Author Topic: Should I take the Cap Gains hit?  (Read 1618 times)

Raenia

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Should I take the Cap Gains hit?
« on: April 06, 2017, 04:08:19 PM »
I've seen many around here constantly tout VTSAX as the go-to stock fund.  Before I found MMM, but after I learned about Vanguard funds, I'd been 'gifting' myself at holidays by picking up a new fund.  So I've got money in several different funds: 500 Index, Small-cap, Mid-cap, Emerging Markets.  Is it worth taking the tax hit to sell these and move the funds into VTSAX?  The 500 Index, which has the most money in it right now, has the same expense ratio as VTSAX, and the Small- and Mid-cap aren't much higher, so I don't know if it's worth moving the money now or waiting until RE and just drawing those down first.

Related, how important is it to have international stocks in your portfolio?  The international funds all have expense ratios 2x that of similar domestic funds.  I already have balanced my portfolio with a bond fund, but is it important to diversify internationally as well?

VoteCthulu

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Re: Should I take the Cap Gains hit?
« Reply #1 on: April 06, 2017, 04:15:39 PM »
No, it doesn't really matter whether you own VTSAX or its component funds, as long as they're held in the equivilent proportions.

There is a great deal of disagreement on the correct allocation of non-US stocks that a portfolio should have, I've heard anywhere fom 0 to 50%. You'll need to read up on the risks and benefits to decide for yourself.

Guide2003

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Re: Should I take the Cap Gains hit?
« Reply #2 on: April 06, 2017, 05:33:39 PM »
As far as taking the capital gains hit, I'm in the same boat except that I put the money into Betterment and now wish I had gone with more of the "lazy portfolio" model and learned a little more about re-balancing it myself. Are you sure you are in a tax bracket that would tax the capital gains?

As far as the foreign allocation, I've heard arguments saying that simply investing in big domestic stocks gives you foreign exposure without risking the fluctuations of exchange rates since most large companies have globalized these days. It seems like most robo-advisers (especially Betterment) include a healthy percentage of foreign assets in their prescribed allocation because that's what worked out in the back-tested models. I think both my IRA and taxable accounts with them have about 45% foreign assets. I use my 401K to skew it back towards domestic because it feels a little extreme, but I haven't seen a more conclusive answer.

Cycling Stache

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Re: Should I take the Cap Gains hit?
« Reply #3 on: April 06, 2017, 05:58:06 PM »
Vanguard has a white paper on international investing.  Answer is that a proportionate amount of US and international stocks that match the relative market caps is probably the best answer, but at 30% international, you get almost all the benefits of diversification and lower volatility.  Holding all US isn't quite the same because you're not holding all those major international companies, and if you believe you can't outsmart the market, then there's no reason to believe US large companies are priced better or more likely to succeed at their current prices than major international companies.

S&P 500 tracks fairly closely to VTSAX.  If that's where you have most of your money, I don't think there's any reason to sell that and take a capital gains tax hit.  Selling out of the other ones to a simpler allocation could be worth it if simplicity gets you to your correct asset allocation.  I would probably go VTSAX in the future over S&P500 just for the slightly greater diversity (adds mid and small cap US).

For what it's worth, I switched to 30% international last summer after reading the Vanguard white paper and some very good posts on the topic by Interest Compound.  Because the expense ratio is the lowest for international for me in my TSP (retirement) account, I hold all my international there and have the rest of my holdings in VTSAX to get to the 70/30 mix.  I plan on rebalancing once a year. 

Good luck!

MustacheAndaHalf

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Re: Should I take the Cap Gains hit?
« Reply #4 on: April 07, 2017, 03:47:22 AM »
I recall the Vanguard white paper suggesting 20% for those who don't want to take much risk in gaining diversification, and up to 40% for those wanting to grab more diversification and willing to tolerate foreign market volatility more.  I'd say 1/3rd international is a fairly common allocation and probably a good goal for OP (or 30% if that's easier).

I believe VTSAX holds ~72% S&P 500, ~19% mid-cap, and ~9% small cap.  There shouldn't be a material difference in your returns using that setup versus letting a US Total Stock Market fund do it for you.

Do you only hold emerging markets?  You might want to add developed markets to your portfolio.  Of Vanguard Total International, 80% is developed markets and 20% is emerging markets.

Raenia

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Re: Should I take the Cap Gains hit?
« Reply #5 on: April 07, 2017, 06:14:19 AM »
Thanks for all the comments, you've given me some good points to think on.  I will let it sink in and read a bit more before doing anything, but I think I'll probably sell at least the emerging markets, move it to total international, and leave the 500 alone for now.  The others I'll think about a bit more, maybe wait and see what tax bracket I end up in this year (depends on my annual raise, which hasn't come in yet.)

Much appreciated!

SeattleCPA

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Re: Should I take the Cap Gains hit?
« Reply #6 on: April 07, 2017, 06:46:00 AM »
...  I will let it sink in and read a bit more before doing anything, but I think I'll probably sell at least the emerging markets, move it to total international, and leave the 500 alone for now.  The others I'll think about a bit more, maybe wait and see what tax bracket I end up in this year (depends on my annual raise, which hasn't come in yet.)

Can I throw out an idea? You might find it profitable (and super educational) to read David Swensen's book about asset allocation formulas for individual investors.

Swensen, who has run the Yale endowment fund for last three decades with astonishing results, suggests this allocation:
30% US stocks
15% REITS
15% developed markets
15% intermediate treasuries
15% TIPS (inflation protected treasuries)
10% emerging markets

Note that above allocation is basically a variation on the 60% stocks and 40% bonds standard except Swensen dials up the stock percentage to 70% and then goes all treasuries with the bond percentage.


Raenia

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Re: Should I take the Cap Gains hit?
« Reply #7 on: April 07, 2017, 07:12:03 AM »
Thanks for the suggestion, I'll add that book to my reading list.