If/when to sell an index fund at a loss.

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NazgulSentient
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If/when to sell an index fund at a loss.

Post by NazgulSentient »

Greetings fellow Bogleheads.

Early in my learning of how to invest Boglehead style, I misread/misunderstood something and bought a little bit of FSMAX (FIDELITY EXTENDED MARKET INDEX FUND, a mid-cap blend) in my taxable account, along with the usual FSKAX (FIDELITY TOTAL MARKET INDEX FUND) and FTIHX (FIDELITY TOTAL INTL INDEX FUND). I understand now that the holdings of FSMAX are held inside of FSKAX, and so I have a redundancy in my taxable account portfolio. I didn't spend too much on FSMAX (current value $2800), but right now it's down a much more significant percentage (-28.75%) than FSKAX (-11.8%). My instincts are to just hold onto FSMAX until it eventually recovers and then fix my mistake and dump it all into FSKAX, but I'm questioning the wisdom of this approach. Furthermore, it just annoys me to see my mistake every time I log into the Fidelity site.

Is there any advantage into moving a currently losing fund into a fund that is currently losing less, or does it make sense just to ride it out until it recovers and then move it? What say you?
Doctor Rhythm
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Re: If/when to sell an index fund at a loss.

Post by Doctor Rhythm »

If you sell while it’s down, you can tax loss harvest. This is what I would do.

Waiting makes sense only if you believe that it will go grow faster than FSKAX by the time you ultimately sell. However, if you really believed this, you should sell FSKAX to buy more FSMAX.
Last edited by Doctor Rhythm on Fri Mar 24, 2023 6:01 pm, edited 1 time in total.
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DaveTH
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Re: If/when to sell an index fund at a loss.

Post by DaveTH »

Their is both a financial and emotional aspect to your question. Only you can decide which one is more important to you.
MattB
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Re: If/when to sell an index fund at a loss.

Post by MattB »

NazgulSentient wrote: Fri Mar 24, 2023 5:44 pm Is there any advantage into moving a currently losing fund into a fund that is currently losing less, or does it make sense just to ride it out until it recovers and then move it? What say you?
A better question: is there any reason to hold onto a fund you don't want, and can currently sell without negative tax consequences?

I believe the answer to that question is no. And I suggest selling the small position you have in FSMAX and being done with it.
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Stinky
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Re: If/when to sell an index fund at a loss.

Post by Stinky »

I'd sell, take the tax loss, reinvest in the fund that you desire, and move on.

No reason to waste any more time on this (minor) mistake.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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DeliberateDonkey
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Re: If/when to sell an index fund at a loss.

Post by DeliberateDonkey »

NazgulSentient wrote: Fri Mar 24, 2023 5:44 pm Is there any advantage into moving a currently losing fund into a fund that is currently losing less, or does it make sense just to ride it out until it recovers and then move it? What say you?
There is no advantage, because there is really no telling how the two funds will perform going forward. That said, I would suggest one of two things:
  1. Exchange FSMAX for FSKAX and do not look at the performance of FSMAX until you've completely forgotten what you paid for it or when you bought it. You can even put in the order with Fidelity tonight and it will execute on Monday evening.
  2. Continue to hold FSMAX until you break even, but direct all new contributions to FSKAX and FTIHX. Once FSMAX arrives back at your cost basis, exchange it for FSKAX. In this way, you avoid taking a loss, regardless of the alternative outcome.
Ultimately, this is a great exercise in investor psychology. Working through this today is going to save you a lot of headaches in the future.

As for what I would do, that would be the second option. You have to know what works for you. That is, in my view, more important than what is theoretically optimal on paper.
RetiredAL
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Re: If/when to sell an index fund at a loss.

Post by RetiredAL »

DeliberateDonkey wrote: Fri Mar 24, 2023 9:11 pm
NazgulSentient wrote: Fri Mar 24, 2023 5:44 pm Is there any advantage into moving a currently losing fund into a fund that is currently losing less, or does it make sense just to ride it out until it recovers and then move it? What say you?
There is no advantage, because there is really no telling how the two funds will perform going forward. That said, I would suggest one of two things:
  1. Exchange FSMAX for FSKAX and do not look at the performance of FSMAX until you've completely forgotten what you paid for it or when you bought it. You can even put in the order with Fidelity tonight and it will execute on Monday evening.
  2. Continue to hold FSMAX until you break even, but direct all new contributions to FSKAX and FTIHX. Once FSMAX arrives back at your cost basis, exchange it for FSKAX. In this way, you avoid taking a loss, regardless of the alternative outcome.
Ultimately, this is a great exercise in investor psychology. Working through this today is going to save you a lot of headaches in the future.

