Moving to Lazy portfolio with significant individual stock cap gains

[savory]

Hi,

I am looking for some guidance to simplify my portfolio.

A few months ago, I released my FAs. I have consolidated my accounts. The FAs performed well over the last several years which caused me much happiness and now some next steps confusion.

My goal is to have a very simple 3-5 ETF fund lazy portfolio. I have become a believer that will work for me. I like the idea of taking vacation on their fees.

But here is my (good) dilemma. In my one and only taxable account, I have about 40 large cap stocks that have achieved significant gains over the last few successful years. Obviously, some have better gains than others.
The tax hit for selling them would be significant. At the same time, they continue, as a group, to perform well. They include Google, Home Depot, and others. The FA basically built a select large cap fund.

I do not use the investments in this fund for day to day living, nor do I plan too. So, I have some flexibility.

My Fidelity reps suggestion was to review their Fidelity® Tax-Managed U.S. Equity Index Strategy. So, that puts me in another .6+ managed fund. It would allow me to move some/all to the fund in-kind.
There would still be a tax hit since they would need to sell some , to fit into their portfolio strategy. We did not get much further than that. ( i realize that this is a delay tactic as one day I (or someone) will need to sell).

I could hold onto them but I am not sure I know how to manage them. Meaning, when to hold them, when to fold them. But, if there was a method to do that, I am wide open.

I am looking for ideas and experiences? Let me know if there are too many blanks for a reasonable response.

Thanks

 

[Sunset]

Hi,

I am looking for some guidance to simplify my portfolio.

A few months ago, I released my FAs. I have consolidated my accounts. ...

..... I like the idea of taking vacation on their fees.

But here is my (good) dilemma. In my one and only taxable account, I have about 40 large cap stocks that have achieved significant gains over the last few successful years. .....
The tax hit for selling them would be significant. At the same time, they continue, as a group, to perform well. They include Google, Home Depot, and others. The FA basically built a select large cap fund.

......
My Fidelity reps suggestion was to review their Fidelity® Tax-Managed U.S. Equity Index Strategy. So, that puts me in another .6+ managed fund. It would allow me to move some/all to the fund in-kind.
There would still be a tax hit since they would need to sell some , to fit into their portfolio strategy. We did not get much further than that. ( i realize that this is a delay tactic as one day I (or someone) will need to sell).

I could hold onto them but I am not sure I know how to manage them. Meaning, when to hold them, when to fold them. But, if there was a method to do that, I am wide open.

I am looking for ideas and experiences? Let me know if there are too many blanks for a reasonable response.

Thanks

I have a similar situation of too many individual stocks in a taxable account with large capital gains.

I'm not fully understanding the bold quote above, I'm guessing they are willing to move some of your funds into their strategy in kind.
It's odd to me that some of your funds would fit in without selling unless they are already Fidelity funds and the strategy (master fund) is a holding of various Fidelity funds.

Not sure why you want that instead of 3-5 low cost mutual funds or etf's.

For myself, the plan is over years sell some individual stock, and buy broad based etf like VTI each year.
This way I won't jump up into another higher tax bracket, or tigger NIT taxes.

Certain individual stocks I will be slower to sell example BRK.A as it is really much like an etf.

 

[target2019]

I wouldn't pay for anything beyond the simple low cost ETFs or funds.

Learn more about the stock holdings before selling. Turn off dividend reinvestment. Sell those with losses to offset sells with gains. Look at it yearly and go further. You need something tax smart in there to invest the proceeds.

The next recession will take care of some or all of this problem. Why rush and pay more tax this year?

 

[DrRoy]

Do not take a big tax hit all at once. Start by selling those with the smallest gains, but be sure that they are long term gains. Take all the dividends as cash and reinvest in your ETF(s) of choice. Then sell small amounts of the others from year to year to spread out the taxes. That is what I did in your situation.

 

[pb4uski]

A couple ideas.

If anytime in the future you expect to be in the 0% capital gains tax bracket then you could just wait and sell then.

If not, one possibility if you don't expect to need the taxable money is to just let it sit there and use shares for donations and ultimately it will get a stepped-up basis for your heirs.... that is what we are doing.

OTOH, just selling and paying the 15% tax probably wouldn't be the worst thing... a cost of getting much better diversification.

 

[Chuckanut]

OTOH, just selling and paying the 15% tax probably wouldn't be the worst thing... a cost of getting much better diversification.

+1

Consider the 15% a success tax.

 

[misanman]

Sell those with losses

Just wondering - Is there anyone with equities that show a loss over the last few years?

