So I just sold a home I own for a juicy capital gain. I’ve got 60% of my gain wiped out already (personal exemption + pandemic crash TLH), but I’m wondering if this is one of the beautiful spots in my investing life where I’m in a win-win scenario no matter what the market does.
Here’s my plan: purchase equities I would have likely bought in 2022, now. Basically going overweight on equities for a while with new money. If the market tanks between now and the end of the year… I win. TLH reduce my tax bill. Market goes up, I win again, collecting gains I wouldn’t have otherwise had. I have plenty of bonds still so I’m not worried about panic selling, nor do I have any record of doing this (quite the contrary).
Flaws in my logic here? The only flaw I can see, is I’d miss or have a weaker rebalancing event if the market tanks (since I’d be overweight equities already), which would potentially cancel out some of the “win” here. I still think I come out ahead though…
Overweight equites after home sale?
Re: Overweight equites after home sale?
What happened to your risk tolerance? That should determine how much you should hold in stock.
If you sold your home and are now renting, this probably decreases your risk tolerance as a percentage of your portfolio. The reason is that the same percentage decline in your portfolio will mean a greater decline in your standard of living; previously, if the stock market crashed, you had a home that would continue to provide a significant part of your living expenses. However, since your portfolio is larger now, you might still hold more dollars in stock, even at a lower percentage.
If you sold your home and are now renting, this probably decreases your risk tolerance as a percentage of your portfolio. The reason is that the same percentage decline in your portfolio will mean a greater decline in your standard of living; previously, if the stock market crashed, you had a home that would continue to provide a significant part of your living expenses. However, since your portfolio is larger now, you might still hold more dollars in stock, even at a lower percentage.
Re: Overweight equites after home sale?
Since in the scenario I've laid out I actually gain when the market tanks, I suppose my risk tolerance has increased, as this is a win-win scenario. There's a certain amount of joy I get by paying less taxes while I'm breathing, vs when I'm dead. Secondly, with the house sale home equity is up significantly as I didn't use a mortgage on the new property. So I guess you could say with these two factors my risk tolerance has gone up.grabiner wrote: ↑Mon Aug 02, 2021 7:58 pm What happened to your risk tolerance? That should determine how much you should hold in stock.
If you sold your home and are now renting, this probably decreases your risk tolerance as a percentage of your portfolio. The reason is that the same percentage decline in your portfolio will mean a greater decline in your standard of living; previously, if the stock market crashed, you had a home that would continue to provide a significant part of your living expenses. However, since your portfolio is larger now, you might still hold more dollars in stock, even at a lower percentage.
There's also the fact that I'm at something like 45-50x spending at this point, so the risk to my financial well being is so diminished at this point, holding more bonds is sort of at a point of diminishing returns I guess. At least that's how I'm looking at it.
Re: Overweight equites after home sale?
If you sold one home and bought another, this shouldn't affect your risk tolerance directly.mrspock wrote: ↑Mon Aug 02, 2021 11:03 pmSince in the scenario I've laid out I actually gain when the market tanks, I suppose my risk tolerance has increased, as this is a win-win scenario. There's a certain amount of joy I get by paying less taxes while I'm breathing, vs when I'm dead. Secondly, with the house sale home equity is up significantly as I didn't use a mortgage on the new property. So I guess you could say with these two factors my risk tolerance has gone up.grabiner wrote: ↑Mon Aug 02, 2021 7:58 pm What happened to your risk tolerance? That should determine how much you should hold in stock.
If you sold your home and are now renting, this probably decreases your risk tolerance as a percentage of your portfolio. The reason is that the same percentage decline in your portfolio will mean a greater decline in your standard of living; previously, if the stock market crashed, you had a home that would continue to provide a significant part of your living expenses. However, since your portfolio is larger now, you might still hold more dollars in stock, even at a lower percentage.
However, if you got rid of a mortgage, that is equivalent to buying an equal amount in bonds, since it gives a guaranteed cash amount (the amount you no longer pay in principal and interest) for every month remaining on the mortgage. Therefore, it would be logical to view the old mortgage as a negative bond, and keep the same allocation. For example, if you previously had $1.2M in stock, $600K in bonds, and a $300K mortgage, your portfolio was 67% stock, but your net allocation was 80% stock. If you got rid of the mortgage (either by selling the home to buy another, or just by using your portfolio to pay it off), you wouldn't be taking any more risk with a portfolio that is 80% stock.
