Trimming Mutual Fund Profits?

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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Wurfmesser666
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Trimming Mutual Fund Profits?

Post by Wurfmesser666 »

Hello,

First time poster. Thanks for having me!

I’ve read into trimming stock profits when you are in the green and I’m curious to see if profit trimming is common with mutual fund holders. I know a lot of people employ the buy and hold technique with MFs but I’m curious to hear from anyone who doesn’t.

I’m looking to trim back about 10 percent of profits from a mutual fund - not for any particular reason other than I believe you haven’t made or lost any money until you sell.

Thank you in advance for your thoughts.
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ghariton
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Re: Trimming Mutual Fund Profits?

Post by ghariton »

Wurfmesser666 wrote: 24 Feb 2018 15:43 I’m looking to trim back about 10 percent of profits from a mutual fund - not for any particular reason other than I believe you haven’t made or lost any money until you sell.
What are you going to do with the proceeds? If you plan to buy a house or remodel your kitchen, that's cool.

But if you will simply invest in another mutual fund, especially one that is similar, then you will essentially have prepaid the capital gains taxes on your profit. This may make sense if you think that your effective tax rate will be significantly higher in future than at present. It may also make sense if you are rebalancing your portfolio. Apart from those two cases, you are simply giving up the extra compounding that your pre-tax dollars would earn for you.

Remember, there are many high-priced tax lawyers whose main purpise in life is to figure out for their clients how to defer taxes (not avoid, simply shift the timing). Except in special circumstances, you would be well advised not to deliberately advance the payment of those taxes.

That is a major reason why I am a buy-and-hold investor.

George
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OnlyMyOpinion
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Re: Trimming Mutal Fund Profits?

Post by OnlyMyOpinion »

Welcome.
Is the MF inside a registered account so that CG's are not an issue, and do you have a better investment or rebalancing reason to sell it?
Last year I trimmed a large chunk of a MF I'd owned for many years, but I had several good reasons (I think) - I used the money for gifting, it was my most expensive holding with a MER costing me $4k/yr, it was a monthly income fund but was among my least effective income investments, and I was able to offset the CG with losses on hand.
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Re: Trimming Mutual Fund Profits?

Post by fireseeker »

In addition to George's sensible analysis, I suggest you examine your question by considering your current asset allocation against your asset allocation target.
If you want to move money from a stock MF to a bond MF because your stocks have grown beyond their target allocation, then that makes sense. (Assuming you rebalance only occasionally, no more than once a year.)
But if you don't need the money, and the MFs are allocated the way you have designed them to be, then selling for the sake of selling won't help you.
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Re: Trimming Mutual Fund Profits?

Post by Peculiar_Investor »

Welcome to FWF.

I concur with the generall tax-deferral advice provided by the previous posters so wouldn't necessarily trim positions just because your funds have gained in value.

I would suggest that part of the rationale for trimming stock positions to take some profits has more to do with asset allocation and policy decisions related to risk and diversification. For example, our investment policy statement states that any equity (stock) position above 5% of the total equity portion of the portfolio should be reviewed for possible trimming. I had direct experience with Nortel, both as an employee and a shareholder, during the heydays when it grew to represent a disproportionate amount of the TSX Index and of many portfolios.

In the case of mutual funds, I would only trim positions in one of the following situations:
  • Your asset allocation is out of line with your targets and you need to rebalance back to target.
  • You are using a large number of mutual funds, or some specific slice and dice strategy involving narrowly focused mutual funds, i.e. precious metals, gold, etc. If one has really "taken off", then yes trim for diversification reasons
One final thought that you may or may not have considered. What are the annual ownership costs of the mutual funds that you hold? I would suggest that many FWF'ers are ex-mutual fund holders due to the high fee structure such as MERs that are well above the low cost alternatives available in exchange traded funds (ETFs) that focus on broad-based indexes. You might want to read our wiki article on Simple index portfolios as an alternative low-cost approach.
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Re: Trimming Mutual Fund Profits?

Post by beachcomber »

Good question. I have been trimming back our mutual funds for a number of years now. Use the proceeds to purchase Vanguard's very low cost ETFs.
Have to be careful I don't trim too much as the capital gains generated can easily trigger the dreaded OAP clawback. But nice to have the problem ;-)
Wurfmesser666
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Re: Trimming Mutual Fund Profits?

Post by Wurfmesser666 »

beachcomber wrote: 25 Feb 2018 15:27 Good question. I have been trimming back our mutual funds for a number of years now. Use the proceeds to purchase Vanguard's very low cost ETFs.
Have to be careful I don't trim too much as the capital gains generated can easily trigger the dreaded OAP clawback. But nice to have the problem ;-)
Thank you everyone for your replies! I should give more background into my situation.

I’m 28 years old and recently got involved in investing. I made a bit of money investing in speculative pot stocks and took the money and ran. I enjoyed investing but decided I wanted to invest in something less speculative.

I talked to a financial advisor at TD who recommended investing all my savings in a mutual fund. Specifically TD US Blue Chip Equity.

I saw some good growth, got slammed in the correction a few weeks ago and have since recovered and moresome.

I’ve been reading a handful of investment advice books and online articles and I’m confident I will enjoy investing in individual stocks. However, I’m still a newbie but reading a balance sheet is slowly becoming less intimidating.

