first Taxable Account

[Phoenixdown99]

So I just read WCI's latest post and I am sold on starting a Taxable Account.

I'm a young attending, 2 years out. No loans, single, no kids yet (but planning in the next 5 yrs), just a mortgage on a condo at around a 3.3% interest rate. So I don't have a lot of options for tax free accounts, unfortunately. I maxed out my 401K at 18,000$ per year and I do the backdoor Roth at $5500.

I have about 150k sitting in an Ally 11 Month CD at growing at 1.5%. I'm interested in moving it to a Taxable Account.

I'm a little worried that if I dump it all in at once, and we go into a dip (I know I know, don't time the market) it would kinda suck. I know I should ignore all these doomsday announcements about likely corrections, and at least I could do Tax Loss Harvesting, but...

Also, should I open an account and add in $2000 every two weeks to a month until it is all in there?

Lastly - I might need some money for a down payment for a house in the next 5 years. Should I only invest what I won't need for the down payment?

Thanks!

 

[jfoxcpacfp]

1. Don't invest any $$ you'll need in the short term (i.e. the next 5 years). If you don't know the answer to this problem, you need to have some kind of plan in place before you invest.


2. Invest only in an appropriately-diversified portfolio (my preference is equities as long as you follow rule #1).


3. Assuming you have a well-balanced portfolio, don't TLH in your portfolio when the market nosedives. That is another form of market timing. Just rebalance every 6 - 12 months.


4. You should not  DCA (Dollar Cost Average) with a lump sum. The market is up 7 days out of 10. DCA is done out of necessity (i.e. 401k contributions).

[VagabondMD]

in the long run, the stock market goes up, so the math dictates that you lump sum your money into the market.

Behaviorally, that is difficult to do. What if you drop $150k into the market tomorrow, and the market starts a 40% decline the next day. You will beat yourself and maybe be driven from investing in stocks, etc. On the other hand, if the market continues a steady climb, even though you will not earn as much as you would have otherwise, you will still show a gain. And you won’t be as likely to second guess.

I like to dollar cost average in these situations. Pick an amount, pick a time frame, and systematically invest. Automate it, if possible, so it will happen without further intervention or thought. Make sure you hold some back for an emergency fund and for short term anticipated expenses (big trip, engagement ring, bathroom remodel, or whatever).

[ENT Doc]

Keep 3-6 months expenses in your CD, put the rest into taxable lump sum per your asset allocation, noting the tax efficient fund placement in the Bogleheads wiki.  Market goes down you can TLH and carry forward those losses to offset income at your marginal rate (likely high) in the future.

[Phoenixdown99]

My understanding is that you can TLH and still stay in the market/don't time the market based on WCI's post:

 

"For instance, if you took a loss on Fidelity’s Spartan Total Stock Market Index Fund, you could immediately exchange the money into Vanguard’s Total Stock Market Index Fund.  These two investments essentially behave identically, but the government views them as substantially different, allowing you to stay in the market and yet still “harvest” the loss.  So you didn’t sell low, and you still get the tax deduction. "

[Lithium]

Phoenixdown99 wrote:

My understanding is that you can TLH and still stay in the market/don’t time the market based on WCI’s post:

 

“For instance, if you took a loss on Fidelity’s Spartan Total Stock Market Index Fund, you could immediately exchange the money into Vanguard’s Total Stock Market Index Fund.  These two investments essentially behave identically, but the government views them as substantially different, allowing you to stay in the market and yet still “harvest” the loss.  So you didn’t sell low, and you still get the tax deduction. “

Click to expand...

This is correct.  The correlation of TLH partners should be very close to 100%.

I agree that lump sum is the way to go.  It would suck if the market drops 30% or more, but if you wait to get in after it goes up even more, you're equally hurt.  Also if you put in a lot of money at once, you have fewer transaction fees and can immediately buy admiral shares of Vanguard funds, if that's your thing.

[VagabondMD]

Phoenixdown99 wrote:

My understanding is that you can TLH and still stay in the market/don’t time the market based on WCI’s post:

 

“For instance, if you took a loss on Fidelity’s Spartan Total Stock Market Index Fund, you could immediately exchange the money into Vanguard’s Total Stock Market Index Fund.  These two investments essentially behave identically, but the government views them as substantially different, allowing you to stay in the market and yet still “harvest” the loss.  So you didn’t sell low, and you still get the tax deduction. “

Click to expand...

I am not sure if that is correct, and I am also unaware of anyone being audited o penalized for such. A Vanguard TSM Fund could be exchanged into a Vanguard S&P 500 Fund to harvest the loss, as they are different instruments with different indices.

[Phoenixdown99]

By the way how often do you need to do the TLH and switch to similar but different fund?

Is once a year (tax season) sufficient? That would be my preference. I like low maintenance.

[ENT Doc]

DCA is a way to address the psychology of investing but lump sum is the mathematically appropriate choice.  Since you're newish to investing I'd recommend trying to adopt the latter approach, absent of emotion.  You have two options, both with unknown outcomes but one (lump sum) with a higher expected benefit.  The logical choice is to choose the one with the higher expected benefit, not what is emotionally comforting.  The sooner emotion can be removed from decision making the better.  Leads to bad decisions.

[Donnie]

If you are uncomfortable Investing a lump sum as large as $150k, which I could understand, DCA over whatever time frame you are comfortable with. While DCA is worse mathematically, a 50% crash right after you invest may seriously dampen your appetite for future investing. This would be much worse than the couple % expected gain you may give up by DCA.

TLH is a good idea. Take advantage of it. You can TLH and keep a well balanced portfolio. Just buy a similar but not equivalent index fund the same day you sell.

[Lithium]

Phoenixdown99 wrote:

By the way how often do you need to do the TLH and switch to similar but different fund?

Is once a year (tax season) sufficient? That would be my preference. I like low maintenance.

Click to expand...

You do this when your investments have dropped in value to a point that they're worth less than what you purchased them for (the cost basis).  So generally whenever there is a dip in the market.  There haven't been many good opportunities since Brexit, as the market has steadily gone up since then with low volatility.

[Phoenixdown99]

If the market keeps dropping and might drop more, when do you choose to Tax Loss Harvest? Once you lost 3,000$? Or earlier?

[Phoenixdown99]

Is using a robo-advisor for TLH a good idea? Seems like they do the work for you.

[Lithium]

The amount of loss at which you TLH is arbitrary.  The lower the threshold, the more you will do it, and the greater the amount of losses you'll accumulate, but that comes at the expense of more time and attention and possibly higher trading fees.  A $3000 loss is worth over $1000 if used to offset income for a high earner, and if you carry it forward, would be worth $450 if used to offset a 15% LTCG in the distant future.  So if you're going to have a minimum, you can still get some decent benefit for a loss of $1000 or less.

Knowing how often you can do it requires an understanding of the wash sale rule.  Basically every 31 days if the market has a prolonged drop.

I don't use Roboadvisors but I'm not sure TLH'ing is worth the 0.25% fee for most of them, if that is the only reason you're going to use them.  Maybe that has been studied.  If you're curious, you can put up to 10k in Wealthfront, since you can invest that much there without getting charged fees.

[LizOB]

Keep an emergency fund plus money earmarked for a down payment on a house in cash or CD. Put the rest in taxable. Agree with those above that lump sum is mathematically better but can be nerve-wracking to a newbie. Try $10k per month if it makes you feel better. Automate it so you don't end up trying to time the market.