New to Indexing

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sherryrauch
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Joined: Wed Mar 25, 2020 9:59 am

New to Indexing

Post by sherryrauch » Wed Mar 25, 2020 10:07 am

I was introduced to Indexing this January by a wise and wealthy friend. I ready Bogle's little book followed by Bogleheads Guide to Investing. Now I'm reading Three Fund Portfolio. Upon completion of the first book, I was enlightened and began moving my personal investments from an actively managed Wells Fargo account to Vanguard. I also moved my Roth's (for me and my husband) from Fidelity (active mgt) to Vanguard. These were all transferred in kind with the exception of one fund not carried by Vanguard. As life would have it, the market started the massive downturn at the time the funds were being transferred. The taxable accounts have lost so much that it would take me decades to stretch out the losses on taxes at $3000 per year. The cost basis on nearly all of the accounts is negative. Some of the funds have a back load that I need to wait a year to eliminate, so I know I should not move those. The Roths have much less money, but (if I understand it correctly) I can move those funds to index funds without tax implications. Should I go ahead and try to balance my portfolio with the change of those funds now into Index funds and slowly move the taxable funds into indexed funds when the losses are much less substantial?

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ruralavalon
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Re: New to Indexing

Post by ruralavalon » Wed Mar 25, 2020 11:13 am

Welcome to the forum :) .

More details will be helpful. You can simply amend your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.

Please see this for information needed and format: "Asking Portfolio Questions".


sherryrauch wrote:
Wed Mar 25, 2020 10:07 am
I was introduced to Indexing this January by a wise and wealthy friend. I ready Bogle's little book followed by Bogleheads Guide to Investing. Now I'm reading Three Fund Portfolio.
Those are excellent choices for learning about investing.

sherryrauch wrote:
Wed Mar 25, 2020 10:07 am
As life would have it, the market started the massive downturn at the time the funds were being transferred. The taxable accounts have lost so much that it would take me decades to stretch out the losses on taxes at $3000 per year.
This means that you can switch to index funds in your taxable accounts without incurring income tax liability for capital gains.

You are selling low. But you are also buying low.

So the losses can be a good reason to make the changes now rather than later.


sherryrauch wrote:
Wed Mar 25, 2020 10:07 am
The cost basis on nearly all of the accounts is negative.

Cost basis is relevant only for the taxable accounts.


sherryrauch wrote:
Wed Mar 25, 2020 10:07 am
Some of the funds have a back load that I need to wait a year to eliminate, so I know I should not move those.

Not necessarily so. More details would clarify.

How much is the back load for each fund? What is the expense ratio of each fund? How much is in each fund? How long until the year is up? Is the fund in a tax-advantaged account?


sherryrauch wrote:
Wed Mar 25, 2020 10:07 am
The Roths have much less money, but (if I understand it correctly) I can move those funds to index funds without tax implications.

You are correct. Inside the Roth IRAs you can exchange to new funds without tax consequences.


sherryrauch wrote:
Wed Mar 25, 2020 10:07 am
Should I go ahead and try to balance my portfolio with the change of those funds now into Index funds and slowly move the taxable funds into indexed funds when the losses are much less substantial?
Even in the taxable accounts it may be better to go ahead and switch to index funds now rather than later.

It is important to have an overall plan for all accounts before switching funds in any account. It's usually better to coordinate investments among all accounts, treating all accounts together as a single unified portfolio, rather than considering accounts separately.

More details are necessary. You can simply amend your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.

Please see this for information needed and format: "Asking Portfolio Questions".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

dbr
Posts: 32131
Joined: Sun Mar 04, 2007 9:50 am

Re: New to Indexing

Post by dbr » Wed Mar 25, 2020 12:17 pm

A general answer is that replacing one kind of investment with another one that is basically the same thing is a wash. In other words selling something at a loss to replace it with an investment of a similar nature is just a fair trade. The difference is getting out of things that were too expensive to maintain into things that are more cost and tax efficient but still basically the same assets.

Selling at a loss in a taxable account actually can help you. It is also an opportunity to unload something you don't want to replace it with something different you do want.

The mistake is having started out with too much risk and then bailing out at low prices and buying less risky but lower returning replacements. That actually is "locking in the loss." It might be academic to decide if the real mistake is bailing out or the real mistake was taking too much risk to start with. But this does not seem to be your situation.

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Phineas J. Whoopee
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Re: New to Indexing

Post by Phineas J. Whoopee » Wed Mar 25, 2020 8:41 pm

dbr wrote:
Wed Mar 25, 2020 12:17 pm
A general answer is that replacing one kind of investment with another one that is basically the same thing is a wash. In other words selling something at a loss to replace it with an investment of a similar nature is just a fair trade. The difference is getting out of things that were too expensive to maintain into things that are more cost and tax efficient but still basically the same assets.

Selling at a loss in a taxable account actually can help you. It is also an opportunity to unload something you don't want to replace it with something different you do want.

The mistake is having started out with too much risk and then bailing out at low prices and buying less risky but lower returning replacements. That actually is "locking in the loss." It might be academic to decide if the real mistake is bailing out or the real mistake was taking too much risk to start with. But this does not seem to be your situation.
And if I may add, outside of tax-advantaged accounts realizing a loss can yield tax benefits. They don't make up for the whole loss, of course, but as dbr correctly wrote selling one thing whose market value is down to buy a similar thing whose market value is also down isn't a bad move. It's simply a fair trade.

I'd take the tax loss while it's available. If you're not sure how to report it on your 2020 tax return we can help. Here's our wiki article on the topic.

PJW

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