Since your portfolio is more than you need, it makes sense to invest the excess for your heirs. If this is your children's retirement fund, or your not-yet-born great-grandchildren's college fund, it can be 100% stock, given the time horizon.mrspock wrote: ↑Mon Aug 02, 2021 11:03 pm There's also the fact that I'm at something like 45-50x spending at this point, so the risk to my financial well being is so diminished at this point, holding more bonds is sort of at a point of diminishing returns I guess. At least that's how I'm looking at it.
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Re: Overweight equites after home sale?
The "wins" are asymmetrical though because $1 of losses generates less than a $1 of tax savings. Though I'm not sure how the math works out. Let's see.
E.g. say you're talking about 300k of capital gains before taxes and say your LTCG rate is 20% and your AA is 70/30.
Under your scenario, if those 300k of "extra equities" went down 50%, you'd be down 150k, still owe .20 * 150k = 30k in taxes, for a net negative of 180k.
If you set aside 60k for taxes, put the rest into 70/30 and stonks dive 50%, you're out that 60k taxes, and are down .5 * .7 * 240k = 84k, for a net negative of 144k, right?
So the thing you describe isn't really a win there, because -180 is worse off than -144. Suggest you play around with your own numbers though. Also suggest you double check my math because I'm kinda bad at it.
Re: Overweight equites after home sale?
This sounds key here. I would dump it all in. Do you plan to buy a new home?mrspock wrote: ↑Mon Aug 02, 2021 11:03 pmgrabiner wrote: ↑Mon Aug 02, 2021 7:58 pm What happened to your risk tolerance? That should determine how much you should hold in stock.
If you sold your home and are now renting, this probably decreases your risk tolerance as a percentage of your portfolio. The reason is that the same percentage decline in your portfolio will mean a greater decline in your standard of living; previously, if the stock market crashed, you had a home that would continue to provide a significant part of your living expenses. However, since your portfolio is larger now, you might still hold more dollars in stock, even at a lower percentage.
There's also the fact that I'm at something like 45-50x spending at this point, so the risk to my financial well being is so diminished at this point, holding more bonds is sort of at a point of diminishing returns I guess. At least that's how I'm looking at it.
Re: Overweight equites after home sale?
Yes, I bought a new one and paid cash. Slightly more expensive. This is a 2nd home as well, so even in the worst case scenario I could jettison it and shore up my balance sheet.Orangutan wrote: ↑Tue Aug 03, 2021 3:18 amThis sounds key here. I would dump it all in. Do you plan to buy a new home?mrspock wrote: ↑Mon Aug 02, 2021 11:03 pmgrabiner wrote: ↑Mon Aug 02, 2021 7:58 pm What happened to your risk tolerance? That should determine how much you should hold in stock.
If you sold your home and are now renting, this probably decreases your risk tolerance as a percentage of your portfolio. The reason is that the same percentage decline in your portfolio will mean a greater decline in your standard of living; previously, if the stock market crashed, you had a home that would continue to provide a significant part of your living expenses. However, since your portfolio is larger now, you might still hold more dollars in stock, even at a lower percentage.
There's also the fact that I'm at something like 45-50x spending at this point, so the risk to my financial well being is so diminished at this point, holding more bonds is sort of at a point of diminishing returns I guess. At least that's how I'm looking at it.
Re: Overweight equites after home sale?
I'm sure someone will contribute a fringe issue, but in any reasonable and practical sense, your logic seems sound. I think you're in a wonderful position to overweight equities.mrspock wrote: ↑Tue Aug 03, 2021 3:26 amYes, I bought a new one and paid cash. Slightly more expensive. This is a 2nd home as well, so even in the worst case scenario I could jettison it and shore up my balance sheet.Orangutan wrote: ↑Tue Aug 03, 2021 3:18 amThis sounds key here. I would dump it all in. Do you plan to buy a new home?mrspock wrote: ↑Mon Aug 02, 2021 11:03 pmgrabiner wrote: ↑Mon Aug 02, 2021 7:58 pm What happened to your risk tolerance? That should determine how much you should hold in stock.
If you sold your home and are now renting, this probably decreases your risk tolerance as a percentage of your portfolio. The reason is that the same percentage decline in your portfolio will mean a greater decline in your standard of living; previously, if the stock market crashed, you had a home that would continue to provide a significant part of your living expenses. However, since your portfolio is larger now, you might still hold more dollars in stock, even at a lower percentage.
There's also the fact that I'm at something like 45-50x spending at this point, so the risk to my financial well being is so diminished at this point, holding more bonds is sort of at a point of diminishing returns I guess. At least that's how I'm looking at it.