help using spreadsheet "Paying a Tax Cost to Switch Funds"

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K72
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Joined: Wed Dec 05, 2018 7:04 pm

help using spreadsheet "Paying a Tax Cost to Switch Funds"

Post by K72 »

I've had some high expense ratio / low cost basis mutual funds for 35 years that have been haunting me because of the expense ratio and large/erratic capital gains but could never figure out how to decide what to do until I read the following thread with great interest:

viewtopic.php?f=1&t=357437

and need a sanity check on my usage of the spreadsheet tool:

https://docs.google.com/spreadsheets/d/ ... =238763229

1. For expected return, I assume we should use the no dividend reinvestment return since the left side of the spreadsheet shows purchases of the new fund with the dividends from the current fund. In my case, STAFX = current and VSIAX = new. The current fund has had rather large capital gains of late (14%, 10%, 32%, 22%), so the expected return w/o dividend reinvestment is very low compared to VSIAX (6.7% CAGR vs 11.1% via Portfolio Analyzer backtest). But the return with dividend reinvestment is the other way around (17% CAGR vs 13.4%). I just want to make sure I'm using the appropriate value because I get the opposite conclusion depending on which one I use. Using the lower numbers (no dividend reinvestment), the result is breakeven after 1 year which suggests it's a no brainer to sell.

2. For LT capital gain tax I used 15% Federal (based on our AGI) + 9.3% marginal state tax rate (yep, it's Calif.!) for a total of 24.3%

3. For distribution yield, I looked up dividends + capital gains in Yahoo Finance and just divided the total by the share price at the time. For the spreadsheet, I used 10% for current and 1.3% for new.

4. For distribution tax rate, I assume that means current marginal tax rates, which for me is 24% Federal + 9.3% state = 33.3%

5. Cost basis for the old fund is tricky because I used dividend reinvestment for many years, plus the fund was absorbed by Wells Fargo in 2011 which wiped out all online records of the fund up to that point. Using the tool though, I get the same conclusion = sell regardless of what is used for cost basis

The net of all of this is that it appears obvious that selling is the appropriate action. I'd appreciate comments as to whether I've done things correctly. Thanks.

Actually, I discovered by playing around that in this case, the distribution yield makes no difference at all. The single most important parameter is expected return of current vs new. Does this make sense?
All we want are the facts...
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