 

[target2019]

There are individual stocks with losses. Check oil companies.

 

[bobandsherry]

You didn't mention if you had any ACA subsidy. If you do, consider any payback of subsidy an additional tax when making your decision.

 

[MBAustin]

In addition to the suggestions above to take all dividends in cash, harvest losses, etc., set up a donor advised fund at someplace like Fidelity or Vanguard and move highly appreciated shares there. You take the charitable deduction in the year of transfer and then contribute from the DAF rather than from your cash whenever you want.

 

[savory]

I have a similar situation of too many individual stocks in a taxable account with large capital gains.

I'm not fully understanding the bold quote above, I'm guessing they are willing to move some of your funds into their strategy in kind.
It's odd to me that some of your funds would fit in without selling unless they are already Fidelity funds and the strategy (master fund) is a holding of various Fidelity funds.

Not sure why you want that instead of 3-5 low cost mutual funds or etf's.

For myself, the plan is over years sell some individual stock, and buy broad based etf like VTI each year.
This way I won't jump up into another higher tax bracket, or tigger NIT taxes.

Certain individual stocks I will be slower to sell example BRK.A as it is really much like an etf.

If I understand correctly, the Tax Managed Fund and some of my funds are the same. In those cases, I can move the holdings in kind at the level the fund approves which is based on their investment strategy. If I do not have the same holding as the fund, I would need to provide cash. I have not looked into it enough to know how much cash I would need to raise and/or how many stocks I have overlapping the funds holdings.

I think it is interesting but I do not expect I will be going back to a managed fund of that sort.

 

[savory]

In addition to the suggestions above to take all dividends in cash, harvest losses, etc., set up a donor advised fund at someplace like Fidelity or Vanguard and move highly appreciated shares there. You take the charitable deduction in the year of transfer and then contribute from the DAF rather than from your cash whenever you want.

This was one of the suggestions of the Fidelity Adviser as well. I appreciate your confirmation and plan to investigate how it will work for me. Thanks

 

[OldShooter]

Here's one from left field: You desired ETF portfolio will almost certainly include a total US market fund. You also mention that your stock holdings are basically large cap US stocks. Now 40 stocks is not real diversification vs the S&P 500 or some other large cap index, but what if you consider your large cap holdings to be adequately diversified?

If so, you could simulate a total market US fund by buying one of the "everything but the S&P 500" funds that are out there and continuing to hold your large cap stocks ad infinitum, possibly even adding large caps to fill sector gaps.

Obviously the size of the holdings vs your total portfolio matters, too, but I don't think that running your own little large cap index fund is an impossible idea. You could make some PortfolioVisualizer runs and see how the idea works.

 

[savory]

Here's one from left field: You desired ETF portfolio will almost certainly include a total US market fund. You also mention that your stock holdings are basically large cap US stocks. Now 40 stocks is not real diversification vs the S&P 500 or some other large cap index, but what if you consider your large cap holdings to be adequately diversified?

If so, you could simulate a total market US fund by buying one of the "everything but the S&P 500" funds that are out there and continuing to hold your large cap stocks ad infinitum, possibly even adding large caps to fill sector gaps.

Obviously the size of the holdings vs your total portfolio matters, too, but I don't think that running your own little large cap index fund is an impossible idea. You could make some PortfolioVisualizer runs and see how the idea works.

I have thought about that. That is what my FA was doing. I was concerned about the attention I would need to pay to it and the learning curve for when to sell. It would be a market weighting approach that I am not sure I am well equipped to execute; that is sell in my case.

But, I did not consider analyzing with PV. I might play around with that idea. while I still own the stocks.

 

[pb4uski]

Here's one from left field: You desired ETF portfolio will almost certainly include a total US market fund. You also mention that your stock holdings are basically large cap US stocks. Now 40 stocks is not real diversification vs the S&P 500 or some other large cap index, but what if you consider your large cap holdings to be adequately diversified?

If so, you could simulate a total market US fund by buying one of the "everything but the S&P 500" funds that are out there and continuing to hold your large cap stocks ad infinitum, possibly even adding large caps to fill sector gaps. ....

^^^ Good idea.... the Extended Market Index Fund would extend coverage from S&P 500 to the entire market. As longs the OPs 40 large cap stocks are not sector concentrated that may be a possibility.... at least for a while or perhaps even long-term.

It'll be interesting to see how your 40 large-cap stock portfolio compares to VFINX on the various metrics that Portfolio Visualizer provides... you already have 8% of the 500 with the 40 that you hold now.