As for what I would do, that would be the second option. You have to know what works for you. That is, in my view, more important than what is theoretically optimal on paper.
OP -
Do note that while holding a relatively broad fund like FSMAX (or similar ETF) while it recovers could make sense, the same wait logic does not apply to a single stock holding.

If you are holding a stock at -25%, just DUMP IT and move on in life having learned an individual stock loss lesson. The lesson is you should have bailed at -7 to 10%, and not have ridden it down 25%.

IMO, in your case, I'd dump it as not being what you want your portfolio to be.
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arcticpineapplecorp.
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Re: If/when to sell an index fund at a loss.

Post by arcticpineapplecorp. »

if you wouldn't buy more of it when it's on sale at a 28.75% discount, when would you buy it? And if you wouldn't buy it, why hold something you wouldn't want to buy more of when it's on sale?

Anchoring (a cognitive bias):
What Is Anchoring? Anchoring is a heuristic in behavioral finance that describes the subconscious use of irrelevant information, such as the purchase price of a security, as a fixed reference point (or anchor) for making subsequent decisions about that security.

source: https://www.investopedia.com/terms/a/anchoring.asp
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NazgulSentient
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Re: If/when to sell an index fund at a loss.

Post by NazgulSentient »

DeliberateDonkey wrote: Fri Mar 24, 2023 9:11 pm Continue to hold FSMAX until you break even, but direct all new contributions to FSKAX and FTIHX. Once FSMAX arrives back at your cost basis, exchange it for FSKAX. In this way, you avoid taking a loss, regardless of the alternative outcome.
[/list]
Ultimately, this is a great exercise in investor psychology. Working through this today is going to save you a lot of headaches in the future.
This is what I've opted to do: I'm going to hold FSMAX until it breaks even (which will eventually happen, unless something apocalyptic happens), and then dump it into FSKAX. Distributions have been directed to FSKAX as well. If I believe in the market as a whole, then it stands to reason that I should also believe in the market in part, as this fund holds 3680 companies' stocks.

Yes, this has been a great exercise in my investment philosophy, and I've decided I'd much rather sit on an emotional mistake than realize an actual loss and sell. I'll just have to get used to seeing that in my portfolio for a while - but hopefully not too long! Thanks, everybody!
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Re: If/when to sell an index fund at a loss.

Post by Nate79 »

NazgulSentient wrote: Sun Mar 26, 2023 6:23 pm
DeliberateDonkey wrote: Fri Mar 24, 2023 9:11 pm Continue to hold FSMAX until you break even, but direct all new contributions to FSKAX and FTIHX. Once FSMAX arrives back at your cost basis, exchange it for FSKAX. In this way, you avoid taking a loss, regardless of the alternative outcome.
[/list]
Ultimately, this is a great exercise in investor psychology. Working through this today is going to save you a lot of headaches in the future.
This is what I've opted to do: I'm going to hold FSMAX until it breaks even (which will eventually happen, unless something apocalyptic happens), and then dump it into FSKAX. Distributions have been directed to FSKAX as well. If I believe in the market as a whole, then it stands to reason that I should also believe in the market in part, as this fund holds 3680 companies' stocks.

Yes, this has been a great exercise in my investment philosophy, and I've decided I'd much rather sit on an emotional mistake than realize an actual loss and sell. I'll just have to get used to seeing that in my portfolio for a while - but hopefully not too long! Thanks, everybody!
You should really research about tax loss harvesting. Holding until it breaks even is really poor advice.
Doctor Rhythm
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Re: If/when to sell an index fund at a loss.

Post by Doctor Rhythm »

NazgulSentient wrote: Sun Mar 26, 2023 6:23 pm If I believe in the market as a whole, then it stands to reason that I should also believe in the market in part, as this fund holds 3680 companies' stocks.
Only time will tell if this is the right decision, but the rationale you present doesn’t make sense to me. It’s not enough that the extended market recovers. That’s would be easy. You have to hope the extended market outperforms the total market in the future by enough of a margin that it makes up for not tax-loss harvesting.

Then again, hopefully $2800 isn’t a lot of money to you, so it could be seen as an inexpensive wager that justified the opportunity costs.
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arcticpineapplecorp.
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Re: If/when to sell an index fund at a loss.

Post by arcticpineapplecorp. »

NazgulSentient wrote: Fri Mar 24, 2023 5:44 pm I didn't spend too much on FSMAX (current value $2800), but right now it's down a much more significant percentage (-28.75%) than FSKAX (-11.8%).
this appears to be from Nov 2021 to now.

thing is, if we look at a much longer time frame back to 1993 (using vanguard's total stock market index fund vs vanguard's extended market index fund) because fidelity's only goes back to 2012 what we see is this:

Image

Source

what do you notice?

there were times when extended pulled ahead of total stock market and times when it fell behind. But over the long term (30 years so far!) they've been pretty similar with total market edging out 9.55% CAGR vs extended market's 9.47%. That's a difference of 0.08%, basically kind of a rounding error.

