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  • Getting out of active investing

    I am getting out of an actively managed portfolio recommended by my (former) advisor. I'll be moving to some variation of a 3 fund portfolio. We have two 401 accounts, a Roth, SEP, and taxable account. Is there any strategy or pitfalls to avoid when transitioning? Do I just sell it all and re-buy at once or is there some reason it should be done slowly?

  • #2
    There are a few reasons to do it gradually.  The first (and most important) is behavioral.  You don't want to convert to a three fund portfolio, then realize afterward that you aren't satisfied with it, and then change it back to something else.  If you think there is some risk that you'll abandon your asset allocation (and if you are just getting started with DIY, that risk is greater than zero), it makes a bit of sense to phase in changes gradually.

    The second reason not to do it all at once only pertains to your taxable account.  Unless you are sitting on sizable capital losses, you want to avoid short-term capital gains at all costs, since these are taxed as ordinary income.  You otherwise want to make sure not to sell any taxable assets that have gone up in price unless you have held them for more than a year.

    In fact, there is a decent argument to be made not to even sell any taxable assets with long-term gains right now, since the new administration may cut long-term capital gains rates this year if Obamacare is eliminated.

    Also, you don't want to sell any mutual fund right now that imposes a short-term redemption penalty (usually in the neighborhood of 1%).

    Finally, if you are selling any taxable assets for losses and want to do tax loss harvesting, watch out for the possibility of wash sales if you have identical funds in your retirement accounts.  This would be a reason to wait 30 days to sell funds in one of the accounts.

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    • #3
      There's no tax consequences if you switch around the allocation of your retirement portfolio.  The taxable account is more tricky, because you will incur long-term or short-term capital gains or losses if you liquidate the portfolio.  As Lithium mentioned, be careful about wash sales between your taxable and retirement accounts.

      Physician on Fire talked about liquidating his suboptimal portfolio in a guest post on WCI:

      https://www.whitecoatinvestor.com/parting-with-suboptimal-investments-one-physicians-story/

      On my blog, I wrote about asset allocation for your taxable account:

      http://www.wallstreetphysician.com/pick-taxable-account-allocation-wisely/

      Is there any way you could give a little more detail about your current investments and we could give you more specific advice?

      Comment


      • #4
        Thanks for the pointers so far with deconstructing this thing.

        here are my investments as stand

        Thompson bond, jp morgan core plus bond, vanguard ltd and int T/E, t Rowe cap appreciation, vanguard global min vol

        equities include Akers focus, Gotham enhanced, vanguard health, t Rowe price health sciences, and some individual stock

        alos Goldman Sachs long/short and Gotham market neutral

        about 20% of investment is in a bond and asset rotation model (I know). This sits in my 401

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        • #5




          Thanks for the pointers so far with deconstructing this thing.

          here are my investments as stand

          Thompson bond, jp morgan core plus bond, vanguard ltd and int T/E, t Rowe cap appreciation, vanguard global min vol

          equities include Akers focus, Gotham enhanced, vanguard health, t Rowe price health sciences, and some individual stock

          alos Goldman Sachs long/short and Gotham market neutral

          about 20% of investment is in a bond and asset rotation model (I know). This sits in my 401
          Click to expand...


          Which of these are in your taxable account?  The funds in your retirement account can be liquidated without tax consequences.  Just move those to the three-fund portfolio you desire and then wait 30 days before touching anything in your taxable account to rule out any wash sale consequences.  The taxable account is the one that will be the trickiest to liquidate.

          Comment


          • #6
            Taxable account includes

            11% in fixed income munis, 22% t Rowe price cap appreciation, 22% Gotham enhanced and akre, 8% vanguard global, 15% health care equity, 9% Goldman long/short and Gotham neutral, 10% individual stock, 3% cash

            i imagine some of the Capitol gain could Be offset by selling some of the poorer performing individual stocks. Just doesn't sit well selling low.

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            • #7




              Taxable account includes

              11% in fixed income munis, 22% t Rowe price cap appreciation, 22% Gotham enhanced and akre, 8% vanguard global, 15% health care equity, 9% Goldman long/short and Gotham neutral, 10% individual stock, 3% cash

              i imagine some of the Capitol gain could Be offset by selling some of the poorer performing individual stocks. Just doesn’t sit well selling low.
              Click to expand...


