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Don't let the tax tail wag the investment dog?
Old 06-05-2018, 10:22 AM   #1
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Don't let the tax tail wag the investment dog?

Catchy slogan and plays to the desire that many of us have to nail down a gain while it is there.

But for years I have kept records of buys and sells, and my conclusion is that the only thing I know for sure is roughly what the tax bill for the sale will be. What may or may not happen to the unsold stock is yet to be revealed. In other words, if I sell I will definitely have to pay tax, since most of my portfolio is in a taxable account. If I hold, my stock may or may not go down. (It's different if there are offsetting losses, or issues held at a loss.) So lately I have tried to be less hot to get rid of what I think are stretched valuations on my stocks. I do own a few consumer stocks that I have had for ~20+ years, as these don't make me feel like I may be on thin ice.

What do others do on this issue?

Ha
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Old 06-05-2018, 10:32 AM   #2
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I often feel compelled to lock in gains at times like these, but am learning to be more averse of trading for that reason alone. Simple rebalancing towards my target allocation takes gains (and losses) into account and seems to be the best guide for my decision process. If it's within 5% of target allocation, I hold.
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Old 06-05-2018, 10:35 AM   #3
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The thing to ask yourself is if it is worth paying 15% a little earlier than you might to avoid the risk of losing the unrealized gains.
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Old 06-05-2018, 10:58 AM   #4
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Great advice.

We were fortunate. We got that advice early on from an individual who was a very successful investor. Pigs get slaughtered.
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Old 06-05-2018, 11:14 AM   #5
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What do others do on this issue?
Basically, I don't buy and sell in response to changing valuations, at all.

Like you, most of my portfolio is in taxable accounts. Normally I just live off dividends from various index funds, and buy and sell only to rebalance.

The one exception was when I needed to sell in order to obtain cash to buy my house in cash. I had to pay taxes then. Oof. But I did not need to buy anything because I sold in such a way that I was rebalanced afterwards.

Well, that is probably more than you wanted to know. Sorry!
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Old 06-05-2018, 11:43 AM   #6
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I don't think you will like my response to "what do others do."

First, we haven't owned any individual stocks in a very long time. We donated the last of them to our Donor Advised Fund years ago. That means we just don't have to worry about valuations anymore at all.

Second, we own index funds. It also doesn't matter what their valuations are as well. We just don't care about their individual performances or whether they go up or down. That's because we only compare our portfolio to benchmarks of index funds. Our portfolio will only do worse than everybody else's portfolio when we own too much of some esoteric index fund.

Third, we simply rebalance among the various index funds. You know. bonds to equities, equities to bonds, bonds to bonds, equities to equities, domestic to international and back. All this is based on what things did in the recent past and without making any predictions for the future. For example, if foreign stocks lag, then our foreign equity ETFs will lag and we will see that we need to buy more of them. Or if US equities outperform, then our US equity ETFs will be overweighted and we will see that we need to sell them.

Fourth, taxes on investments? What's up with that? There are so many ways to avoid taxes on investments even with a large taxable account that it is almost something not to worry about. You got your tax-loss harvesting and your 0% taxes on long-term capital gains and qualified dividends. Also return of capital is tax free. And donating to charity is easy and avoids taxes, too.

Was I right? Did you not like my response?
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Old 06-05-2018, 12:08 PM   #7
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I saw some colleagues forfeit a great deal of money by not exercising stock options in a prudent manner. It was always the same....waiting for that higher stock price or tax avoidance issues.

As it turned out they crapped out on the first but aced the second. The stock went under water. No tax to pay! I prefer option one.
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Old 06-05-2018, 01:18 PM   #8
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What I have learned is, if my problem is worrying about how much tax I may need to pay by exercising a sale, I really do not have a problem .



My priority becomes do I want/need the proceeds for the sale for some purpose (any thing from wild spending to moving the proceeds into another investment vehicle). Taxes are, for the most part, a secondary issue.
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Old 06-05-2018, 01:59 PM   #9
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You got your tax-loss harvesting and your 0% taxes on long-term capital gains and qualified dividends. Also return of capital is tax free.
Under the new tax law, 0% fed taxes on long term capital gains for a couple is only in effect for the <$77.2K income...above that, you'll have to pay 15% or 20%, depending. For those of us with lower joint incomes, the 0% LTCG exclusion rocks!
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Old 06-05-2018, 02:41 PM   #10
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I don't think you will like my response to "what do others do."

First, we haven't owned any individual stocks in a very long time. We donated the last of them to our Donor Advised Fund years ago. That means we just don't have to worry about valuations anymore at all.

Second, we own index funds. It also doesn't matter what their valuations are as well. We just don't care about their individual performances or whether they go up or down. That's because we only compare our portfolio to benchmarks of index funds. Our portfolio will only do worse than everybody else's portfolio when we own too much of some esoteric index fund.

Third, we simply rebalance among the various index funds. You know. bonds to equities, equities to bonds, bonds to bonds, equities to equities, domestic to international and back. All this is based on what things did in the recent past and without making any predictions for the future. For example, if foreign stocks lag, then our foreign equity ETFs will lag and we will see that we need to buy more of them. Or if US equities outperform, then our US equity ETFs will be overweighted and we will see that we need to sell them.