Now I'm not saying this to convince you to stay in extended market because they both might perform similary over the next 30 years (we don't really know that), because I'm trying to convince you to do the opposite. That is, sell, take the loss and buy the fund that you actually want to own (total stock market index fund).

Here's why:

1. You only have $2800 in the extended market. It's a small amount of money over your lifetime of earnings and savings. It's a rounding error I'm sure. So it's not worth worrying over.

2. You can take a tax loss since this is in a taxable account. We don't know the amount of the loss because you're only telling us it's now worth $2800 but we don't know what you paid for it originally. Just because the fund is down -28.75% doesn't mean that's the amount of money you lost. Could be, but it could just be the drawdown your looking at for the fund, rather than the actual loss. You didn't tell us how much you invested originally and how that compares to the $2800 you have now in extended market.

3. if you want to be in total stock market then just sell, take the loss on extended market and buy total stock market. You're still getting to buy shares at discount in total stock market and claim a tax loss from selling extended market. And since they're not substantially identical you create no wash sale as a result. You also simplify your portfolio having 1 fewer fund.

have i convinced you?
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Navillus1968
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Re: If/when to sell an index fund at a loss.

Post by Navillus1968 »

NazgulSentient wrote: Sun Mar 26, 2023 6:23 pm
DeliberateDonkey wrote: Fri Mar 24, 2023 9:11 pm Continue to hold FSMAX until you break even, but direct all new contributions to FSKAX and FTIHX. Once FSMAX arrives back at your cost basis, exchange it for FSKAX. In this way, you avoid taking a loss, regardless of the alternative outcome.
[/list]
Ultimately, this is a great exercise in investor psychology. Working through this today is going to save you a lot of headaches in the future.
This is what I've opted to do: I'm going to hold FSMAX until it breaks even (which will eventually happen, unless something apocalyptic happens), and then dump it into FSKAX. Distributions have been directed to FSKAX as well. If I believe in the market as a whole, then it stands to reason that I should also believe in the market in part, as this fund holds 3680 companies' stocks.

Yes, this has been a great exercise in my investment philosophy, and I've decided I'd much rather sit on an emotional mistake than realize an actual loss and sell. I'll just have to get used to seeing that in my portfolio for a while - but hopefully not too long! Thanks, everybody!
Please read the BH wiki on Tax Loss Harvesting- https://www.bogleheads.org/wiki/Tax_loss_harvesting. Your decision to hold a losing ETF (FSMAX) instead of realizing the loss & re-investing the money in FSKAX is wasting the value of your loss.
If you sell FSMAX & re-invest into FSKAX, your money will still climb back towards a breakeven point & beyond, but you will have gained the ability to use the loss to deduct about $1200 off your income taxes next April.
Assuming you're in the 22% tax bracket, that deduction will save you about $265 in taxes while you remain fully invested in the market. Win-win.
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DeliberateDonkey
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Re: If/when to sell an index fund at a loss.

Post by DeliberateDonkey »

Nate79 wrote: Sun Mar 26, 2023 6:51 pm You should really research about tax loss harvesting. Holding until it breaks even is really poor advice.
Navillus1968 wrote: Sun Mar 26, 2023 9:16 pm Please read the BH wiki on Tax Loss Harvesting- https://www.bogleheads.org/wiki/Tax_loss_harvesting. Your decision to hold a losing ETF (FSMAX) instead of realizing the loss & re-investing the money in FSKAX is wasting the value of your loss.
If you sell FSMAX & re-invest into FSKAX, your money will still climb back towards a breakeven point & beyond, but you will have gained the ability to use the loss to deduct about $1200 off your income taxes next April.
Assuming you're in the 22% tax bracket, that deduction will save you about $265 in taxes while you remain fully invested in the market. Win-win.
Since when did Bogleheads advocate for tax-loss harvesting into fundamentally different investments? Sounds like performance-chasing to me. If FSKAX is going to follow FSMAX back towards breakeven, how did OP manage to lose an extra 17% on it in the first place? Looking at the numbers, it seems that a lot of investors might be in the same boat with them.

Image

I'm not saying that OP shouldn't swap the funds, but I think it is inaccurate to suggest that swapping them is a simple exercise in tax-loss harvesting.
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Nate79
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Re: If/when to sell an index fund at a loss.

