Rebalancing Portfolio challenges

[tacman1123]

I'm struggling with the actual mechanics of switching from a buy-and-hold, mostly equities, strategy to a newly-FIRE, more conservative approach. I've done most of my own investing during my work years, and am wondering if now is a good time to consider a financial advisor.

I'm waaaaay overweighted in domestic tech equities, which has helped me get to the point of FIRE, but is not the place to be if I want to guarantee I can stay here. In particular, Amazon, Google and Berkshire Hathaway make up a disproportionate amount of my portfolio.

Rebalancing is the wise thing to do. I know that. There will be tax consequences, and the decision of where to put the proceeds once I sell. I feel like I've read a ton of articles, but having a hard time pulling the trigger. And I don't want to wait until a market correction / disruption to motivate me. I remember 2009 all too well, and my promised that if my assets ever got back to their 2008/9 highs, I'd reduce some risk. Well, now I'm here, and need to make good on that promise.

Suggestions on going forward? The simple retirement calculators are fine for calculating AA and such, but I'd like to find something that incorporated the taxes and gave more feedback on risk (including inflation risk).

Thanks,

Tac

 

[copyright1997reloaded]

First, a word to the wise. In the dot.com run up I had a stock that I paid approximately $2K for which was worth $233K. I was afraid to sell it because of the capital gains. It was a semi-conductor stock (LLTC) with a good, profitable business which I expected to continue. So I rationalized that although it might fall somewhat, I wanted to continue to hold it. To placate myself I sold 200 shares (of my 3200 share position). It was my biggest (by far) holding at the time.

All of the above was true, but the stock fell dramatically when the bubble burst. Even though the company continued to improve sales and earnings, it took a long, long time to get back to those levels. In fact, it didn't (quite) and was acquired by ADI last year.

So the message here is to start to sell, and pay the taxes.

If you have tax-deferred accounts, you might want to start there because there is no tax penalty. If you don't, well just set aside some of the proceeds for the tax man (and do estimated if necessary). Since I find estimated to be a PITA and I am still employed, I instead take more taxes out of each paycheck by withholding an additional amount.

I like to do things a little at a time - so if I wasn't super exposed I would sell to get to my proper allocation over a period of months. However, during that time you are exposed to big downturns over that time. Remember that market downturns tend to happen much more quickly than the upward price moves. (The exception to this is in a true down market there are often violent upswings that sucker people in thinking the down market is over.) The more "automatic" you make the ongoing selling process the likelier you are to not be emotionally wracked by it.

 

[kaudrey]

Well, if you are FIRE'd and don't have a large income coming in, you can likely sell some of the stock without any capital gains as all. Or, if not, the rate on long-term capital gains is not too high, so I'd just suck it up and sell to get to the allocation you want. As far as deciding that allocation, it depends on so many things - sources of income, withdrawal needs now and over time, planning for heirs, how old you are and your time horizon. We'd need to know a lot more about you to help with that part.

 

[travelover]

What I did was just go for a simple portfolio of index funds - no advisor needed. Agree, it might be best to sell large gains in after-tax accounts and suck up the tax consequences rather than regret it later.

 

[ERD50]

What I did was just go for a simple portfolio of index funds - no advisor needed. Agree, it might be best to sell large gains in after-tax accounts and suck up the tax consequences rather than regret it later.

+1

As mentioned, some of the gains may be taxed at 0%. Run one of the 2018 tax estimators to see how much you can sell to diversify.

-ERD50

 

[audreyh1]

Sell your stocks - at least some of them. Put the proceeds in a broad US index mutual fund or ETF and/or fixed income as needed. Tax on the cap gains is the fee for diversifying to a safer position now that you’ve arrived (retired). Pat yourself on the back.

Berkshire Hathaway is probably far less vulnerable than the other high fliers.

 

[walkinwood]

I'll echo the others - rebalance. Risk trumps taxes.

Also, look closely at index funds and choose diversified indexes. eg. total market instead of growth+value+small+reit. At some point, you'll want to simplify and you'll end up paying cap gains taxes again when you want to do that. I really wish I had done that in 2009 after I harvested losses.

Resign yourself to the very real possibility that your current portfolio will outperform your well-balanced portfolio. You can't dwell on that. The small chance of a 2009 repeat has very large consequences to ER.

Congrats and good luck.

 

[GTFan]

I'll echo the others - rebalance. Risk trumps taxes.

While true, things get a lot more expensive when you factor in ACA subsidies. May or may not apply here but cap gains can be problematic if you are relying on the ACA.

Yet another reason to have a decent split of taxable vs. tax-advantaged assets so you can rebalance for free with the tax-advantaged stuff. Of course that means you had to plan for it long ago and invest in both classes.

 

[tacman1123]

Thanks, all, for the sage advice. I've begun the process, selling some individual stocks in my taxable account that I bought a long time ago and don't even follow anymore (An avid Motley Fool fan at the time).

Although I'm very computer-savvy, I'm stuck on the next step -- actually picking the assets to purchase. I moved my retirement accounts (IRA and Traditional) to Personal Capital, which at least gave me some diversification, but I doubt their services are worth the 0.6% fee, $6000 for a million dollar portfolio.

Personal Capital does have a nice interface for aggregating accounts and showing assets by category. TD AmeriTrade has good research tools and lots of no-fee EFTs, but only for their accounts. USAA allows you to link external accounts, but their tools aren't as pretty nor do they offer as many options. Mint has a great interface that aggregates both investments and income/expenses, but doesn't seem to do too much with that data as far as planning and research.