Fourth, taxes on investments? What's up with that? There are so many ways to avoid taxes on investments even with a large taxable account that it is almost something not to worry about. You got your tax-loss harvesting and your 0% taxes on long-term capital gains and qualified dividends. Also return of capital is tax free. And donating to charity is easy and avoids taxes, too.

Was I right? Did you not like my response?
+1.

Exactly what I do with our stuff. 2 index equity funds. 2 index bond funds. Complicated, but not too much.
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Old 06-05-2018, 02:48 PM   #11
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Under the new tax law, 0% fed taxes on long term capital gains for a couple is only in effect for the <$77.2K income...above that, you'll have to pay 15% or 20%, depending. For those of us with lower joint incomes, the 0% LTCG exclusion rocks!
Another thing to consider that not everyone is a member of a duly sanctioned couple. When people like to prove their points, they often forget that although a spouse cuts tax on the same amount of income as compared to a single, in general I haven't met too many couples where that extra person is actually a non-consumer.


Ha
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Old 06-05-2018, 03:17 PM   #12
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When you have to write a 5 figure check to the tax man, you try and avoid them anyway you can. Taxable account equites will ride a few more years until my taxable income drops and then I might be able to sneak them in under $77,200 12% level.
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Old 06-05-2018, 03:42 PM   #13
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Great advice.

We were fortunate. We got that advice early on from an individual who was a very successful investor. Pigs get slaughtered.
Actually, I think it is "Pigs get fat, hogs get slaughtered".
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Old 06-05-2018, 03:44 PM   #14
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Under the new tax law, 0% fed taxes on long term capital gains for a couple is only in effect for the <$77.2K income...above that, you'll have to pay 15% or 20%, depending. For those of us with lower joint incomes, the 0% LTCG exclusion rocks!
Actually it is $77.2k of taxable income, which after the $24k standard deduction translates to $101.2k of income.... $50,600 for a single.
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Old 06-05-2018, 04:29 PM   #15
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I don't have any hard rule regarding harvesting gains. Sometimes I am willing to pay the tax to get out of an investment. And sometimes I am not. I evaluate each situation. Right now we are in the 0% bracket for LTCG and the decision is much easier than when we were in the 23.8% bracket.
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Old 06-05-2018, 04:36 PM   #16
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I saw some colleagues forfeit a great deal of money by not exercising stock options in a prudent manner. It was always the same....waiting for that higher stock price or tax avoidance issues.

As it turned out they crapped out on the first but aced the second. The stock went under water. No tax to pay! I prefer option one.
Saw that too!

One of them was asking if they could take a "loss" for the value of peak price to option price, i.e. that virtual paper loss. Ah, no. Doesn't work that way. Yes, friend, you were rich for a while.
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Old 06-05-2018, 04:37 PM   #17
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Fourth, taxes on investments? What's up with that? There are so many ways to avoid taxes on investments even with a large taxable account that it is almost something not to worry about. You got your tax-loss harvesting and your 0% taxes on long-term capital gains and qualified dividends. Also return of capital is tax free. And donating to charity is easy and avoids taxes, too.

If you’re able to offset all your gain by tax loss harvesting, you’re not doing too well. I did all my tax loss harvesting a couple of years ago and my gains far outweigh my losses.
Successful investors do pay taxes. While I do give generously to charities, my goal is to increase my wealth for a comfortable retirement and a legacy for our children. I’d never give all my gains to charity to avoid taxes, except perhaps in a down year. We have a target amount for charity each year that has nothing to do with taxes.
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Old 06-05-2018, 04:46 PM   #18
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I just try to do my normal stuff, rebalancing per the usual schedule, etc. As tax efficiently as I can. I pick the highest basis for sales. When it comes to rebalancing, if a certain position off by say 0.5% I don’t bother correcting.
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Old 06-05-2018, 04:54 PM   #19
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If you’re able to offset all your gain by tax loss harvesting, you’re not doing too well. I did all my tax loss harvesting a couple of years ago and my gains far outweigh my losses.
Successful investors do pay taxes. While I do give generously to charities, my goal is to increase my wealth for a comfortable retirement and a legacy for our children. I’d never give all my gains to charity to avoid taxes, except perhaps in a down year. We have a target amount for charity each year that has nothing to do with taxes.
I think perhaps you were not invested in 2008 to early 2009 in a taxable account then. I have plenty of unrealized gains, but when one's portfolio is so large that 2008-2009 created a million dollar loss, then one has plenty of carryover losses still.
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Old 06-05-2018, 05:24 PM   #20
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d
I think perhaps you were not invested in 2008 to early 2009 in a taxable account then. I have plenty of unrealized gains, but when one's portfolio is so large that 2008-2009 created a million dollar loss, then one has plenty of carryover losses still.

I was fully invested in 2008/9. I just didn’t sell my stocks to realize any losses. I was buying stocks during that time. Everything has bounced back plus some.
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