Post by Nate79 »

DeliberateDonkey wrote: Sun Mar 26, 2023 10:04 pm
Nate79 wrote: Sun Mar 26, 2023 6:51 pm You should really research about tax loss harvesting. Holding until it breaks even is really poor advice.
Navillus1968 wrote: Sun Mar 26, 2023 9:16 pm Please read the BH wiki on Tax Loss Harvesting- https://www.bogleheads.org/wiki/Tax_loss_harvesting. Your decision to hold a losing ETF (FSMAX) instead of realizing the loss & re-investing the money in FSKAX is wasting the value of your loss.
If you sell FSMAX & re-invest into FSKAX, your money will still climb back towards a breakeven point & beyond, but you will have gained the ability to use the loss to deduct about $1200 off your income taxes next April.
Assuming you're in the 22% tax bracket, that deduction will save you about $265 in taxes while you remain fully invested in the market. Win-win.
Since when did Bogleheads advocate for tax-loss harvesting into fundamentally different investments? Sounds like performance-chasing to me. If FSKAX is going to follow FSMAX back towards breakeven, how did OP manage to lose an extra 17% on it in the first place? Looking at the numbers, it seems that a lot of investors might be in the same boat with them.

Image

I'm not saying that OP shouldn't swap the funds, but I think it is inaccurate to suggest that swapping them is a simple exercise in tax-loss harvesting.
You don't need to TLH into a different type of investment.
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Re: If/when to sell an index fund at a loss.

Post by tibbitts »

It's not a huge amount of money, but in principle it's a bad idea to either keep the fund or exchange it for a different category of stock fund. Assuming this is a taxable account, I'd exchange the balance for some other mid-cap fund that isn't exactly a completion index, so there's no issue with "substantially identical" funds.
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Re: If/when to sell an index fund at a loss.

Post by Navillus1968 »

DeliberateDonkey wrote: Sun Mar 26, 2023 10:04 pm
Nate79 wrote: Sun Mar 26, 2023 6:51 pm You should really research about tax loss harvesting. Holding until it breaks even is really poor advice.
Navillus1968 wrote: Sun Mar 26, 2023 9:16 pm Please read the BH wiki on Tax Loss Harvesting- https://www.bogleheads.org/wiki/Tax_loss_harvesting. Your decision to hold a losing ETF (FSMAX) instead of realizing the loss & re-investing the money in FSKAX is wasting the value of your loss.
If you sell FSMAX & re-invest into FSKAX, your money will still climb back towards a breakeven point & beyond, but you will have gained the ability to use the loss to deduct about $1200 off your income taxes next April.
Assuming you're in the 22% tax bracket, that deduction will save you about $265 in taxes while you remain fully invested in the market. Win-win.
Since when did Bogleheads advocate for tax-loss harvesting into fundamentally different investments? Sounds like performance-chasing to me. If FSKAX is going to follow FSMAX back towards breakeven, how did OP manage to lose an extra 17% on it in the first place? Looking at the numbers, it seems that a lot of investors might be in the same boat with them.

Image

I'm not saying that OP shouldn't swap the funds, but I think it is inaccurate to suggest that swapping them is a simple exercise in tax-loss harvesting.
OP- "Early in my learning of how to invest Boglehead style, I misread/misunderstood something and bought a little bit of FSMAX (FIDELITY EXTENDED MARKET INDEX FUND, a mid-cap blend) in my taxable account, along with the usual FSKAX (FIDELITY TOTAL MARKET INDEX FUND) and FTIHX (FIDELITY TOTAL INTL INDEX FUND). I understand now that the holdings of FSMAX are held inside of FSKAX, and so I have a redundancy in my taxable account portfolio."

Considering OP bought FSMAX by mistake in the first place, why would she continue to hold a position she never intended?
Tax loss harvesting occurs when you sell at a loss, period. Whether you repurchase shares of a similar fund is not the heart of TLH, especially when the original position was established in error!
Are you saying if I sell a domestic stock MF/ETF at a loss & purchase a international fund with the money to re-balance my AA, that's faulty TLH, because I didn't buy a domestic stock fund as a TLH partner? Seems rigid & doctrinaire to me, but what do I know?
tibbitts
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Re: If/when to sell an index fund at a loss.

Post by tibbitts »

Navillus1968 wrote: Sun Mar 26, 2023 11:14 pm Considering OP bought FSMAX by mistake in the first place, why would she continue to hold a position she never intended?
Tax loss harvesting occurs when you sell at a loss, period. Whether you repurchase shares of a similar fund is not the heart of TLH, especially when the original position was established in error!
Are you saying if I sell a domestic stock MF/ETF at a loss & purchase a international fund with the money to re-balance my AA, that's faulty TLH, because I didn't buy a domestic stock fund as a TLH partner? Seems rigid & doctrinaire to me, but what do I know?
The OP seemed to first be considering the worse performance over the period as part of the justification for selling FSMAX, and then later for not selling until it broke even. Some of us are suggesting that the performance shouldn't be an issue except in determining whether to TLH. Obviously with the modest number of dollars involved it won't make much difference. It would just be unfortunate for the OP to get into the habit of TLHing from worse performing funds into better (or less-worse) performing funds.
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