Short of going to a financial planner, who I imagine will charge between $20k and $30k/ year, what tools do folks recommend to do this? A spreadsheet? Obviously, any tool would need to know the cost basis and tax bracket, and I guess that's what professional tax software and investment management tools have.

Thanks!

 

[ERD50]

Thanks, all, for the sage advice. I've begun the process, selling some individual stocks in my taxable account that I bought a long time ago and don't even follow anymore (An avid Motley Fool fan at the time).

Although I'm very computer-savvy, I'm stuck on the next step -- actually picking the assets to purchase. ...

This was answered in post #4 by travelover. In case you missed the link:

https://www.bogleheads.org/wiki/Three-fund_portfolio

Just "buy the market", spread across US Total Market, some INTL, and bonds. Easy-peasy, and most important... effecitve.

Obviously, any tool would need to know the cost basis and tax bracket, and I guess that's what professional tax software and investment management tools have.

Thanks!

The cost basis should be on your statements, so figuring taxes should be pretty easy. Spreadsheet, or back of an envelope would do. I recc a spreadsheet.

-ERD50

 

[mrfeh]

I'm struggling with the actual mechanics of switching from a buy-and-hold, mostly equities, strategy to a newly-FIRE, more conservative approach. I've done most of my own investing during my work years, and am wondering if now is a good time to consider a financial advisor.

I'm waaaaay overweighted in domestic tech equities, which has helped me get to the point of FIRE, but is not the place to be if I want to guarantee I can stay here. In particular, Amazon, Google and Berkshire Hathaway make up a disproportionate amount of my portfolio.

Rebalancing is the wise thing to do. I know that. There will be tax consequences, and the decision of where to put the proceeds once I sell. I feel like I've read a ton of articles, but having a hard time pulling the trigger. And I don't want to wait until a market correction / disruption to motivate me. I remember 2009 all too well, and my promised that if my assets ever got back to their 2008/9 highs, I'd reduce some risk. Well, now I'm here, and need to make good on that promise.

Suggestions on going forward? The simple retirement calculators are fine for calculating AA and such, but I'd like to find something that incorporated the taxes and gave more feedback on risk (including inflation risk).

Thanks,

Tac

You may want to get advice from an accountant regarding taxes. However, you should be able to handle the investing piece yourself.

First step is to educate yourself. Start here: https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit

 

[pb4uski]

Thanks, all, for the sage advice. I've begun the process, selling some individual stocks in my taxable account that I bought a long time ago and don't even follow anymore (An avid Motley Fool fan at the time).

Although I'm very computer-savvy, I'm stuck on the next step -- actually picking the assets to purchase. I moved my retirement accounts (IRA and Traditional) to Personal Capital, which at least gave me some diversification, but I doubt their services are worth the 0.6% fee, $6000 for a million dollar portfolio.

Personal Capital does have a nice interface for aggregating accounts and showing assets by category. TD AmeriTrade has good research tools and lots of no-fee EFTs, but only for their accounts. USAA allows you to link external accounts, but their tools aren't as pretty nor do they offer as many options. Mint has a great interface that aggregates both investments and income/expenses, but doesn't seem to do too much with that data as far as planning and research.

Short of going to a financial planner, who I imagine will charge between $20k and $30k/ year, what tools do folks recommend to do this? A spreadsheet? Obviously, any tool would need to know the cost basis and tax bracket, and I guess that's what professional tax software and investment management tools have.

Thanks!

I use Quicken, augmented a workbook. Our investments are across 5 different vendors... mostly Vanguard, then some PenFed, Discover Bank, Health Savings Administrators and an old whole life policy. Vanguard and Discover Bank update transactions and prices automtically in Quicken. The others are manual but are not a burden because there are few transactions.

After everything is updated in Quicken I run a report with portfolio values by account and ticker and copy and paste it into a worksheet in an Excel workbook. Another sheet in the workbook references the data and summarizes the total value by asset class compared to target with % and $ differences, total value across buckets compared to target with % and $ differences, total value by tax status (taxable, tax-deferred and tax-free) compared to when we retired, and domestic stocks between large, mid and small cap compared to target with % and $ differences.

While it took a bit of time to build it, most times it takes me less than 5 minutes to update it and review it. I also have built into it the ability to add pro forma transactions... I use this to build my rebalancing plan by adding various trades until my portfolio is rebalanced... if the trade is a taxable trade the spreadsheet calculates an estimate of the capital gain/(loss) based on cost basis data in Quicken... once I have my rebalancing plan built then I execute transactions on Vanguard's website.

I usually refresh it at least once a month... but it only takes about 5 minutes.

I keep "snapshots" of the data sheet and the summary analysis as of the end of for each year for reference.

 

[canuck5]

It's been said a few times, above, but it's pretty hard to beat an S&P 500 (VFINX, .14% exp or less) or a Total Stock Market Fund ETF (VTI, .04% exp). Lots of fund managers, can't and if you go to this website, you'll see that 82.38% can't, over a 5 year period. Click on "Get Stats on Other Market Segments", you find whatever index you want.

SPIVA

 

[walkinwood]

While true, things get a lot more expensive when you factor in ACA subsidies. May or may not apply here but cap gains can be problematic if you are relying on the ACA.

Yet another reason to have a decent split of taxable vs. tax-advantaged assets so you can rebalance for free with the tax-advantaged stuff. Of course that means you had to plan for it long ago and invest in both classes.

Point taken, but you can do the rebalancing one year, take the hit and then get back to getting ACA credits in future years if you're eligible.

The additional hit to your portfolio if an over-weighted or concentrated asset crashes is a lot worse than losing ACA credits for a year or more.

As always, each person's situation is different.