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Sell equities due to potential home purchase
Old 11-23-2013, 09:51 AM   #1
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Sell equities due to potential home purchase

With markets (and my portfolio) at all time highs, I have given thought to selling some equities and either letting the proceeds sit in cash or allocate to much more conservative investments due to the potential of buying a condo and needing down payment money.

What are your thoughts?

Only 2.5% of my portfolio (incl retirement funds) is cash/cash equivalent; the remainder is 100% equities.

Even with the home purchase consideration aside, I should probably allocate some more to cash/cash equivalents in my portfolio.

But my thinking/questions are as follows:

1. Usually the market ends the year with a bull run. If this year is no different, I could sell whatever amount necessary for a downpayment (probably not needed until the spring).

2. I am already "taking a bath" from a tax perspective this year since I sold 100% in February 2013 by pulling my money from money manager. My estimated tax due on that alone is $5,000, and if I sell more by year end, I will owe more in April.

3. Do any of you speculate a market drop in Q1 next year? I know most of your approaches are hands off and don't involve market speculation, but in my case (of needing money for a downpayment), wouldn't it be wise to set some of the gains aside to cash in case the market drops?

4. If I do sell some equities, should I just let it sit in cash or are there some conservative bond funds that might give me some better return in the 3-5 month time frame?
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Old 11-23-2013, 09:59 AM   #2
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If it were me, I'd grab the cash now for the needed down payment given your goal is in the short term. Even though, the talking heads on tv mentioned that 80% of the time markets have gone up in the months of November and December.
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Old 11-23-2013, 10:08 AM   #3
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Selling because you expect a drop in Q1 is a terrible idea and sooner or later you will be burned by this kind of market timing. But if you are selling because you anticipate a need for cash in the next year or two, then moving that amount from long term (equity) investments to short term (fixed) is a good hedge to keep from needing the money in a down period. If you have a short term need, selling at a high point makes sense.
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Old 11-23-2013, 10:09 AM   #4
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It's a crap-shoot. What would the tax delta be in waiting for the new tax year? Would any shift to long term gains?

You need to weigh that against an unknown market future, no right answer IMO.

Q: Couldn't you have pulled your money from the manager w/o selling? Just transferring?

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Old 11-23-2013, 10:32 AM   #5
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Selling because you expect a drop in Q1 is a terrible idea and sooner or later you will be burned by this kind of market timing. But if you are selling because you anticipate a need for cash in the next year or two, then moving that amount from long term (equity) investments to short term (fixed) is a good hedge to keep from needing the money in a down period. If you have a short term need, selling at a high point makes sense.

The whole point is to sell for a short term need.
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Old 11-23-2013, 10:33 AM   #6
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I think it's a huge mistake to have 100% equities if some of that money is earmarked for a home purchase, unless you think the purchase is more than ten years away.

If the money is to be spent in the next 24 months, it should be in fixed income...probably CDs, since bond funds have the potential to go down in the short term as interest rates potentially rise.
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Old 11-23-2013, 10:34 AM   #7
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Originally Posted by ERD50 View Post
It's a crap-shoot. What would the tax delta be in waiting for the new tax year? Would any shift to long term gains?

You need to weigh that against an unknown market future, no right answer IMO.

Q: Couldn't you have pulled your money from the manager w/o selling? Just transferring?

-ERD50
Yes... I could have..... but I didn't like his choices nor allocation; they all had high expense ratios and the allocation was too heavily vested in bonds.

Most of the short term gains would shift to long term gains if I sold in March-April 2014. I might not need the money for a downpayment until April-May.....so it could work out not selling until then.....but the big unknown would be whether or not the market drops.
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Old 11-23-2013, 10:44 AM   #8
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Do you have any purchase lots in a loss position that you could sell in 2013? That would both raise the cash you need and help in taxes.

