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What would you do?
Old 01-26-2009, 10:15 PM   #1
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What would you do?

Hereís my dilemma:

With the market falling, my portfolio has taken a serious beating, roughly equivalent to the Dow. Iím 43, and donít plan on retiring any time soon, but Iíve now started thinking about making some major changes to my investment strategy, and Iíd be interested in hearing some opinions from the folks here.

For the most part, my investments are in cash reserves and in three main "holdings," which are just about in equal parts. I do so to diversify not only my investments, but also the locations at which they are being held.

1. A mid-size wealth management company. Managed mutual funds. Highest cost of management. Some tax planning.

2. A discount broker. Managed funds. Moderate fees. No tax planning.

3. Vanguard. Half managed, half ETF. Lowest fees. No tax planning.

Iím now thinking of cashing out of the wealth management funds and moving the money into Vanguard. Basically, I feel that the investment advice Iím getting is pretty much worthless, as my portfolio has dropped almost exactly the same as the market.

If I shift funds around, Iíll take a substantial loss on the sale of the shares, but I will also be buying into other investments at equally low prices. If/when the market rebounds, obviously, Iíd rather pay less fees at Vanguard than at the wealth management company.

On the other hand, the option is to wait out the downturn and then make the move without taking a loss Ė even on paper. Of course, that could take years, and during that time, Iíd be paying management fees all along.

What would you do, if faced with this question?
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Old 01-26-2009, 10:24 PM   #2
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If your "expensive" funds are in a taxable account you could tax loss harvest by selling them with a loss and buying similar (but not identical) funds at Vanguard. This way you gain the tax advantage and haven't really "locked in" your loss. I'd probably still do it if they are in tax advantaged accounts as expenses are a killer over the long term.

DD
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Old 01-27-2009, 02:20 AM   #3
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Restructure for costs and taxes. I bit the bullet a few years ago. You have a lot of years left and these things will be cumulative and large over time. Put the tax-inefficient investments in your retirement accounts. Use index funds or tax-managed funds for your post-tax accounts. Move your stuff to a low cost provider (Vanguard) if you feel comfortable managing your own money, which you apparently do.
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Old 01-27-2009, 12:30 PM   #4
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The beat down market is an opportunity to get out of crappy investments and sidestep into better ones with minimal real loss. And, as has been pointed out, if you can generate some paper losses, you get to tax loss harvest.

I'm move the high expense accounts to Vanguard while maintaining your asset allocation for the portfolio as a whole. Be sure to take tax considerations into account - stocks in taxable, bonds in tax deferred, etc.
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Old 01-27-2009, 12:57 PM   #5
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I moved my managed funds over to VG Brokerage. I tax harvested some of them this year - immediately converting to VG funds so I didn't get caught by one of those 5% rise days. I have a couple of back-load funds that haven't converted to A shares yet. Selling them now would generate substantial fees so I am waiting until they convert at which point I plan to sell and move to VG funds.
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Old 01-27-2009, 04:42 PM   #6
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Quote:
Originally Posted by DblDoc View Post
If your "expensive" funds are in a taxable account you could tax loss harvest by selling them with a loss and buying similar (but not identical) funds at Vanguard. This way you gain the tax advantage and haven't really "locked in" your loss. I'd probably still do it if they are in tax advantaged accounts as expenses are a killer over the long term.

DD
Thanks DD, Surfdaddy, travelover, donheff!

Your opinion seems to be unanimous to move into VG. I'm now consulting with my accountant to see if there is some kind of "even exchange" tax provision that would help me not show a loss on my tax return.

I really appreciate the advice. Thanks again.
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Old 01-27-2009, 04:52 PM   #7
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Originally Posted by CaseInPoint View Post
Thanks DD, Surfdaddy, travelover, donheff!

Your opinion seems to be unanimous to move into VG. I'm now consulting with my accountant to see if there is some kind of "even exchange" tax provision that would help me not show a loss on my tax return.

I really appreciate the advice. Thanks again.
Plenty of good advice above. Not sure why you don't want to book the loss, it's a loss either way. If in a taxable account you can offset other gains or up to $3K of taxable income.

Michael
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Old 01-27-2009, 04:54 PM   #8
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CIP-

As another option to investigate, check with your wealth management company
about dropping the annual management fees in favor of a fee for use agreement.
(as long as you don't do any trading, you don't incur any charges...you're
in for the long haul, right?).

It might sound crazy, but it's worth asking about. Faced with losing a customer
in this market, many financial planners will do anything they can to keep your
money with them.

I was tired of the 1.25% advisory fee and knew I'd be holding the money
in the market long term, so I checked and was able to switch to a fee
for service account.

Good luck,
LB
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Old 01-28-2009, 11:21 AM   #9
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Plenty of good advice above. Not sure why you don't want to book the loss, it's a loss either way. If in a taxable account you can offset other gains or up to $3K of taxable income.

