Hey all,
I have a bit of an interesting problem to work through.
Over the years I built up my main nest-egg in Vanguard funds (about 70% of my net worth).
Now I've found what I consider to be slightly superior investments (actively managed multi-factor funds with lower rates than my Vanguard indexes and which I expect to generate a ~1% annual net return greater than the market).
The problem is, I'm in the highest tax bracket imaginable, as I currently work two full-time jobs which are both very well remunerated. Plus my Vanguard investments have done very well, as you can probably imagine from looking at market performance over the 2017-2021 period.
So I'm wondering how to go about selling the Vanguard and buying the multi-factor funds.
1. All in one go? Pros: I can begin to benefit from the expected 1% over-performance earlier. Cons: I'll get taxed at the highest marginal tax rate for the growth over the time I've held them, which will be substantial. (Though, fortunately, according to the Australian Taxation Office, the tax will be half the regular income tax, since I held them longer than 1 year; so that's about 15%.)
2. In smaller chunks? Pros: I can lessen the tax burden, as I'll be selling smaller chunks, therefore generating smaller capital gains, therefore paying less capital gains tax, therefore paying less tax overall in total. Cons: I'll miss out on the opportunity to capture the extra 1% performance of the multi-factor funds. Also there's a bit of complication involved in determining precisely how big the chunks should be.
3. Wait until I retire? Pros: I'll be living frugally, thus I'll be in the lowest tax band, thus, I can pay little or no CGT on selling, especially if I sell in chunks. Cons: That could be another few years, during which I'll miss out on the 1% out-performance of the multi-factor funds.
4. Don't alter the portfolio at all? Maybe, given the CGT tax I'd be paying if I altered the portfolio, the most efficient option is just to never alter it at all? Simply wait until FIRE date, then just live off selling small chunks of the funds, according to my original plan? (This will probably work out well in any case, so there's no major downside to this plan.)
In summary I'm trying to figure out whether the tax from altering my investments would override the potential gains from being invested in better performing funds.
I guess, thinking about it, this is all just fiddling around the edges. My basic plans are probably going to work out in any case, all else equal. I'm just chasing an extra 1% return, as I believe this could add up to be quite substantial over a long period of time I expect to remain invested (40+ years, and I want to pass it on to younger family members also).
Any thoughts from anyone in a similar situation would be much appreciated!
BTW - the funds I'm looking to get into are:
* Dimensional Core International Equity (DFAI)
* Dimensional Core US Equity (DFAU)
* Dimensional Core Emerging Equity (DFAE)