Tax Hit vs Asset Allocation/Re-balancing?

[RenoJay]

I have realized significant taxable capital gains this year which will result in a six figure tax bill. I'm ok with it. When I did the math, about $.70 of every dollar in stock I sold was a long term gain. Of that, I'll pay 23.8%, or about $.17 of every dollar of stock sold ($.70 x .238 = $.166.) Ergo, if the market falls by 17% from where I sold and I rebuy, I'm essentially back to even.

I realize market timing and associated talk is not appreciated around here, but I am of the opinion that our current incredible bull market is mostly driven by easy Fed policy, and now that the Fed is changing course, I fully expect an opportunity in the future which will be at least 17% below the prices at which I sold.

And in the meantime, I've found good fixed income investments that yield anywhere from ~3% to ~9% which, regardless, is more than I would expect the stock market to return annually over the next decade.

I may be wrong, and if so, so be it. Some people sleep better with a fixed asset allocation and a buy and hold forever mentality. I applaud them. For me, my beliefs and studies of markets have proven very profitable over the years (I sat out the dotcom bubble and entered the market after the crash and I was a renter, not an owner, during most of the housing bubble but made a fortune on a website related to housing) so I'm willing to make some big bets like that described above. And I heed Warren Buffett's opinion that the tax tail should not wag the investment dog.

 

[ERD50]

And other times it will hurt, and we can't know in advance.

In a long, steady bull, re-balancing has you selling stocks along the way, missing some of those gains. ... I went back to the JAN2000-JAN2010 time-frame you offered up, and I found re-balancing made almost no difference, and the delta was actually slightly negative for re-balancing:

https://goo.gl/uUxvch

Further edit/add: And the type of re-balancing made a difference too. Quarterly, Semi-Annual and Monthly did progressively worse. With a starting balance of $100,000:

No-REBAL ends @ $125,292
Monthly ends @ $121,139

What are you seeing?


-ERD50

OK - you were right for that time period

Originally Posted by audreyh1 View Post
You just have to look at surviving the decade 2000-2010 to see how much rebalancing can help during volatile times!

Yes, but it was the period you provided, as a clear example of how valuable re-balancing is, not a cherry-picked time frame from me!

You have a point regarding the AA in extreme markets, a 50/50 would have moved to ~ 25/75 in 2009. But a few years later it's moved back close to 50/50.

And I'd probably rebalance before it gets that extreme, but I think calendar rebalancing, or small band adjustments just don't seem to help much and probably not worth any small effort it takes.

-ERD50

 

[MrLoco]

I think you need to look at this as simply as possible. There are 2 choices:


1) Rebalance and take the tax hit. If you have to pay taxes; it is because you made money. And that is never a bad thing.




2) Don't rebalance and we enter a bear market and potentially hundreds of thousands of dollars in gains are wiped out in the course of a few months. And it may have taken you decades to build up those gains.
Trust me you will be kicking yourself that you didn't rebalance in your taxable accounts and just give the tax man his cut! And I'm not even sure about spreading this out over a number of years. If it is time to rebalance ....just do it and pay the taxes. Or roll the dice and pray.

 

[HI Bill]

I think you need to look at this as simply as possible. There are 2 choices:


1) Rebalance and take the tax hit. If you have to pay taxes; it is because you made money. And that is never a bad thing.




2) Don't rebalance and we enter a bear market and potentially hundreds of thousands of dollars in gains are wiped out in the course of a few months. And it may have taken you decades to build up those gains.
Trust me you will be kicking yourself that you didn't rebalance in your taxable accounts and just give the tax man his cut! And I'm not even sure about spreading this out over a number of years. If it is time to rebalance ....just do it and pay the taxes. Or roll the dice and pray.

The third choice is to let it ride, if you don't need the $ in the next 3-8 years. You'll come out ahead, most likely. I NEVER understood why they tell anyone under 50 to hold bonds, when most likely, you'll not be accessing your investments until 60 or so.

 

[RunningBum]

The third choice is to let it ride, if you don't need the $ in the next 3-8 years. You'll come out ahead, most likely. I NEVER understood why they tell anyone under 50 to hold bonds, when most likely, you'll not be accessing your investments until 60 or so.

The OP is not under 50 (said he rode out 1987, 31 years ago, assuming he did not do this as a teenager) and I don't think under 60.

But yes, riding it out is an option. That would be a change in strategy from a 50/50 AA. If he wants to do this, that's fine, but I wouldn't change strategy just for tax reasons. A strategy change should hold up on its own.

We're coming to the end of the year, it would be easy enough to sell half the stocks now and half in the 3 months to get to 50/50. This would be a quick enough correction while splitting the tax impact over 2 years. I don't know the $ amount we're talking about but I'd guess that'd keep CGs out of 20%, and maybe avoid NIIT. So then we're just talking about taking 15% now or later. Doesn't seem like a big deal to me.

 

[audreyh1]

And it wouldn’t be 15% of the whole amount sold either, just the gains.