Tax-loss harvesting and ETF investing

[spotty_dog]

So, I'm looking to try tax-loss harvesting for the first time, or at least the first time on this scale. My foreign investments did pretty poorly over the past few years, so I waited out the short-term trading penalty (I think I had to hold the position for 90 days to avoid the penalty) and now my plan is to sell the mutual funds (locking in about a $12k loss) and then re-buy index ETFs to get my asset allocation back. (DH is skeptical that we even need to hold foreign stock, but I feel better with the diversification, even if it keeps nose-diving as the EU struggles and earthquakes hit South America, etc.) This way we should be able to offset dividends and anything we choose to sell at a gain, and/or offset a little bit of income every year until the loss is used up (I think we can apply $3k a year against our income, which at our tax bracket is worth a good few hundred bucks in reduced taxes.)

I'm hesitating to pull the trigger though. I don't know how I feel about moving to ETF investing -- I hate feeling like I need to buy in round lots, instead of just being able to plunk down the amount that rebalances my portfolio. But I like that there's no expense ratio or trading fee (Fidelity offers certain "core" index ETFs at no trading cost.) I also feel like I need to decide on my plan for after the wash sale rule expires. Do I go back to my same index funds, or stick with the ETFs?

Has anyone done TLH, or made the decision between ETF and mutual fund investing? I feel like I had the discussion with one of our guy members here about the merits of ETFs a few months back.

Weigh in please! Selling low feels so wrong, and yet TLH is so…next-level investing, LOL.

[rufflesanddots]

You should start a finance blog. I would read it.

Sent from my Nexus 6P using Tapatalk

[spotty_dog]

Heh, thanks, but I really don't know almost anything! I just save…invest…hope for the best.

[OrionGrad]

I know that Betterment does tax loss harvesting for my account, but since it's all automated I don't know much about the specifics.
I agree w/ r&d, I'd definitely read your finance blog if you started one. 😀

[MDPhDWife]

Haven't done any TLH, but I've been reading about it on WCI. I did invest recently in an ETF. Too early to tell how it'll work out.

[spotty_dog]

What made you pick the ETF over an ordinary mutual fund? I didn't make any decisions before the market closed so I'll be doing my sell order on Monday I guess -- if I get the guts to go through with it. Then if I switch over to ETFs I'll have to wait for the funds to settle before I can invest them again.

[MDPhDWife]

My nephew gave me what I perceived to be solid advice. Since he lives and breathes for this kind of thing, I thought I would put a little into a couple ETF bonds he recommended and see what happens.

[Windsurfer]

I used to have mutual funds when I started investing but now primarily use ETFs. Buying a market-wide ETF like SPY or VTI is fairly safe and has a much lower Management Expense Ratio than even the best mutual fund. I' ve never looked back.

You can get better tax loss harvesting advice from others. I'm sure the rules in the US are different than here in Canada.

[spotty_dog]

I think I'm going to have to do some research and see if there is any evidence for intraday price shifts and bid/ask spread affecting returns, as compared to a comparable index fund. I'll have time, since I have to wait out the wash sale period for a few months before I can change my holdings again. I'll probably just go with the ETFs because it's easy: they're a clearly different investment that doesn't violate the wash sale rule, yet they are cheap to trade. That said, the ERs are pretty much the same between the two kinds of investment, at least the ones I'm looking at.

I do already have a couple of ETFs, and I think part of the problem is they have fairly high share prices. So instead of picking up $1500 of something, I'm picking up like 12 shares of it, and that makes me imagine some trader on the market floor rolling their eyes at such a tiny trade. I think I have issues, LOL. The foreign ETFs I'll be buying have smaller share prices, and at least at first I'll be buying in big chunks, so I can try for round-ish lots of 50 or 100 or 200 shares. So that makes it easier.

[Windsurfer]

I think I'm going to have to do some research and see if there is any evidence for intraday price shifts and bid/ask spread affecting returns, as compared to a comparable index fund. I'll have time, since I have to wait out the wash sale period for a few months before I can change my holdings again. I'll probably just go with the ETFs because it's easy: they're a clearly different investment that doesn't violate the wash sale rule, yet they are cheap to trade. That said, the ERs are pretty much the same between the two kinds of investment, at least the ones I'm looking at.

I do already have a couple of ETFs, and I think part of the problem is they have fairly high share prices. So instead of picking up $1500 of something, I'm picking up like 12 shares of it, and that makes me imagine some trader on the market floor rolling their eyes at such a tiny trade. I think I have issues, LOL. The foreign ETFs I'll be buying have smaller share prices, and at least at first I'll be buying in big chunks, so I can try for round-ish lots of 50 or 100 or 200 shares. So that makes it easier.

