Active Management and Capital Gains

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frankrom
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Active Management and Capital Gains

Post by frankrom »

Hi Guys,

I have a question... Firstly I am referring to investments in a non-registered account

If I am investing for the long term and I am bull on the S&P 500 and I am willing to invest in an ETF like VTI for 10-30 plus years... If i never sell or liquidate this ETF I will never incur capital gains taxes and thus I will have the entire capital and all the gains working for me for the entire term. So for simple numbers if I had 100,000 invested and made 20% a year every year i would make 120,000 then 144,000 etc etc

However, If i am opting for a more active style of investing and I create my own small portfolio of stocks let's say 10 and I earn 20% across all my stocks... however, after 12 months, 24 months whatever it may be... I sell a few here and there... Every year when I report my taxes I am going to incur capital gain and pay capital gain tax thus i'll actually do worse over the long term due to incurring capital gain taxes along the way. Do you feel as if this is a big concern over the long term?

I ask because I may want to pick up a momentum stock, or maybe something in a particular stock changes over sometime and I no longer want to hold onto it long term and want to swap it out. I don't want to feel as if I have to beat the index by a gross amount to make up for these potential issues.

Side note I hold both S&P 500 and some stocks... I don't claim to be some stock picking expert! But if my stocks need to out perform the index by a wide margin I may as overweight the index.

Thoughts?

Thanks!

Frank
ig17
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Re: Active Management and Capital Gains

Post by ig17 »

Read this post and the follow-up discussion:

http://www.financialwisdomforum.org/for ... 36#p595636
OhGreatGuru
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Re: Active Management and Capital Gains

Post by OhGreatGuru »

You've heard the old saying that there are 2 things in life you cannot avoid - death & taxes. (Actually some very clever people have figured out ways to avoid taxes, usually for the benefit of the rich, but that's another story)

You are correct that if you never sell any of your securities, you will not pay capital gains on them in your lifetime. But your estate will after you die. (Unless you have a spouse, in which case they can be deferred until the spouse dies.). And they will have to be paid in one fell swoop, probably putting your estate into a high tax bracket.

The other question you have to ask yourself is: if you are never withdrawing any of these assets, how are they improving your quality life?
nisser
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Re: Active Management and Capital Gains

Post by nisser »

If you are selling a stock because you have the opportunity to make more money then I would do it, regardless of the tax consequences. However, it's hard to know if selling x stock and rotating to y stock will make you more money.
Spudd
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Re: Active Management and Capital Gains

Post by Spudd »

To nit-pick just a little, you will likely pay some capital gains taxes just holding VTI. The index cannot avoid incurring capital gains in the case of buyouts or stocks going private.
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adrian2
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Re: Active Management and Capital Gains

Post by adrian2 »

Spudd wrote: 26 Jan 2018 19:42 To nit-pick just a little, you will likely pay some capital gains taxes just holding VTI. The index cannot avoid incurring capital gains in the case of buyouts or stocks going private.
VTI uses US tax law in determining its distributions. There's a provision to use specific lots in calculating capital gains, and the ability to designate appropriate lots to redemptions made by non-taxable investors.
The Globe and Mail wrote:Then there's VTI's lifetime track record of making no capital gains distributions, an advantage because investors don't have to pay a dime in taxes until they decide to sell the fund.
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OhGreatGuru
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Re: Active Management and Capital Gains

Post by OhGreatGuru »

PS: Your desire to pursue "a more active style of investing" conflicts with your desire never to realize any taxable capital gains in your lifetime. Make up your mind.
Spudd
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Re: Active Management and Capital Gains

Post by Spudd »

adrian2 wrote: 26 Jan 2018 20:45
Spudd wrote: 26 Jan 2018 19:42 To nit-pick just a little, you will likely pay some capital gains taxes just holding VTI. The index cannot avoid incurring capital gains in the case of buyouts or stocks going private.
VTI uses US tax law in determining its distributions. There's a provision to use specific lots in calculating capital gains, and the ability to designate appropriate lots to redemptions made by non-taxable investors.
The Globe and Mail wrote:Then there's VTI's lifetime track record of making no capital gains distributions, an advantage because investors don't have to pay a dime in taxes until they decide to sell the fund.
Wow, I had no idea. So if Tim Hortons was an American company, they wouldn't have had to realize cap gains when it got bought out?
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kcowan
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Re: Active Management and Capital Gains

Post by kcowan »

Spudd wrote: 28 Jan 2018 11:07So if Tim Hortons was an American company, they wouldn't have had to realize cap gains when it got bought out?
The capital gains is a function of the nature of your selection. Cash is subject to gains and shares are a swap.
For the fun of it...Keith
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