Harvesting of capital gains
Harvesting of capital gains
Hello:
I'm seeking advice/sources regarding "capital gain harvesting" in my **taxable** (not tax sheltered) brokerage accounts where I hold primarily low-cost index mutual funds. A few key things about my situation:
1) My holdings have seen considerable appreciation in past few years
2) I intend to invest more cash into same type of funds in the next couple of years, with a 10-year time horizon after that (for a total horizon of 12 years) before I convert from my existing well-diversified asset allocation (around 75% equity (various geographies) /25% bond) into a retirement/income allocation.
3) My tax rate now and in ten years time will be same roughly.
I am considering partially (or perhaps even fully) harvesting my existing taxable capital gains *now* (and taking the cap gains tax hit) then re-investing the funds gradually again in same or similar funds over next couple of years. My reasoning (perhaps flawed):
-- I've already gained a lot on these holdings in past few years;
-- CAPE Shiller is very high and
-- given my 10-year horizon I am nervous about potential black swan or upcoming "lost decade"....
I am looking for articles/books/advice on how to best assess my situation and my options. I can find lots of sources regarding tax-loss harvesting, and a few about gain harvesting. However the few things I have found about *gain* harvesting are written from a *tax* perspective - i.e., harvest a cap gain now if your tax rate will be higher in future. What I am looking for is best strategy for me/a situation that is about **risk mitigation**/having only a ten-year horizon (not taxes).
Any sources (or thoughts) you can recommend would be appreciated!
Thanks
I'm seeking advice/sources regarding "capital gain harvesting" in my **taxable** (not tax sheltered) brokerage accounts where I hold primarily low-cost index mutual funds. A few key things about my situation:
1) My holdings have seen considerable appreciation in past few years
2) I intend to invest more cash into same type of funds in the next couple of years, with a 10-year time horizon after that (for a total horizon of 12 years) before I convert from my existing well-diversified asset allocation (around 75% equity (various geographies) /25% bond) into a retirement/income allocation.
3) My tax rate now and in ten years time will be same roughly.
I am considering partially (or perhaps even fully) harvesting my existing taxable capital gains *now* (and taking the cap gains tax hit) then re-investing the funds gradually again in same or similar funds over next couple of years. My reasoning (perhaps flawed):
-- I've already gained a lot on these holdings in past few years;
-- CAPE Shiller is very high and
-- given my 10-year horizon I am nervous about potential black swan or upcoming "lost decade"....
I am looking for articles/books/advice on how to best assess my situation and my options. I can find lots of sources regarding tax-loss harvesting, and a few about gain harvesting. However the few things I have found about *gain* harvesting are written from a *tax* perspective - i.e., harvest a cap gain now if your tax rate will be higher in future. What I am looking for is best strategy for me/a situation that is about **risk mitigation**/having only a ten-year horizon (not taxes).
Any sources (or thoughts) you can recommend would be appreciated!
Thanks
Re: Harvesting of capital gains
You appear to have made conflicting statements. You worry about the appreciation, high CAPE and black swan events and yet you propose continuing to invest in the 'same type of funds'. That defies logic. Further, if your future tax rate will be about the same, it is almost always best to defer tax as long as possible. IOW, let your gains ride.
You also suggest you want to "convert" to a more conservative allocation some 12 years from now. If you do that by crystallizing current assets, you will indeed have a substantial tax bill at that time. Instead of changing horses (making a sharp left turn and potentially risk falling off that horse) at that time, consider a gentle wide sweeping turn into 'retirement income' mode by leaving your current investments alone, and putting new money to work into more conservative investments today. By the time you retire, you might be most of the way there just by investing conservatively over the next 12 years. And if you are not yet quite satisfied with the risk/reward balance at that time, start tapping into the 'higher risk' investments preferentially at that time.
To me, there is no particular value in arbitrary dates for moving abruptly from an aggressive portfolio to a conservative portfolio. It is a multi-year process, a journey so to speak. Besides, there is no guarantee that the market will cooperate and line up with your timing for conversion. IMO, asset allocations should migrate methodically over a period of time in the transition from accumulation to withdrawal.
You also suggest you want to "convert" to a more conservative allocation some 12 years from now. If you do that by crystallizing current assets, you will indeed have a substantial tax bill at that time. Instead of changing horses (making a sharp left turn and potentially risk falling off that horse) at that time, consider a gentle wide sweeping turn into 'retirement income' mode by leaving your current investments alone, and putting new money to work into more conservative investments today. By the time you retire, you might be most of the way there just by investing conservatively over the next 12 years. And if you are not yet quite satisfied with the risk/reward balance at that time, start tapping into the 'higher risk' investments preferentially at that time.
To me, there is no particular value in arbitrary dates for moving abruptly from an aggressive portfolio to a conservative portfolio. It is a multi-year process, a journey so to speak. Besides, there is no guarantee that the market will cooperate and line up with your timing for conversion. IMO, asset allocations should migrate methodically over a period of time in the transition from accumulation to withdrawal.
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Re: Harvesting of capital gains
Dave,
Your post reflects your thoughts about market timing. I strongly urge you to avoid believing you can or should do this. I wasted at least a decade believing I could do it. I can't. You can't.
