pedals
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Re: I’m done with index funds

Post by 2pedals » Sun Dec 01, 2019 12:33 pm

krb wrote:
Sun Dec 01, 2019 11:53 am
<--- cut --->
Yes that’s exactly what it seemed to me was the advantage. I thought I must be missing something. But if your tax rate in retirement is likely to be similar (or at least unlikely to be dramatically better) as compared to now it seems like a lot of work for only a little gain. In his case it’s likely his tax rate will be no less in retirement and he will have a lot of money left over for inheritance. So it sounds like a lot of work for not a huge benefit. I don’t know that I’d spend the time. I was wondering what I was missing.
I don't think you are missing anything. A lot of work for small potential savings that may never materialize in the long run for growing HNW and VHNW individuals.

krb
Posts: 182
Joined: Tue Nov 19, 2019 1:30 pm

Re: I’m done with index funds

Post by krb » Sun Dec 01, 2019 1:03 pm

2pedals wrote:
Sun Dec 01, 2019 12:33 pm
krb wrote:
Sun Dec 01, 2019 11:53 am
<--- cut --->
Yes that’s exactly what it seemed to me was the advantage. I thought I must be missing something. But if your tax rate in retirement is likely to be similar (or at least unlikely to be dramatically better) as compared to now it seems like a lot of work for only a little gain. In his case it’s likely his tax rate will be no less in retirement and he will have a lot of money left over for inheritance. So it sounds like a lot of work for not a huge benefit. I don’t know that I’d spend the time. I was wondering what I was missing.
I don't think you are missing anything. A lot of work for small potential savings that may never materialize in the long run for growing HNW and VHNW individuals.
I read about and so I thought that's a great idea! Then I did it and I was like "wait what did I just do?" I got a benefit now but now my basis is lower so when I sell I have to pay the capital gains back again. That doesn't make sense. Obviously I hadn't thought it through before doing it and now reading this I'm trying to think I'm obviously missing a subtle point but I don't think I am.

Juice3
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Re: I’m done with index funds

Post by Juice3 » Tue Dec 03, 2019 5:06 am

michaeljmroger wrote:
Sat Nov 30, 2019 11:11 pm
heart_in_san_francisco wrote:
Sat Nov 30, 2019 11:00 pm
Can the capital gains losses you harvest be carried forward years into the future and offset an arbitrary amount of capital gains when your windfall arrives, and do you expect that amount to be greater than the 0.7% * number of years implementing this?
The answer is “yes”.
It seems this strategy is basically shifting gains out of years where they be more highly taxed, into years where they would be taxed less. The strategy seems to be pro some Boglehead philosophies (Minimize Taxes) and against others (keep costs low).

This strategy would have a huge risk exposure to wash sale rules
https://www.sec.gov/answers/wash.htm

Very simply, is this a play to avoid 20% LTCG and rather pay 15% in some future year?

What is the "pitch"? What math do they show you purporting to make up the 70bps yearly fee on Principle not gain?

tj
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Re: I’m done with index funds

Post by tj » Tue Dec 03, 2019 7:45 am

Theseus wrote:
Sat Nov 30, 2019 5:36 pm
sambb wrote:
Sat Nov 30, 2019 5:19 pm
amazes me that an intellignet HNW / UHNW investor woudl consider this for TLH. The benefit is small and the risk of being taken advantage of, is high. Not worth it. i bet the investor can just take his dividends in cash and live off it later in life if needed, esp since they are adding 500k per year. I cant believe the TLH course is even being considered. Worried for the individual.
I have gone through majority of the responses on this thread. I must disagree with this statement. I don’t feel I am being taken advantage of.

I have broken up my s&p 500 investment allocation in two parts. One is invested in fidelity spartan 500 index fund. And other part is in fidelity SMA that is supposed to generate s&p 500 like return before taxes and outperform after taxes. Based on two years of my experience with this the SMA is offsetting much of my capital gain and dividend distribution from my index fund. So my overall portfolio is giving me s&p500 returns (my goal) but still helping me offset with capital gain and dividend distributions.

Having said that, I am concerned that if market keeps going up, the opportunity for tax loss harvesting while trying to keep it close to s&p 500 is not going to be possible.
Is the active portfolio matching the performance of the index?

EddyB
Posts: 1080
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Re: I’m done with index funds

Post by EddyB » Tue Dec 03, 2019 9:49 am

Juice3 wrote:
Tue Dec 03, 2019 5:06 am
michaeljmroger wrote:
Sat Nov 30, 2019 11:11 pm
heart_in_san_francisco wrote:
Sat Nov 30, 2019 11:00 pm
Can the capital gains losses you harvest be carried forward years into the future and offset an arbitrary amount of capital gains when your windfall arrives, and do you expect that amount to be greater than the 0.7% * number of years implementing this?
The answer is “yes”.
It seems this strategy is basically shifting gains out of years where they be more highly taxed, into years where they would be taxed less. The strategy seems to be pro some Boglehead philosophies (Minimize Taxes) and against others (keep costs low).

This strategy would have a huge risk exposure to wash sale rules
https://www.sec.gov/answers/wash.htm

Very simply, is this a play to avoid 20% LTCG and rather pay 15% in some future year?

What is the "pitch"? What math do they show you purporting to make up the 70bps yearly fee on Principle not gain?
I think you’re missing the possibility of never paying taxes on some portion of the gains, and then getting the stepped-up basis for the heirs at death.