              Unfortunately, it's hard to give specific advice without details like the expense ratio, and the gains and losses in each of the positions.  In general, I'd offset any gains and losses, such that you sell as much of your current portfolio while not incurring any capital gains, and move that into the index fund portfolio of your choice.  Eventually though, you'll need to sell any high ER funds (is the Gothan Enhanced and Goldman long/short actually greater than 2% ER?) and bite the bullet on the taxes because these expense ratios will hurt you long-term.  Good luck!

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              • #8
                Couple comments:

                - An interesting wrinkle would be if the original poster was a resident (I assume you are out of training?). If that were the case, then moving more quickly out of the taxable account (before a full attending salary) may be beneficial because your long-term capital gains tax rate would be at 15%, whereas if you were making >$466,950 as an attending (or w/a dual MD couple's income) the long-term capital gains tax rate would be 20%. Is that a correct interpretation @wallstreetphysician? Then again, there are rumors the Trump admin may lower capital gains rates, which would favor delaying liquidating the taxable account until these policy changed are clarified.

                - @W_sobchak - love the user name.

                Comment


                • #9




                  Couple comments:

                  – An interesting wrinkle would be if the original poster was a resident (I assume you are out of training?). If that were the case, then moving more quickly out of the taxable account (before a full attending salary) may be beneficial because your long-term capital gains tax rate would be at 15%, whereas if you were making >$466,950 as an attending (or w/a dual MD couple’s income) the long-term capital gains tax rate would be 20%. Is that a correct interpretation @wallstreetphysician? Then again, there are rumors the Trump admin may lower capital gains rates, which would favor delaying liquidating the taxable account until these policy changed are clarified.

                  @w_sobchak – love the user name.
                  Click to expand...


                  I did talk about this special situation in a post about tax-gain harvesting (http://www.wallstreetphysician.com/tax-gain-harvesting-for-medical-residents/).  If he were a resident and had a stay-at-home spouse, potentially he could be in the 15% income tax bracket and be eligible for a 0% long-term capital gains rate.  If he is a single resident or an attending, most likely he would be in the 25%+ tax bracket and the standard tax-loss harvesting advice would apply.

                  Comment


                  • #10
                    Note thought I posted last night but maybe it was terrible advise and someone deleted however this is how I would do it (transitioning to 3 fund portfolio)

                     

                    In retirement/tax-deferred accounts just sell whatever holdings you have as they are non taxable sales. In your taxable account sell anything that is currently at a loss. After that assess what portion of your total holdings are currently invested at all (your taxable funds with current gains). If this is a small portion of your portfolio say 20% or less I'd definitely consider just creating an asset allocation of the three fund portfolio as you chose and leaving the taxable positions with gains as they are. The issue becomes if the taxable is a large portion of your holdings and you really aren't pleased with the current holdings this is going to create a significant taxable capital gains event you'd obviously like to avoid.

                    Comment


                    • #11
                      Unfortunately (fortunately?) I am not a resident but well into midlife practice. I'm 46. Although my dad is a big Boglehead, I never felt like I had time to learn about investing and I couldn't do it better than an advisor anyway. I believe my advisor is well intended but as I learn and read more I don't buy statements like "expense ratios are not a good way of comparing dissimilar investment vehicles" and "certain active fund managers have proven that research and stock selection can make a huge difference in returns over time" anymore. He's had me in bond and stock rotation strategies as well so there's a lot I need to scrap. I've only used this advisor for about 5 years but my portfolio NOT net of his fees during this time is up only 2.6% over this time compared to S&P I think of about 12%.

                      Comment


                      • #12
                        Jeez. If you're not even coming close to the indices, esp the S&P, that's an abject failure.

                        Look, actively-managed funds are not a complete and utter scourge...well, not all of them are, at least. The issue with them is obvious when they don't routinely beat the indices which a very significant portion (don't recall the % fttomh) fail to do; what the ************************ are you paying them for, then? That's why we almost always choose the low-cost index funds to do the heavy lifting.

                        However, there do exist some funds that routinely beat their index to make their turnover and fees worth it. The issue with that, though, is whether they can keep that up over time. Even with their knowledge and experience, fund managers do sometimes have to get by on luck...though one might argue consistent luck in the same fashion is simply skill.

                        As for personal portfolio allocation, this particular forum is very into self-management (like me), which to do "well enough" in as reliable a fashion as possible is not particularly complicated or difficult, and if done properly, you should probably save in fees (esp AUM fees) more than you might get in return from a differently-managed portfolio. This does not mean, of course, that you should eschew financial planning if you haven't already sat down and ticked every box about your plan for everything to do with money in your life.

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