When should one sell their underperforming funds?

[Moscyn]

I have 2 country funds (Vietnam and Japan). They were both performing well 4 and 3 years ago respectively and I had some good unrealised gains. Thereafter, they have dropped by 50% and 40% from their value. The thing is they collectively represent less than 5% of my stocks and funds portfolio and since it is not a large loss relatively, I've been hanging on to them over the years and not taken the loss. I could switch the funds (and thus taking loss) to some other less risk funds. Or I could hold on to them for some more years given that (i) I'm not losing material opportunity costs, (ii) my daily expenses is not impacted by the current losses and (iii) it is no fun paying redemption fees or switching fees on underperforming funds. Any advice? Just wondering what should one consider when taking losses on underperforming funds. Thks

[LOL!]

So if you sold now, you would realize a capital loss?

If you have a loss, then there are hard and fast rules on when to sell:

1. Sell losers before you have held them 12 months. You want to book losses while they are still short term. This helps with the trap of loss aversion. Always look to see if any positions bought within the last 12 months are losers. Sell them and buy something to replace them that does not change your asset allocation. For example, sell VBR and buy IJS.

2. Sell losers in November and December to book the loss for the current tax year. This goes for both short-term and long-term losses.

3. Sell losers on days that the market drops substantially. Buy on the same day something to replace the loser. Your purchase will be bought low as well.

You should start every January with positions that are all in the black.

For the Vietnam fund, sell it. You can purchase an emerging markets fund instead. You should already have an emerging markets fund anyways. I suggest VWO for large cap and DGS for small cap. I own them both.

For the Japan fund, you can get Japan in all foreign developed funds such as VEU, VEA, EFA, etc. Sell that Japan fund and replace it.

There is absolutely no reason to hold onto losers since you can always find similar, but not substantially identical, investments that fulfill your asset allocation.

Do not buy funds that have redemption fees or switching fees. You should not have to pay any commissions or fees nowadays to invest.

[kcowan]

What LOL said!

Always sell your losers on a regular basis. I do it in April and October.

[kmoeini]

Wow, this information is gold...exactly what I was looking for, because I have the same problem. Actually, most of the funds in my taxable portfolio are losers and I have held them for 2-3 years.

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You want to book losses while they are still short term. This helps with the trap of loss aversion.

Is there also a financial benefit to short-term losses?

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Sell losers in November and December to book the loss for the current tax year.

Are you suggesting the OP sell (switch funds) on the next big down market day, and sell again in Nov / Dec if his positions are in the red again?

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you can always find similar, but not substantially identical, investments that fulfill your asset allocation.

This is something I never understood clearly. Where is the line drawn for substantially identical? Is it for example a mutual fund and its ETF equivalent, like VEIEX and VWO? Or one company's Japan fund and another company's Japan fund?

Thanks again, this post has been a big help for me.

[LOL!]

Tax Loss Harvesting - Bogleheads

http://www.early-retirement.org/foru...tml#post583857

Quote:

Originally Posted by kmoeini Is there also a financial benefit to short-term losses?

In a taxable account, there is a tax benefit to having realized losses. There is a chance that ST losses are better than LT losses. If you have both ST and LT gains, then add losses, the LT losses will go against LT gains first and not ST gains. Thus you will pay more taxes on ST gains. ST losses will offset ST gains first. In reality you should not have ST gains because you are trying to be a long-term tax-efficient investor. However, if you have ST losses then you have a little more flexibility when selling to rebalance.

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Are you suggesting the OP sell (switch funds) on the next big down market day, and sell again in Nov / Dec if his positions are in the red again?

Yes, absolutely. Be sure to buy on the big down day as well. An exchange of funds is probably what fund holders would want to do.

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This is something I never understood clearly. Where is the line drawn for substantially identical? Is it for example a mutual fund and its ETF equivalent, like VEIEX and VWO? Or one company's Japan fund and another company's Japan fund?

The IRS has not drawn the line. Certainly VEIEX and VWO are substantially identical since they are different share classes of the same fund. But are VWO and EEM substantially identical? They track the same index, but if you look at their top 10 holdings, they are different. You will have to make up your own mind on this. The consequences of being wrong are rather minor though. It is not illegal to have a wash sale and a wash sale usually only delays the ability to deduct the loss on your tax return. Warning: If you buy substantially identical shares in an IRA or 401(k) in a wash sale, then you do lose the ability to deduct the loss.