As such, I strongly agree with AltaRed in his advice. Well said.
Your post reflects your thoughts about market timing. I strongly urge you to avoid believing you can or should do this. I wasted at least a decade believing I could do it. I can't. You can't.
As such, I strongly agree with AltaRed in his advice. Well said.
Re: Harvesting of capital gains
dave2008,
Moving funds by means of a sale from "fund X" to a "fund similar to X" if done on the same day (simply stated for the purpose of illustration) accomplishes only one thing! The erosion of your wealth (as well as the income generating power of your portfolio). I mean the erosion occasioned by the payment of government taxes. The only argument that I can imagine to support such a move is a certainty of a very significant and sustained general market decline. That is something that you cannot possibly know.
I agree with all those that have responded so far.
I moved progressivly from a 75:25 to a 65:35 asset allocation over a 10 year period. During that time, new money went towards (mostly) FI and I also performed a few "opportunistic" equity sales. Opportunistic means that I had (in my own estimation) a reason to sell that was more related to the merits of the individual investment rather than motivated by a need for FI. You may consider doing something similar.
Moving funds by means of a sale from "fund X" to a "fund similar to X" if done on the same day (simply stated for the purpose of illustration) accomplishes only one thing! The erosion of your wealth (as well as the income generating power of your portfolio). I mean the erosion occasioned by the payment of government taxes. The only argument that I can imagine to support such a move is a certainty of a very significant and sustained general market decline. That is something that you cannot possibly know.
I agree with all those that have responded so far.
I moved progressivly from a 75:25 to a 65:35 asset allocation over a 10 year period. During that time, new money went towards (mostly) FI and I also performed a few "opportunistic" equity sales. Opportunistic means that I had (in my own estimation) a reason to sell that was more related to the merits of the individual investment rather than motivated by a need for FI. You may consider doing something similar.
"The term is over: the holidays have begun. The dream is ended: this is the morning."-C.S.Lewis, The Last Battle
Re: Harvesting of capital gains
Another argument in favour of such a move would be being in a year with a low, possibly zero tax bracket, when one expects that in the future the tax bracket would move significantly higher.StuBee wrote: ↑15 Sep 2017 14:54 dave2008,
Moving funds by means of a sale from "fund X" to a "fund similar to X" if done on the same day (simply stated for the purpose of illustration) accomplishes only one thing! The erosion of your wealth (as well as the income generating power of your portfolio). I mean the erosion occasioned by the payment of government taxes. The only argument that I can imagine to support such a move is a certainty of a very significant and sustained general market decline.
finiki, the Canadian financial wiki
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
Re: Harvesting of capital gains
Very true. I had assumed that this type of situation did not apply to the OP (because of his "and take cap gains hit" comment and because his holdings had experienced considerable appreciation.)
I have often nuanced my answers to take into account those zero tax situations only to come to the realization that such an event occurs very infrequently.
"The term is over: the holidays have begun. The dream is ended: this is the morning."-C.S.Lewis, The Last Battle
Re: Harvesting of capital gains
I missed this big opportunity when I retired. On the first or subsequent years in retirement you could delay your pension/CPP and use that or those years to do capital gains or RRSP withdrawals at a lower income level.adrian2 wrote: ↑15 Sep 2017 18:50Another argument in favour of such a move would be being in a year with a low, possibly zero tax bracket, when one expects that in the future the tax bracket would move significantly higher.StuBee wrote: ↑15 Sep 2017 14:54 dave2008,
Moving funds by means of a sale from "fund X" to a "fund similar to X" if done on the same day (simply stated for the purpose of illustration) accomplishes only one thing! The erosion of your wealth (as well as the income generating power of your portfolio). I mean the erosion occasioned by the payment of government taxes. The only argument that I can imagine to support such a move is a certainty of a very significant and sustained general market decline.
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Re: Harvesting of capital gains
My 2 cents worth.
If you are worried about a correction and wish to preserve your capital, set a value that you don't want to go below. If the market takes your portfolio down to that value then sell out, pay your cap gains tax and start looking for new opportunities.
As long as your portfolio continues to perform as you want, there is no reason to sell.
If you are worried about a correction and wish to preserve your capital, set a value that you don't want to go below. If the market takes your portfolio down to that value then sell out, pay your cap gains tax and start looking for new opportunities.
As long as your portfolio continues to perform as you want, there is no reason to sell.
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard
Re: Harvesting of capital gains
I have heard of a similar strategy done just prior to retirement. This is to avoid loosing a big chunk of your savings in the first years of retirement and gradually building back up to your target equity allocation. Probably done over 0-3 years not 10 and preferably in early retirement when your tax bracket is low.
"Everybody has a plan until they get punched in the face." Mike Tyson
Re: Harvesting of capital gains
When we switched to investing for Income generation, the value of the portfolio lost our interest. Certainly if there was a stock we wanted to get rid of, selling at a high was great, but we no longer worry about selling for capital gains or taking profits (only to look for something else to invest in). As long as our income continues to rise, in up or down markets, we're happy. In 2008/09 we got a 35% hit on value, but our income rose from 2007 and continued each year after (not always at the same rate, but it never dropped). Our value has recovered and is much higher, but so is our income.