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There is no right point in time to replace funds, isn't it?
Old 05-17-2020, 01:23 PM   #1
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There is no right point in time to replace funds, isn't it?

We have to revise our strategy to adjust our portfolio with respect to early retirement. Actually, we have bought several mutual stock funds without having had a real strategy in mind. So most probably we will have to replace all or most of them with those more suitable. I discussed this with my wife and said that there is no reason to spread the selling of certain ones and buying others over a longer period or wait until the economy will have recovered - provided you know what you want/need. So doing this as fast as possible is only a psychological problem since there is no right point in time regarding the state of the world economy and, thus, the indexes. Am I correct? If not, how would a good replacement strategy look like?


Olli
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Old 05-17-2020, 01:27 PM   #2
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If these are not in a taxable account, then since taxes are not a consideration, I think you are right.

But if taxes are a consideration so that realizing gains will play havoc with your income pushing you into a higher tax bracket or preventing you from getting tax credits or all those other things, then a careful "not all at the same time" strategy might be warranted.
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Old 05-17-2020, 02:01 PM   #3
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Some funds will charge an early redemption fee, so check on that as well.
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Old 05-17-2020, 02:15 PM   #4
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A rising tide lifts all boats and an ebbing tide drops them all down. So as long as you are basically moving from one boat to another, there is no market timing issue. Tax and redemption issues , though, you'll have to evaluate.

Are you comfortable now with your strategy; what you are selling and what you're buying? If not, IMO this book is a good place to start: "The Coffee House Investor" by Bill Schultheis https://www.coffeehouseinvestor.com/ It's an easy read and you even get a recipe for pumpkin pie. Another good one is: "The Bogleheads Guide to Investing" by Taylor Larimore et al https://www.amazon.com/Bogleheads-Gu.../dp/0470067365
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Old 05-17-2020, 02:17 PM   #5
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Also, what exactly is wrong/unsuitable about the current funds, and what makes others more attractive?

It sounds like you are maybe moving from sector/active funds to broad based index funds? Then probably yes, other than tax considerations, just do it.

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Old 05-17-2020, 02:34 PM   #6
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Yes, be careful of capital gains in a taxable account. If your income is low enough you may have a 0% tax rate for some capital gains, which would be nice. It might take a few years to get everything sold while staying within the 0% capital gains limit. On the other end, the healthcare tax kicks in at $250k AGI, which would increase your effective capital gains tax rate. That's as high as I go.

Of course, if your old funds are really bad it's always a good time to sell.

I'm in a similar situation, transitioning to a simple index fund portfolio after using a large number of funds previously. I transitioned our tIRA's and Roth accounts as soon as I was ready, with no tax consequences. However, we had large capital gains in our taxable accounts, and I wanted to Roth convert as much as possible while staying below $250k AGI. So all the old funds were still in the taxable accounts until this year. With the market down as much as 30% I was able to sell some of the old funds and have a net capital loss or a small gain and buy the new funds I wanted. Which makes this a pretty good time to transition in a taxable account.

This is the last year for our maximum Roth conversions. Next year I'll be selling the least favorite of my remaining old funds while staying mostly under the 0% capital gains tax rate limit. I'll have a minimal Roth conversion within the 10% bracket, then capital gains for the rest. I think there's four or five years of this before the taxable accounts are drained and SS payments and RMD's hit.
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Old 05-17-2020, 02:50 PM   #7
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I do not know German tax laws, but I will assume for this answer that they are similar to US laws. LOLs point about capital gains is valid. On the other hand, our hope is that any gains will be smallest at this point in time (or perhaps losses will be largest). So there is merit in getting it done sooner rather than later.
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Old 05-17-2020, 03:50 PM   #8
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We have bought our mutual stock funds over a period of 25 years. Never sold one of them - only bought other ones. I’m currently reading the book Work less, live more and have to digest its content. I’ll ask my tax accountant - actually my aunt - about taxes pertaining to selling our funds. Here in Germany we have to pay capital yields tax for our funds annually. We don’t have ETFs in our portfolio and they seem to be the way to go or be at least a considerable part of an early retirement portfolio. Therefore, the intention to replace the old ones by ETFs. But this is still in consideration and I still need to dig deeper into the investment topic.
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Old 05-17-2020, 08:02 PM   #9
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Originally Posted by LayC View Post
We have to revise our strategy to adjust our portfolio with respect to early retirement. Actually, we have bought several mutual stock funds without having had a real strategy in mind. So most probably we will have to replace all or most of them with those more suitable. I discussed this with my wife and said that there is no reason to spread the selling of certain ones and buying others over a longer period or wait until the economy will have recovered - provided you know what you want/need. So doing this as fast as possible is only a psychological problem since there is no right point in time regarding the state of the world economy and, thus, the indexes. Am I correct? If not, how would a good replacement strategy look like?


Olli
I think when the COVID crisis is over and the economy is beginning to recover, the financially strong companies and the best management will be more obvious. As Warren Buffet once said "Only when the tide goes out do you discover who has been swimming naked."

You mention you are investing in mutual funds, which I am no fan of. You might recall before the financial crisis, Morningstar and the rest of the financial media were all gaga about Dodge and Cox Stock, which had done well investing in financials. Their rather large management team was given kudos for their skill in stock picking. They were also very heavily invested in what would turn out to be dodgy financial institutions. The fund incurred above average losses and did not recover well post crisis. So, much for mutual fund heroes.

That said, you might want to wait till the smoke clears, and you will have a better picture of where you want to park your money.
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Old 05-17-2020, 11:23 PM   #10
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Quote:
Originally Posted by LayC View Post
We have bought our mutual stock funds over a period of 25 years. Never sold one of them - only bought other ones. Iím currently reading the book Work less, live more and have to digest its content. Iíll ask my tax accountant - actually my aunt - about taxes pertaining to selling our funds. Here in Germany we have to pay capital yields tax for our funds annually. We donít have ETFs in our portfolio and they seem to be the way to go or be at least a considerable part of an early retirement portfolio. Therefore, the intention to replace the old ones by ETFs. But this is still in consideration and I still need to dig deeper into the investment topic.
Here in USA, I have to pay taxes on whatever the fund declares as a capital gain and dividend. Sometimes this is a huge amount, over which I have no control.
So I tend towards ETF's as then I can largely control when capital gains are made (by selling them).
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Old 05-18-2020, 12:53 AM   #11
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Seems to be tricky in Germany. Laws have changed over the years and, thus, I need to check. The annual capital yields tax seems not to be the only one :-(

So thanks for the hint :-)
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