Through my research I’ve digested the point that ETFs can be advantageous to mutual funds due to a significantly lower MER.

Where I’m stuck right now is should I ditch the TD US Blue Chip fund completely and buy into one of the new Vanguard Balanced or Growth ETFs? Should leave the mutual fund as is and buy into the Vanguard ETF over time?

I asked about trimming because I guess I’m trying to build up my cash reserve for other investments and I’m not convinced of the value in holding this particular MF to begin with.

I need to build a framework for investing. I like the diversification of the new Vanguard ETFs but I lack direction right now in my foray into investing.

I’d like to build something safe while playing around on the side with a fixed amount of capital in individual stocks.

My MF is in a TFSA/capital gains will not be taxed as I haven’t hit my contribution limit.

Thanks for reading my rant!
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Re: Trimming Mutual Fund Profits?

Post by OnlyMyOpinion »

I suggest you take some time to read and learn.
Review 'Financial Plan' in Finiki and establish some boundaries and objectives. Investing is only part of the picture.
Using your TSFA is good. Maximizing it over time even better.
It sounds like you were willing to roll the dice with pot stocks. You are young so maybe you can afford to take chances and lose it all - but maybe not. It depends what your future short & long term goals and needs are, income prospects, etc.

According to Morningstar, http://quote.morningstar.ca/QuickTakes/ ... ture=en-CA your TD US Blue Chip Equity (TDB220) has a horrendous MER of 2.54%, but it also has some good long returns (daily ttr of 30% 1yr, 22.6% 5yr and 13.0% 10yr). This compares to Vanguard's VFV with a low MER of 0.08%, and returns of 14% 1yr, and 19.6% 5yr, 10yr n/a). So your MF, while expensive is not a poor performing dog.
It looks like TDB220 's benchmark is the Russell 1000, not the S&P 500, and I'm not sure what else your MF does to get its performance, but the point is that you can afford to stay invested for while to establish a more holistic plan for your burdgeoning fortune.
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Re: Trimming Mutual Fund Profits?

Post by kcowan »

At 28, your priority should be to develop a financial plan. One of you biggest sources of leverage is your earnings. So focus on how you can maximize them. Then set a target for saving and investing. Your initial attempts have been successful. So build on that to plan for the future.

Congratulations and welcome to FWF.
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Re: Trimming Mutual Fund Profits?

Post by Peculiar_Investor »

Wurfmesser666 wrote: 25 Feb 2018 19:06 Through my research I’ve digested the point that ETFs can be advantageous to mutual funds due to a significantly lower MER.
Depending on the amount of funds you have to invest, a broad-based index mutual fund can have advantages over ETFs where you factor the commission costs to purchase into the equation. Since you mentioned you were using TD, have a look at their TD e-series funds. Using something like the TD e-series will also make it easier to add smaller, periodic amounts to your investments.
Where I’m stuck right now is should I ditch the TD US Blue Chip fund completely and buy into one of the new Vanguard Balanced or Growth ETFs? Should leave the mutual fund as is and buy into the Vanguard ETF over time?
You could do either, although given the high MER associated with the specific mutual fund you mentioned, I'd be inclined to move away from it.
I asked about trimming because I guess I’m trying to build up my cash reserve for other investments and I’m not convinced of the value in holding this particular MF to begin with.

I need to build a framework for investing. I like the diversification of the new Vanguard ETFs but I lack direction right now in my foray into investing.
I would strongly recommend the wiki links that I provided in my previous post. Our wiki represents the collective wisdom of this forum and will save you some time for searching out discussions on the same topics. As you build up your understanding and ideas about how you would like to move forward with your investments with the goal of developing an investment policy statement to guide your investing. Understanding that was one of the most important things I've learned from being a member here.
My MF is in a TFSA/capital gains will not be taxed as I haven’t hit my contribution limit.
Just to clarify, capital gains within a TFSA are never taxed, regardless of whether you've hit your contribution limit or not.
Thanks for reading my rant!
Not a problem. Continue to ask questions here, that's the whole point of this forum.
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Wurfmesser666
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Re: Trimming Mutual Fund Profits?

Post by Wurfmesser666 »

Thank you Peculiar Investor and co!

I'm going to start digesting the finki as suggested.

I'm leaning towards ditching the MF and investing over time into the Vanguard Balanced ETF. I like the much lower fees (2.54% vs .22%) and I figure that I can contribute four times per year with funds deposited on a bi-weekly basis to my TFSA trading account to keep trading fees down.

A hypothetical 10,000 dollars would cost me 254 dollars per year in fees with the MF vs only 22 dollars per year with the ETF. If I factor in trading fees (10 dollars per trade with Waterhouse) based on four lump sum contributions a year, that would bring my ETF fees to 62 dollars per year on 10,000 dollars.

I also feel that the TD Blue Chip fund could bite me as its comprised of just over 90% US equity; not terribly diversified based on what I understand thus far and maybe not a great primary (read: sole) investment. On the other hand, the Vanguard Balanced ETF seems like a safer bet with better diversification. I think I would be happy parking the majority of my investing capital here and slowly working towards buying individual stocks on the side after some due diligence.

Paul
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