Theseus
Posts: 609
Joined: Sat Jan 23, 2016 9:40 am

Re: I’m done with index funds

Post by Theseus » Tue Dec 03, 2019 2:54 pm

tj wrote:
Tue Dec 03, 2019 7:45 am
Theseus wrote:
Sat Nov 30, 2019 5:36 pm
sambb wrote:
Sat Nov 30, 2019 5:19 pm
amazes me that an intellignet HNW / UHNW investor woudl consider this for TLH. The benefit is small and the risk of being taken advantage of, is high. Not worth it. i bet the investor can just take his dividends in cash and live off it later in life if needed, esp since they are adding 500k per year. I cant believe the TLH course is even being considered. Worried for the individual.
I have gone through majority of the responses on this thread. I must disagree with this statement. I don’t feel I am being taken advantage of.

I have broken up my s&p 500 investment allocation in two parts. One is invested in fidelity spartan 500 index fund. And other part is in fidelity SMA that is supposed to generate s&p 500 like return before taxes and outperform after taxes. Based on two years of my experience with this the SMA is offsetting much of my capital gain and dividend distribution from my index fund. So my overall portfolio is giving me s&p500 returns (my goal) but still helping me offset with capital gain and dividend distributions.

Having said that, I am concerned that if market keeps going up, the opportunity for tax loss harvesting while trying to keep it close to s&p 500 is not going to be possible.
Is the active portfolio matching the performance of the index?
Yes. According to the comparison shown on my fidelity account following is return data. These are supposed to be after the fees (but I will double check).

1 year cumulative returns
S&P 500 - +14.33%
Pre-tax - +14.88%
After-tax - +16.77

YTD cumulative returns
S&P 500 - +23.16%
Pre-tax - +22.55%
After-tax - +24.13

I have done it only for two years (don't have two year data with me but it is even more impressive), so I can't speak for it's long term viability. I have confirmed with the fidelity rep that If market continues to go up with only upward volatility it will have less TLH opportunities. I will continue to have a portion of my S&P500 allocation in this SMA account to offset capital gains from S&P 500 mutual fund and other investments.

I am as boglehead as most people here. Frustrating part is some people are being purist about using 3 fund portfolio (or something similar) without realizing there may be things you do that are still in the same BH philosophy without using prior established approaches.

Also some mistakenly assume that a HNW or UHNW individual is not savvy about understanding BH approach of lower cost, diversified investment, taxes. Or they are going to be taken advantage of by a fast talking person (and that happens often enough based on so many postings). And it's great that our BH community cares for fellow members to steer them in the right direction. But we should also note that for them be HNW or UHNW (especially if they did it themselves like OP) - they have to be somewhat savvy and based on all the guidance here and from other sources they will likely end up making the best decisions.

Juice3
Posts: 133
Joined: Sun Nov 05, 2017 7:40 am

Re: I’m done with index funds

Post by Juice3 » Tue Dec 03, 2019 5:57 pm

EddyB wrote:
Tue Dec 03, 2019 9:49 am
I think you’re missing the possibility of never paying taxes on some portion of the gains, and then getting the stepped-up basis for the heirs at death.
I did not miss it. Step up is a possibility with our without buying something that does index tracking. Step up applies to gains unrealized and assumes there is no change to U.S. tax laws.

The step up would only apply to the delta the individual stocks are able to apply. This is pretty much why I asked for the math, to see what assumptions exist. Cutting down that 70 bps per year tree is tall order.

Another assumption is how the 'wealth tax' discussion goes. This has the potential to eliminate the things like CG taxes in favor of wealth taxes in one part to prevent schemes like the one being discussed here.

EddyB
Posts: 1080
Joined: Fri May 24, 2013 3:43 pm

Re: I’m done with index funds

Post by EddyB » Tue Dec 03, 2019 7:16 pm

Juice3 wrote:
Tue Dec 03, 2019 5:57 pm
EddyB wrote:
Tue Dec 03, 2019 9:49 am
I think you’re missing the possibility of never paying taxes on some portion of the gains, and then getting the stepped-up basis for the heirs at death.
I did not miss it. Step up is a possibility with our without buying something that does index tracking. Step up applies to gains unrealized and assumes there is no change to U.S. tax laws.

The step up would only apply to the delta the individual stocks are able to apply. This is pretty much why I asked for the math, to see what assumptions exist. Cutting down that 70 bps per year tree is tall order.

Another assumption is how the 'wealth tax' discussion goes. This has the potential to eliminate the things like CG taxes in favor of wealth taxes in one part to prevent schemes like the one being discussed here.
Back on page 1 OP said the assumption is $50k/million in harvestable annual losses. I stopped paying attention mid-thread, so I don't know if that was further detailed later on.

arsenalfan
Posts: 774
Joined: Mon Dec 09, 2013 12:26 am

Re: I’m done with index funds

Post by arsenalfan » Tue Dec 03, 2019 7:21 pm

I've made an individual Muni Bond Ladder with yields 5-7% in my state.
After 5 years, it really has been wonderful.

tj
Posts: 2683
Joined: Thu Dec 24, 2009 12:10 am

Re: I’m done with index funds

Post by tj » Tue Dec 03, 2019 7:28 pm

arsenalfan wrote:
Tue Dec 03, 2019 7:21 pm
I've made an individual Muni Bond Ladder with yields 5-7% in my state.
After 5 years, it really has been wonderful.
Duration?

inverter
Posts: 175
Joined: Mon Jul 27, 2015 1:40 pm

Re: I’m done with index funds

Post by inverter » Tue Dec 03, 2019 9:29 pm

Have you thought about the "vendor lock in" you are subjecting yourself to? I'd rather be tied at the hip to Vanguard than Morgan Stanley.

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