What are the tax rates on the gains if you sell in 2013 vs 2014? My thought is that if you don't have any losers to sell and are above the 15% bracket this year as a result of sales but expect to be in the 15% bracket next year (which would mean 0% LTCG taxes) you might be better off waiting and buying a hedge to protect the amount you would have sold against market fluctuations rather than paying ordinary rates on a STCG. But if your marginal tax rate on the gain on a sale now vs next year are not significantly different then just sell now, raise the cash and avoid the hedging cost and complexities.
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Old 11-23-2013, 10:55 AM   #9
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Originally Posted by younginvestor2013 View Post
With markets (and my portfolio) at all time highs, I have given thought to selling some equities and either letting the proceeds sit in cash or allocate to much more conservative investments due to the potential of buying a condo and needing down payment money.

....
Personally I would just do it, lock in the gains, put it in a savings account, and not look back. If you buy a place early next year you will have some nice deductions to itemize in mortgage interest and taxes for 2014, so sell this year to keep next year's income lower. If you don't buy a place, you will still have your down payment ready and a cash allocation.
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Old 11-23-2013, 11:02 AM   #10
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Originally Posted by younginvestor2013 View Post
[...] my thinking/questions are as follows:

1. Usually the market ends the year with a bull run. If this year is no different, I could sell whatever amount necessary for a downpayment (probably not needed until the spring).

2. I am already "taking a bath" from a tax perspective this year since I sold 100% in February 2013 by pulling my money from money manager. My estimated tax due on that alone is $5,000, and if I sell more by year end, I will owe more in April.

3. Do any of you speculate a market drop in Q1 next year? I know most of your approaches are hands off and don't involve market speculation, but in my case (of needing money for a downpayment), wouldn't it be wise to set some of the gains aside to cash in case the market drops?
As always, the extent of my speculation is 50% chance that the market will drop, 50% chance that it will rise. In other words, I am not betting my life and future on a guess. What you are asking for really IS a guess, and nothing more, especially considering that I don't have the inside information that the big guys have.

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4. If I do sell some equities, should I just let it sit in cash or are there some conservative bond funds that might give me some better return in the 3-5 month time frame?
If you are sure that you are going to buy, I'd just let it sit in money market for now. Otherwise, I'd leave it invested at your long term asset allocation.

You are going to take such a tax hit! Ouch. My sympathies on that. A few times I have thought of moving just to get a nicer house, but I don't want a mortgage. I imagine that I would get a huge tax hit from selling enought portfolio holdings to cover the purchase price if I bought the new house before selling the old one. For now, my solution will probably be to just stay put and enjoy what I have, which is really a very nice house even though a very few others do seem nicer from afar.
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Old 11-23-2013, 11:33 AM   #11
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Originally Posted by pb4uski View Post
Do you have any purchase lots in a loss position that you could sell in 2013? That would both raise the cash you need and help in taxes.
What are the tax rates on the gains if you sell in 2013 vs 2014? My thought is that if you don't have any losers to sell and are above the 15% bracket this year as a result of sales but expect to be in the 15% bracket next year (which would mean 0% LTCG taxes) you might be better off waiting and buying a hedge to protect the amount you would have sold against market fluctuations rather than paying ordinary rates on a STCG. But if your marginal tax rate on the gain on a sale now vs next year are not significantly different then just sell now, raise the cash and avoid the hedging cost and complexities.
+1, this is what I'd do. Also, if you haven't already done it, set up your taxable accounts so that any interest/dividends are going into a money market fund (that way it will be there when you need it for the down payment, decreasing the number of shares you have to sell and the resultant cap gains taxes).

No one knows what the market will do in the short term. If we did, we could use that knowledge to buy options and be fabulously rich in very short order.

Regarding where to put the money: There are no great options for yields that will beat inflation. A simple CD or money market fund is about the best you can do. A very short term bond fund might offer slightly better return and little downside risk if interest rates go up, but if you do the math using the real numbers and the actual amount of interest you'll earn in all cases, you'll see it doesn't make a lot of difference given the low rates and short time period.

Of course, from a strict maximum "expected value" perspective, leaving the whole thing invested in equities until the day you need it produces the best expected result, but that's rolling the dice.
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Old 11-27-2013, 08:38 PM   #12
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At todays interest rates, I'd take every nickle someone would loan you and leace my money in the market.
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