Captial gains: Friend or foe?

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restingonmylaurels
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Captial gains: Friend or foe?

Post by restingonmylaurels »

I have a couple of active VG funds from the 1990s that I cannot easily sell, as they both have large unrealized gains.

The funds perform well and if they were index funds, I would have no issue with them. As active funds, they generate significant new capital gains distributions each year, even during years like this one.

I have long viewed distributed capital gains as the enemy, requiring current payment of tax and pushing me into tax issues due to the impact on MAGI.

On the plus side, it does imply that your fund is doing well when they can make annual capital gain distributions and I guess the cg distributions can be viewed as a second source of income generation, alongside dividends.

My query to the forum is whether you view capital gain distributions as a bother or a blessing?
prd1982
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Re: Captial gains: Friend or foe?

Post by prd1982 »

Unrealized capital gains are wonderful. Realized capital gains are less desirable (as opposed to bad). At a minimum, turn off dividend reinvestment.
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markjk
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Re: Captial gains: Friend or foe?

Post by markjk »

If the funds are in a non-taxable account, it doesn't matter. If the funds are in a taxable account (such as your situation), then at least you can be happy about the investment providing a return. It would be best if you could earn the money tax-free until you use it (via capital appreciation) but if not, capital gains and dividends are the next best thing.

Taxes are a huge topic but I try to look at the benefit of each situation. You are investing to earn a return. That's the goal. There are benefits of a pre-tax account. You are earning a return (meeting the goal) and since this is already a taxable account, you have access to the money if you need it at any time without penalty.

So really, I think it depends on the situation to determine if capital gains are a friend or foe.
adestefan
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Re: Captial gains: Friend or foe?

Post by adestefan »

Don't let the tax tail wag the dog.

Taxes are on profits; profits mean you're making more money. What you're saying is that you'd rather not make money than pay taxes. If you're that concerned about taxes take the money and stuff it under your mattress.
exodusNH
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Re: Captial gains: Friend or foe?

Post by exodusNH »

restingonmylaurels wrote: Wed Jun 29, 2022 6:23 am I have a couple of active VG funds from the 1990s that I cannot easily sell, as they both have large unrealized gains.

The funds perform well and if they were index funds, I would have no issue with them. As active funds, they generate significant new capital gains distributions each year, even during years like this one.

I have long viewed distributed capital gains as the enemy, requiring current payment of tax and pushing me into tax issues due to the impact on MAGI.

On the plus side, it does imply that your fund is doing well when they can make annual capital gain distributions and I guess the cg distributions can be viewed as a second source of income generation, alongside dividends.

My query to the forum is whether you view capital gain distributions as a bother or a blessing?
If you wouldn't have sold an equivalent amount of dollars of the fund to pay for your expenses, they're a bother.

They're not always indicative of success. It could be due to redemptions exceeding inflows. It could be that the manager has decided to change strategy and needed to sell off holdings to buy the replacements.

Capital gains and dividend distributions aren't a unique source of income. Both reduce the value of the fund by the amount paid out. If you're simply reinvesting, you are less wealthy due to the taxes involved. (Though it does reduce your future tax burden.)

If those distributions wind up reducing the amount you sell to cover your expenses, then there's really no harm in them, as you'd incur taxes when you chose to sell anyway.

As someone else said, if, absent the taxes due, you'd sell these holdings in favor of passive index funds, you should turn off dividend reinvestment.
Call_Me_Op
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Re: Captial gains: Friend or foe?

Post by Call_Me_Op »

restingonmylaurels wrote: Wed Jun 29, 2022 6:23 am I have a couple of active VG funds from the 1990s that I cannot easily sell, as they both have large unrealized gains.

The funds perform well and if they were index funds, I would have no issue with them. As active funds, they generate significant new capital gains distributions each year, even during years like this one.

I have long viewed distributed capital gains as the enemy, requiring current payment of tax and pushing me into tax issues due to the impact on MAGI.

On the plus side, it does imply that your fund is doing well when they can make annual capital gain distributions and I guess the cg distributions can be viewed as a second source of income generation, alongside dividends.