This fund offers investors a low-cost way to gain broad exposure to U.S. mid- and small-capitalization stocks in one fund. The fund invests in about 3,000 stocks, which span many different industries and account for about one-fourth of the market-cap of the U.S. stock market. One of the fund’s risks is its full exposure to the mid- and small-cap markets, which tend to be more volatile than the large-cap market. The fund is considered a complement to Vanguard 500 Index Fund. Together they provide exposure to the entire U.S. equity market.

 

[OldShooter]

... you already have 8% of the 500 with the 40 that you hold now.

On a nose-count basis. On a cap-weighted basis it may be much higher.

 

[savory]

^^^ Good idea.... the Extended Market Index Fund would extend coverage from S&P 500 to the entire market. As longs the OPs 40 large cap stocks are not sector concentrated that may be a possibility.... at least for a while or perhaps even long-term.

It'll be interesting to see how your 40 large-cap stock portfolio compares to VFINX on the various metrics that Portfolio Visualizer provides... you already have 8% of the 500 with the 40 that you hold now.

I'll play with this when I get the time. It is an alternative I think albeit not lazy.

 

[pb4uski]

It might not be too bad. If your 40 individual stocks have metrics similar to the S&P 500... in PV the portfolio and VFINX are close in metrics.... then you just add Extended Market Index... equal to 1/3 of your large cap total... and then monitor it.

 

[OldShooter]

... I think albeit not lazy.

Well, why not? If you were in a total US market fund, you would not worry about trading anything. Same-o for your own private US large cap fund. Buy and hold. Check on things once every year or two, but as a passive investor you are just riding the wave.

If your private fund's stock list was small cap or value, more maintenance would be required as companies move in and out of those categories from time to time. But large caps don't move around much. GE was in the Dow and is not now in the Dow, but that doesn't affect your holding it. About the only maintenance would be due to acquisitions and mergers, like Walgreens. But there you would basically have an opportunity to use proceeds to further diversify your private large cap fund.

 

[Vincenzo Corleone]

A couple ideas.

If anytime in the future you expect to be in the 0% capital gains tax bracket then you could just wait and sell then.

If not, one possibility if you don't expect to need the taxable money is to just let it sit there and use shares for donations and ultimately it will get a stepped-up basis for your heirs.... that is what we are doing.

OTOH, just selling and paying the 15% tax probably wouldn't be the worst thing... a cost of getting much better diversification.

+1

Consider the 15% a success tax.

FWIW to the OP, this is exactly how I viewed it when I sold my individual stocks and moved the money to index ETFs. The market was overvalued and I wanted to reduce my risk and diversify. I thought of it as a reallocation.

 

[thefist]

I realize you may not want to follow the portfolio closely, but consider buying a Morningstar Premium subscription. This is about 199/yr or a bit less. Large Cap analysis is one of their sweet spots. You could base sell decisions upon their opinion of how over/under/fair valued each stock is. They can be wrong or early or late, but you wanted to sell anyway, right?
Morningstar portfolio Xray can show you portfolio weightings, so maybe you can just keep what you have if you're not too heavy in some.
As others have mentioned...
- selling and paying 15% is not that bad a deal, maybe some is 0% if you're in that bracket
- DAF is a great choice for the highest appreciated. I did that in my last 2yrs of employment, and now about 7yrs of giving is funded already w/o portfolio withdrawals.
- With transaction fees at ZERO now, slowly dollar cost average OUT of them a little at a time over the years.

 

[targatom2019]

it sucks but I bit the bullet and sold 39 of the 40 stocks mid 2018 and got into 3 fund portfolio and life is so much better now dealing with 3 index funds instead of 39 stocks.

 

[savory]

I want to thank everyone who provided input. It encouraged me to take a closer look. I learned I was in better shape than I expected.

Without selling anything, my total portfolio is 5% heavy in large blend and 5% short in large value. Otherwise, it is following a total market balance. That includes stocks, etfs and mutual funds in the analysis. The brokers program is not suggesting a change, right now.

This will allow me to rebalance as I move ahead. A more complicated portfolio but more time to simplify.

Thanks, again. But it is likely 'I'll BE BACK'

 

[OldShooter]

... Without selling anything, my total portfolio is 5% heavy in large blend and 5% short in large value. Otherwise, it is following a total market balance. That includes stocks, etfs and mutual funds in the analysis. ...

Good for you. That will yield a negligible tracking error and now that you have worked through this you will be able to play a good strategic game of chess with the tax man.