Poorly diversified -- how to fix (while minimizing capital gains)???

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iinterval
Posts: 1
Joined: Thu Jun 24, 2021 8:03 am

Poorly diversified -- how to fix (while minimizing capital gains)???

Post by iinterval »

Hi folks,
I've been neglecting my portfolio for too long and now it's gotten fairly unbalanced. I fear that I have some fairly risky investments and its not set up well for long term growth. I'd like to diversify, but also don't like the idea of paying a lot of capital gains taxes to sell my current investments.

$600k cash
$600k roboadvisor (90% stocks / 10% bonds)
$600k 401k vanguard target date 2045
$800k google stock
$300k misc other tech stocks (tsla,fb, nflx, amzn, msft, etc)

Th two issues I see is being 1) cash heavy and 2) heavy on google stock (lots of capital gains tax if I were to sell). How can I get to a diversified portfolio with the right balance (i.e. 4 fund) from here?
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retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Poorly diversified -- how to fix (while minimizing capital gains)???

Post by retiredjg »

What other accounts do you have? What is your tax bracket? What state are you in? How old are you? And a long list of other questions.... :happy

You will only get very general answers with the information you have posted. Consider posting in the format we use to help people with their portfolio questions. See the link at the bottom of this message for how to do that. The closer you follow the format, the easier it is to help you (and you will get more and better answers)

General answer, invest the cash in a diversified manner, don't hold a target fund in a taxable account, get rid of almost all of the Google stock and other stuff.... If everything you have shown us is in a taxable account, you probably need an overhaul for both diversification but also tax-efficiency.

Welcome to the forum. :happy
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Poorly diversified -- how to fix (while minimizing capital gains)???

Post by dbr »

Tax cost is an exercise in detail. I think you have to begin by laying out in a spreadsheet what your tax returns might look like over the next few years with different scenarios for what to sell when by tax lot. The result is obviously affected by your standing income from all sources. I am not sure I have seen an algorithm for optimizing the cost but such a thing is theoretically possible. Trial and error is probably good enough.

As to trading off the tax cost of diversifying against the cost of risk from not diversifying, that would also be theoretically possible but I have never done it or seen it done other than the obvious comment to not let the tax tail wag the investment dog. That comment means it is thought to be worth it to spend on taxes to eliminate risk, without actually quantifying that. Someone else might be able to help.
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retiredjg
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Joined: Thu Jan 10, 2008 11:56 am

Re: Poorly diversified -- how to fix (while minimizing capital gains)???

Post by retiredjg »

Here is a Wiki article that discusses this type of decision.

https://www.bogleheads.org/wiki/Paying_ ... itch_funds
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Cyclesafe
Posts: 1474
Joined: Wed Dec 31, 2014 12:03 pm

Re: Poorly diversified -- how to fix (while minimizing capital gains)???

Post by Cyclesafe »

It is not uncommon for Boglehead newbies to be in your kind of situation. But yours is extreme. And I think you are hostage to your past strategy.

Rome wasn't built in a day.

Rather than primarily targeting 3 fund, perhaps you should focus exclusively on reducing volatility.

Cash is eroding away. Hold your nose and invest in shorter term bond funds. If/when their value drops if/when interest rates go up, sell them and match the LTCG loss to the LTCG gain of sales of your least appreciated single stock. Then take the total proceeds and reinvest in index funds to start moving towards your target overall asset allocation.

Alternatively, invest your cash in VTSAX and exchange your 401k target 2045 for a combination of VTSAX/VTIAX/VBTLX that maintains your target asset allocation. You'll likely prefer growth in taxable to growth in your 401k because of RMD's in your distant future. If you are are filing MFJ now, the possibility of filing single from age 72 makes this especially poignant.

Furthermore, bear in mind that if LTCG / QDI tax rates were to revert to levels we have seen in the past, you will be glad you paid the lower preferential rates we enjoy today on sales of some of your most worrisome single stocks. This would be tax timing, however. YMMV.
"Plans are useless; planning is indispensable.” (Dwight Eisenhower) | "Man plans, God laughs" (Yiddish proverb)
exodusNH
Posts: 10347
Joined: Wed Jan 06, 2021 7:21 pm

Re: Poorly diversified -- how to fix (while minimizing capital gains)???

Post by exodusNH »

iinterval wrote: Thu Jun 24, 2021 8:31 am Hi folks,
I've been neglecting my portfolio for too long and now it's gotten fairly unbalanced. I fear that I have some fairly risky investments and its not set up well for long term growth. I'd like to diversify, but also don't like the idea of paying a lot of capital gains taxes to sell my current investments.

$600k cash
$600k roboadvisor (90% stocks / 10% bonds)
$600k 401k vanguard target date 2045
$800k google stock
$300k misc other tech stocks (tsla,fb, nflx, amzn, msft, etc)

Th two issues I see is being 1) cash heavy and 2) heavy on google stock (lots of capital gains tax if I were to sell). How can I get to a diversified portfolio with the right balance (i.e. 4 fund) from here?
You really need to edit this post and put it in the format as described here: viewtopic.php?f=1&t=6212

With that said, deploy the cash into a AA that matches your comfort level. You need to start selling the individual stocks. Remember, you pay taxes on the gains, not the price of the stock. And you're going to pay the taxes eventually (unless you die and your heirs get a step-up basis.) It's better to do it now, both before your start RMDs and the 2017 tax laws sunsets in 2026. If you are married and you die, your spouse will be stuck with the single-filer tax brackets, paying far, far more in taxes.

You could also look at donating some of your low-basis shares. (https://www.bogleheads.org/wiki/Donatin ... securities)
delamer
Posts: 17458
Joined: Tue Feb 08, 2011 5:13 pm

Re: Poorly diversified -- how to fix (while minimizing capital gains)???

Post by delamer »

You have one stock that makes up 30% of your portfolio. That’s your biggest problem.

No one likes to pay capital gains taxes, but that’s the only way to derisk.

Do you know your cost basis in the Google stock? Do you have multiple lots?
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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