[kmoeini]

Thanks again, LOL. That link is great.

[ESRwannabe]

If I think I have made a mistake, I sell without hesitation. It doesn't even have to be because a particular investment has poor returns either. If I think I can make a better investment elsewhere then I will sell at a loss, even out of an investment that I think is a good one long term.

I have sold and taken significant capital losses before. Selling at a loss doesn't bother me. The bad decision was made when I did the buying. The bad decision has already been made and I will be eager to deploy the money elsewhere in a better investment.

[Moscyn]

Thanks for the replies. LOL, looks like I should have taken the loss a few years back - guess it is never too late.

[yakers]

Quote:

Originally Posted by ESRwannabe If I think I have made a mistake, I sell without hesitation. It doesn't even have to be because a particular investment has poor returns either. If I think I can make a better investment elsewhere then I will sell at a loss, even out of an investment that I think is a good one long term. I have sold and taken significant capital losses before. Selling at a loss doesn't bother me. The bad decision was made when I did the buying. The bad decision has already been made and I will be eager to deploy the money elsewhere in a better investment.

Is there a difference for taxable vs tax deferred account? TLH doesn't apply to tax deferred accounts but stupid decisions do and is there a different strategy for correcting them?

[DoingHomework]

I owned a Vietnam fund a few years ago and made some good money in it. I sold because the situation changed with Vietnam...I don't remember the details but there was some change in the law or the politics in the region that did not bode well for Vietnam so I sold before I lost much. It turned out to be a good move. This was maybe 3 years ago as I recall.

So while I found myself jotting down some of the good advice here with regard to timing loss sales, I think you also need to look at the situation going forward, especially with an emerging country. Why lock in losses if you think the situation looks promising going forward (lock them in for tax advantage if you can use the loss).

Personally I think emerging markets have become relatively attractive over the last 2 years. Previously emerging markets were seen as riskier than developed markets. Yet the US had a loss in 2008 that was not any smaller than a loss typical of an emerging market. So, emerging markets typically return more yet don't seem to be much riskier based on past performance. Many developing countries are in fairly good shape debt wise because they had their debt crisis 20 years ago. I have been buying emerging markets for about 18 months (though still less than 10% of my stocks) and have been looking closely at Vietnam again because it stands to fill in for some of the lost agricultural production as China industrializes..

[ESRwannabe]

Quote:

Originally Posted by yakers Is there a difference for taxable vs tax deferred account? TLH doesn't apply to tax deferred accounts but stupid decisions do and is there a different strategy for correcting them?

I have never intentionally tax loss harvested. Maybe I will one day but so far it has never been my reason for selling. I have only sold because either I made a mistake or I believe I have a much better alternative elsewhere.

Taxes are way down the list for me in regards to investing. I'm in the 25% tax bracket. Payroll taxes make up a substantial, maybe the majority, of my taxes and there is nothing I can do about it for now.

[DoingHomework]

Quote:

Originally Posted by ESRwannabe Payroll taxes make up a substantial, maybe the majority, of my taxes and there is nothing I can do about it for now.

Not true. You can offset $3000 of tax losses from investing every year against your ordinary income from wages. That will save you $750 a year plus state tax savings. That savings comes free (except commissions and a few hours of observing and planning). You can also store up your losses to use in years when you only have gains (remember those days)...

[nwsteve]

When it comes to selling a position, I have found very helpful at clearing out the "yeah-buts", the advice that if you would not buy it today, then it becomes an immediate candidate for sale Tax issues and allocation can be addressed in a number of the ways outlined in earlier posts.
Nwsteve

[ESRwannabe]

Quote:

Originally Posted by DoingHomework Not true. You can offset $3000 of tax losses from investing every year against your ordinary income from wages. That will save you $750 a year plus state tax savings. That savings comes free (except commissions and a few hours of observing and planning). You can also store up your losses to use in years when you only have gains (remember those days)...

Hmm... That would be a nice chunk of change. However, it won't work very well for my taxable portfolio any more as I have moved from a majority of indexes to a majority of individual stocks.