Exchanging Funds — Worth it with tax hit?

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T96128
Posts: 2
Joined: Wed Jan 13, 2021 9:09 am

Exchanging Funds — Worth it with tax hit?

Post by T96128 »

Hello— before starting to read Bogleheads some time ago, I was convinced of the benefits of index funds but made some index fund selections that I now regret with some additional knowledge. For example, I bought a good number of shares of VBIAX (more or less 60% total market, 40% bonds) in a taxable account, but now realize that having a single balanced fund like this limits some of my flexibility down the line. For example, if there is a major stock dip or crash, I’d like the flexibility to sell some bonds to buy more stock, but holding the bonds in VBIAX, I’d also be forced to sell the stock piece.

My question is this: does the tax hit from selling VBIAX, even to just buy its components separately, make the exchange simply not worthwhile? I’d be triggering about $10,000 in capital gains tax that would have to be paid instead of being invested. I have to think over the long term that would cost me in total returns.

I guess I’m struggling to understand if it will ever be worth it to simplify the portfolio, even with long term cap gains, or whether I should just make new investments where I want them.

Any thoughts would be appreciated. Love the forum.
lakpr
Posts: 6760
Joined: Fri Mar 18, 2011 9:59 am

Re: Exchanging Funds — Worth it with tax hit?

Post by lakpr »

I am not sure that the so-called "advantage" is really an advantage for you. The advantage is that it provides daily rebalancing, so you are never out of the market completely. With a 2-fund portfolio in 60:40 proportions (mimicking the VBIAX composition), are you sure you will not be selling the wrong asset type at the wrong time?

2020 is a good gut check. Would you have stomached the loss of almost 40% of your stock fund Feb-2020 to March-2020?

I know I am going on a tangent rather than your main question -- primarily because I believe VBIAX is an excellent fund to hold, forever ...
livesoft
Posts: 74625
Joined: Thu Mar 01, 2007 8:00 pm

Re: Exchanging Funds — Worth it with tax hit?

Post by livesoft »

$10K in cap gains tax suggests a minimum $67K realized long-term capital gain. I suggest:

1. Stop buying VBIAX.
2. Stop reinvesting dividends into VBIAX.
3. Invest for a while in other more tax-efficient things.
4. Consider donating shares to your DAF.
5. Watch for TLH opportunities especially in the new things you buy in taxable.

Otherwise, I suggest you be patient for a while and revisit this good problem from time to time.

See also: https://www.bogleheads.org/wiki/Paying_ ... itch_funds
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Topic Author
T96128
Posts: 2
Joined: Wed Jan 13, 2021 9:09 am

Re: Exchanging Funds — Worth it with tax hit?

Post by T96128 »

I should clarify that the cap gains are $10k, so tax would be lower.

In general I am trying to limit bonds to 10% of portfolio, mostly due to age (under 35) and some risk tolerance for the long haul. One of the reasons I am opting for 10% bonds instead of 0% is so that I could sell them in a crash.

I have sufficient reserves that I am not worried about selling in a stock crash.
livesoft
Posts: 74625
Joined: Thu Mar 01, 2007 8:00 pm

Re: Exchanging Funds — Worth it with tax hit?

Post by livesoft »

With cap gains only $10K, that changes the calculus drastically. If the cap gains taxes are just $1500, then I would just git 'er done.

Besides, you may be able to tax-loss harvest whatever new funds you buy before the end of 2021 anyways.
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