Best ways to re-allocate assets you've had a long time

[Amethyst]

I have questions for the members about the mechanics of doing Asset Allocation (versus what AA to have).

When we got married in the 80s, we gradually built up savings that conventional wisdom said we should not just plunk in the bank. We knew zilch about investing and it seemed hard to find advice we could understand. We had no system for where or why to invest—so ended up with various “pots” of investments, with whatever company, fund or stock seemed hot at the time.


Anyway, at some point we found Vanguard, learned about DCA, and have done most of our investing via DCA with Vanguard ever since. However, we never knew what to do with the other “pots.” In 2005, when all our investments were doing great, Vanguard’s financial planner advised us to sell everything and buy Vanguard funds with the proceeds. We chickened out due to potential tax consequences of selling, since income taxes eat 35-40% of our income. The VG folks also wanted us to rebalance our VG investments, and again, we were scared by the Tax Demon.


Complicating matters -- a few of the oddball investments were my husband’s, and predate our marriage. Oddly, though he’s highly responsible, he didn't keep good records about those investments. We don’t know their cost basis, and the companies could not provide records from that far back.

Now we are tired of procrastinating and would like to rebalance, but cringe at the thought of selling at a big loss. Yet, if not now, when?

Obviously there are no easy answers, but I would welcome ideas about how to proceed. P.S. I searched on “asset allocation” and hardly knew where to begin…was hoping maybe a forum guru could direct me to useful threads on the topic.

Thanks,

Amethyst

 

[travelover]

I think this is actually an opportunity to dump doggy investments, since even the good stuff is beaten down.

You may want to generate some tax losses by exchanging some funds in a taxable account to cover any capital gains that you might have in dumping the old stuff. Google Tax Loss Harvesting and Wash Sales.

Regarding not having any records to establish tax basis, I'd say maybe you can reconstruct it using old price records and purchase dates. If not, maybe you can make it up and see if the IRS challenges you.

 

[Darryl]

I just typed "asset tutorial" in the search function and found a thread started by LOL in I believe 11/2007. The thread has many links offered by posters that could be helpful Frank Armstrong keeps showing up.
I would agree that if these funds are in taxable accounts you could take advantage of selling while they are down to minimize the tax bite. Don't worry about selling at a loss if you are maintaining your AA you will be buying at these prices too.
I also have become much more aware of the joys of fewer funds and have been consolidating.

 

[Animorph]

Capital gains taxes will be going up, another good reason to do it now.

If you're talking big gains and big income, you may be able to exceed the tax exemption/deduction rollback limits, reducing your marginal tax rate for gains above that level. That gets you back to the nominal stated tax rates. It is a substantial improvement over the effective rates within the rollback income range.

 

[2B]

I had the problem of doing my FIL's capital gains when we liquidated everything he owned to pay for his memory care. Records weren't available for everything...

Well, most everything we had were less than complete.

What I did was guess. That's a very established accounting technique used for centuries.

All I can say is do the best you can. Be able to go into an IRS audit (very, very unlikely) with a straight face when discussing the cost basis.

Don't not sell poor investments because of tax confusion. Clear the books and go forward. Keep good records from now on. Avoid dividend reinvestment for taxable accounts.

 

[Red_y]

Taking an educated guess on the price of securities when you bought them is the best you can do sometimes. I've found this site helpful for looking up historical stock prices:

Historical Quotes: Charting Tools for Looking Up a Security's Exact Closing Price - BigCharts

 

[LOL!]

If you have losses in a taxable account, sell before they become long term losses if possible. Otherwise go ahead and sell. Do NOT succumb to the loss aversion behavioral finance trap. Go read "Why Smart People Make Big Money Mistakes" for help with this. As Darryl wrote, you can immediately reinvest in the Vanguard index funds or ETFs that match the same asset allocation. For example, sell Dodge&Cox foreign and buy Vanguard FTSE all-world ex-US fund. Another example, sell your small cap actively managed fund at a loss and immediately buy VBR with the proceeds.

This loss aversion appears to be your biggest cringe factor. Get over it.