In recent years the stock markets have become very "efficient", meaning it is hard to beat the market return and find bargains because there are so many people who can easily participate and on the rare occasions when there is a bargain lots of people execute trades that give each of them a small share in the windfall and drive the prices back toward fair market value. I used to look for bargains, until a prof in an MBA finance course convinced me that even the best mutual fund manager cannot outperform the market year after year; it they did last year they probably wont next year. If a mutual over several years cannot do much better than the overall market, then what matters is how much money is being deducted from those returns to pay for fund management. ETFs like SPY and VTI intentionallly track and match the relative weightings of key firms that form part of their particular index -- so that management of it is simply rules-based, could be done by almost anyone, and hence doesn't cost much. I buy ETFs because I can know at any time what their price is, they perform just as well as the index they represent before the management expenses are deducted, and the management expenses are much lower than for any actively managed mutual fund with comparable holdings. ETFs contiribute to an efficient market and provide appropriate returns in the long run commensurate with risk exposure; mutual funds keep some people out of the efficient market by offering the false hope of consistently getting better than effiicient-market returns.

[spotty_dog]

Thanks, but I am not comparing ETFs to actively managed funds. I completely agree with you about efficient market theory and the pitfalls of market timing. If someone tells you they can do better than the market, or that the manager determines a mutual fund return, they are deluding themselves, or you, or both. What I am comparing is index ETFs to passive index funds -- usually, ones that track the *exact same index*. FWIW, there are also actively managed ETFs that have the same pitfalls you describe.

The issue I'm describing is that if I execute an order on Monday for, say, VTSAX (Vanguard Total Market) to fill at its NAV, and I also attempt to enter a mid-day market limit order for VTI at somewhere between the bid and the ask prices, I'm going to nab essentially the same underlying fund for two different costs. One price is driven partly by timing and demand, the other driven purely by market forces. Trading volume also affects the prices of the different products. Is the difference more likely to harm me in the long run, over the years I plan to hold the position, or will it help me? Certainly the difference is negligible at best, since asset allocation and expenses will always drive returns more than any other factors. But I have free time and can ponder tiny differences -- especially if they will grow into big differences because of the size of the transactions I'm making these days.

Anyway I'm happy with my domestic equity, so SPY and VTI are irrelevant. What I'm looking at is fiddling with my foreign equity. I am trying to unload FSIVX (ER .12) and FPMAX (ER .2), which track the MSCI EAFE and FTSE Emerging indices respectively. I have several choices for how to keep my overall asset allocation the same after locking in this loss. Option one is to purchase the index ETFs IEFA (.12) and IEMG (.16), which track MSCI EAFE and MSCI Emerging. Option two is to replace my separate developed and emerging positions with the single FSGDX, Fidelity Global ex-US (ER .12). Option three is to do nothing and wait out the wash sale rule in cash. (I suppose option four is to purchase something like a Vanguard ETF, but I'd pay $7.95 per transaction in that case, which would add up fast with my monthly rebalancing habits.)

Then after the waiting period is up, I have to make decisions again. I could stick with whatever I buy in the interim, either ETFs or index funds. Or I could return to my original index fund position.

At this point, I've already got a little bit of IEFA, so I will probably just take the ETF option if/when I sell my foreign equity. Seems easiest. So the question remaining is whether to stick with it after the waiting period. MOAR RESEARCH!

[spotty_dog]

Oops, I waited too long. My loss is only about $8k now, and some of my more recent purchases are even showing a gain. >.< I guess it's still worth it to go ahead with the sale. (Edit: Gah, cold feet! What if the price climbs before I can re-buy? *fidget fidget*)

[metroguy]

i'm not sure why you are hesitating, it doesn't look like it's a large amount. most trades are done via machines - namely the other side of the trade is normally a machine - using automated market marking programs (it calculates the real time price of the index and price it with a small spread). anyway, this is a normal thing most people do with loss harvesting-sell index, buy another same exact index with a different name. (note, i never do it cause.. i don't follow what i say).. most of time, i'm not good investing.. i like to gamble.. and when the trades goes against me, i just hold it.

[spotty_dog]

Thank you for the calm words. You might have convinced me to go for it. >.< I'm particularly reassured to think about automatic programs conducting trades, not individual brokers getting an order and calling it in ("Ugh, how am I supposed to find a seller for just 10 shares?!") Another hangup is that I know when I have a lot sitting in cash I get really intimidated to get it all invested. It's roughly 10% of my portfolio, so while it's not a HUGE amount relatively speaking, it's still about three times as much as I made the last year I was employed, so there's that. Foreign is doing well lately, and the loss is down to just about $7k, so the benefit is shrinking fast too. Anyway we'll see if I get brave tomorrow.

[metroguy]

10% cash is not a big deal.. if you think about it, if you got a 50/50 balance fund --50% of the fund is in a bond index that probably generates 1 to 2% interest. in a bank, you probably get .1% over time, it's a big dealer but if you're talking about 1 to 2 yr time frame, it's not very large difference.
i used to work in a trading group as a programmer.. chances of a human trading against a human is low. in fact, most human trades are consider dumb/easy money. firms pay for order flow from retail clients. all big/serious trades are done via computer programs that spread it over time with multiple exchanges and through various strategies.