Michael
Michael,

There is a possibility that I would purchase a house or commercial RE in the next few years. If so, I'll need to present 3 years of tax returns when applying for a mortgage. That's why I'm trying to avoid showing a loss for any particular year.

Quote:
Originally Posted by leftbucket View Post
CIP-

As another option to investigate, check with your wealth management company
about dropping the annual management fees in favor of a fee for use agreement.
(as long as you don't do any trading, you don't incur any charges...you're
in for the long haul, right?).

It might sound crazy, but it's worth asking about. Faced with losing a customer
in this market, many financial planners will do anything they can to keep your
money with them.

I was tired of the 1.25% advisory fee and knew I'd be holding the money
in the market long term, so I checked and was able to switch to a fee
for service account.

Good luck,
LB
LB,

That's a very good idea. It didn't occur to me that I might be able to renegotiate management fees, but of course you're right. There is a possibility, given the economy, and it doesn't hurt to ask.
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Old 01-28-2009, 11:27 AM   #10
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How is showing a loss on your tax returns going to affect you getting a mortgage?

Basically they want to know how much you make, what your expenses are and what other assets you have.

None of those are changed by the fact that you lost some money in the market.
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Old 02-05-2009, 08:36 PM   #11
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Just FYI -

Here's some feedback from my accountant. In case anyone comes across this thread directly from a Google search, etc:

Unfortunately securities including mutual funds are specifically excluded from the benefits of tax free exchanges. If you have other capital gains against which the losses could be offset it will work out OK for you. However, if all you have are the capital losses, the deduction for capital losses is limited to $3,000 against other types of income so although the total loss would show up on schedule D, only $3,000 of loss would show up on page one of the returns.
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Old 02-05-2009, 09:45 PM   #12
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Quote:
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How is showing a loss on your tax returns going to affect you getting a mortgage?
Basically they want to know how much you make, what your expenses are and what other assets you have.
None of those are changed by the fact that you lost some money in the market.
I'd think that a mortgage company would be impressed by a borrower who knew enough to move to a cheaper investment, book a tax-loss swap that could be rolled forward indefinitely, and have an extra [$3000 x tax bracket] each year to spend on mortgage payments.

Never been asked for tax returns anyway. Pay statements, W-2s, 1099s, sure-- but never a tax return.
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Old 02-05-2009, 09:55 PM   #13
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You should WANT a loss to show up on your tax return. You should make sure that you harvest all tax losses in the year they occur and never ever let them become long term losses. This also helps with the behavioral finance trap of "loss aversion".

I have a few hundred thousand in losses. I only get to deduct $3000 this year against ordinary income, but all the rest don't go "poof" -- they get carried over to next year where the thing repeats ($3000 deducted against ordinary income and carried over to the next year). This save about $1000 a year in taxes (that's real money) and later on when I am living off of my taxable investments, I won't have to pay any taxes on cap gains.

It reads like your accountant didn't tell you about the carry over of excess losses to next year. I'm getting Uncle Sam to pay me 33% of my losses over the next several years and maybe until I die. Thank goodness I don't have an accountant who doesn't help me.

Bottom line: sell all your losers each and every year. Make the IRS help pay for your losses and take the opportunity to upgrade your funds to passively managed low-expense ratio index funds.
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Old 02-05-2009, 09:57 PM   #14
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I did exactly this in 2008: moved about 25% of my portfolio from expensive, tax inefficient managed mutual funds to tax efficient or tax managed mutual funds (a mix of ETF's and vanguard funds). I booked a huge capital loss on the trades, and managed to trade out and trade back in on the same day so I never risked losing money by being out of the market for a +5% day. This year was especially nice not having huge capital gains distributions from my former funds that would have added insult to the injury of losing close to 40% of the principal value in 2008.
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Old 02-05-2009, 11:36 PM   #15
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We rebalanced a year ago and booked some mighty capital gains, which resulted in paying some mighty estimated taxes.

Then in November we did a tax-loss swap on our losers, wiped out every dollar of cap gains and then some, and will probably get most of those estimated taxes back from the feds. I'm certain we'll get it all back from the state.

Not that I care to discuss this with the average mortgage broker. We did our refi with statements, not transaction lists, so it never came up.

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Bottom line: sell all your losers each and every year.
Or as Will Rogers said, don't buy losers in the first place.
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Old 02-06-2009, 03:11 PM   #16
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Regarding mortgage applications, I was able to persuade Pen Fed to consider my investments in their decision to refi my loan. They turned me down at first because I had a lot of credit card debt. Then I faxed them a copy of my statement of assets and liabilities and explained that I have sufficient income from assets to pay the mortgage and then some each month, and that I also have a sufficient level of assets to pay off the loan in full many many times over. It was only a 60% LTV loan in a non-bubble area anyway. They immediately approved me after I provided that level of documentation to them - they didn't even request copies of statements or anything.
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