Do NOT have your distributions automatically re-invested. Instead, take them in cash and then reinvest the cash to the places that help rebalance your portfolio.

For those investments where you don't have records for the cost basis, if they have long term gains, then donate them to charity instead of giving cash.

For more help and encouragement, go to the Bogleheads site, read and get a free personalized portfolio review. But do your homework before asking questions there.

 

[donheff]

Good advice on harvesting tax losses. Just sell the old stuff and immediately invest in new securities aligned with your AA. You can carry your losses on your tax return from year to year and use them to offset future gains.

 

[Amethyst]

Sheesh. Hard to believe, but not reinvesting dividends is a whole new notion for me. Along with "Don't put your money in cash," we were always told to reinvest dividends...always.

I guess that is why I keep returning to ER Forum...the points of view are so different from what I'm used to hearing.

Amethyst

 

[2B]

Sheesh. Hard to believe, but not reinvesting dividends is a whole new notion for me. Along with "Don't put your money in cash," we were always told to reinvest dividends...always.

I guess that is why I keep returning to ER Forum...the points of view are so different from what I'm used to hearing.

Amethyst

I reinvest dividends in my Roth and regular IRAs because the cost basis doesn't need to be recalled later. I don't reinvest in my after tax account. A lot of people do but if they don't keep very good records they will have a mess when they get ready to sell something.

 

[LOL!]

What 2B said. +1

 

[donheff]

I reinvest dividends in my Roth and regular IRAs because the cost basis doesn't need to be recalled later. I don't reinvest in my after tax account. A lot of people do but if they don't keep very good records they will have a mess when they get ready to sell something.

What 2B said. +1

I do the same, but I learned to do it here recently. Didn't help with the old taxable stuff I sold off a while back :-(

 

[youbet]

I don't see reinvesting divs + capital gains as requiring a lot more record keeping. If the div is automatically reinvested, I need to keep a record. If I get the div in cash and reinvest it in the same fund or another fund, I need to keep a record....... What's the difference?

 

[harley]

It's more complicated to be continually adding reinvested dividend cost basises into existing investments than it is to keep a single piece of paper with the cost basis of a new purchase. Not saying it isn't possible, but if you aren't a great record keeper or a spreadsheet guru there's definitely more work involved. Plus, in my case not reinvesting the dividends gives me more chance to diversify (in my stock gambling fund). For my main investments I need it for the cash flow.

 

[youbet]

I need it for the cash flow.

I think that's the real deal. The process of keeping reinvestment records, at least with Schwab, is completely automated and I just don't see the issue.

I don't reinvest all dividends. For example, my allocation in international is currently low so I have those dividends automatically reinvested and I take the domestic dividends in cash and reinvest them manually in international to whatever extent I desire. That scheme gets changed from time to time as AA rebalancing becomes necessary.

For me, to take the international divs in cash and manually reinvest into the same fund is just an unnecessary manual step requiring exactly the same record keeping.

But..... whateva floats yer boat.....

 

[Animorph]

I switched to all cash distributions late last year to avoid getting a distribution within 30 days of selling a fund. I rebalance using triggers instead of annually, and I was pretty busy in 2008. I haven't been in most of the funds long enough to still have gains at the market bottom, so all sales were pretty much losses (rebalanced into funds with even bigger losses!) So I was avoiding wash sale problems by selling for a loss and having new shares bought for me by reinvesting distributions.

I'll probably leave it this way so I can rebalance with the cash, though I hate having to wait for the price to go back down to the distribution price when I manually reinvest.

 

[harley]

I think that's the real deal. The process of keeping reinvestment records, at least with Schwab, is completely automated and I just don't see the issue.

The problem here is when Ameritrade buys Schwab, then they reorganize into Amerischwab, which is bought by Fidelity, who spins it off into 3 different companies, records tend to not be so available. I've had this problem with TDWaterhouse > TDAmeritrade > Ameritrade. Now I admit I've been dealing with them since the late 90s, but it seems they should have all those records. But they don't. No apologies, no "we screwed up", just nope. So don't trust the company's records, keep your own.