My query to the forum is whether you view capital gain distributions as a bother or a blessing?
It is not capital gains that are an enemy, it is distributed capital gains - which force you to pay taxes before you would otherwise want to do so. While mutual funds need to distribute (net) capital gains, ETFs do not have this problem. Index mutual funds may distribute some gains, but usually much less than active funds.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
nura
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Re: Captial gains: Friend or foe?

Post by nura »

Distributed Capital gains are blessing, typically for actively managed funds, gains distributed surge during bull markets and subside during bear markets.
Case in point, my actively managed funds threw lot of capital gains end of last year, since then the index funds with no distributions has dropped nearly 22%.
exodusNH
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Re: Captial gains: Friend or foe?

Post by exodusNH »

nura wrote: Wed Jun 29, 2022 8:11 am Distributed Capital gains are blessing, typically for actively managed funds, gains distributed surge during bull markets and subside during bear markets.
Case in point, my actively managed funds threw lot of capital gains end of last year, since then the index funds with no distributions has dropped nearly 22%.
You should plot the two funds on portfoliovisualizer.com and see if there really was a difference. If you kept the distributions as cash, you likely wound up ahead, but that was only by luck. You could have achieved the same result by selling x% of an index fund in December and keeping the cash.
Nowizard
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Re: Captial gains: Friend or foe?

Post by Nowizard »

Inconvenience versus performance and individual circumstances involving other investments and aspects of behavioral psychology seem to be the factors. Is there a way to combine TLH with sales and moving these funds to retirement accounts, for example?

Tim
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anon_investor
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Re: Captial gains: Friend or foe?

Post by anon_investor »

Nowizard wrote: Wed Jun 29, 2022 8:25 am Inconvenience versus performance and individual circumstances involving other investments and aspects of behavioral psychology seem to be the factors. Is there a way to combine TLH with sales and moving these funds to retirement accounts, for example?

Tim
TLH and moving these funds to tax efficient index funds should be explored.
saver7007
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Re: Captial gains: Friend or foe?

Post by saver7007 »

exodusNH wrote: Wed Jun 29, 2022 7:16 am
Capital gains and dividend distributions aren't a unique source of income. Both reduce the value of the fund by the amount paid out. If you're simply reinvesting, you are less wealthy due to the taxes involved. (Though it does reduce your future tax burden.)
I wonder if "future tax burden" should show up on the liability side of personal balance sheets, to balance out the less wealthy now vs. less taxes later factors. There is something material there for any taxable holdings with a low basis but the actual future tax you'll pay on the gains is probably unknowable.
quietseas
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Re: Captial gains: Friend or foe?

Post by quietseas »

We had some actively managed Vanguard funds in taxable between 1990s and 2013. We donated some shares to charity and sold the rest for a down payment on a house. Realized gains were offset by other realized capital losses carried over from 2008 so no extra tax was paid.
quietseas
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Re: Captial gains: Friend or foe?

Post by quietseas »

saver7007 wrote: Wed Jun 29, 2022 8:36 am
exodusNH wrote: Wed Jun 29, 2022 7:16 am
Capital gains and dividend distributions aren't a unique source of income. Both reduce the value of the fund by the amount paid out. If you're simply reinvesting, you are less wealthy due to the taxes involved. (Though it does reduce your future tax burden.)
I wonder if "future tax burden" should show up on the liability side of personal balance sheets, to balance out the less wealthy now vs. less taxes later factors. There is something material there for any taxable holdings with a low basis but the actual future tax you'll pay on the gains is probably unknowable.
You might enjoy reading this wiki page:
https://www.bogleheads.org/wiki/Tax-adj ... allocation
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restingonmylaurels
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Re: Captial gains: Friend or foe?

Post by restingonmylaurels »

anon_investor wrote: Wed Jun 29, 2022 8:29 am
Nowizard wrote: Wed Jun 29, 2022 8:25 am Inconvenience versus performance and individual circumstances involving other investments and aspects of behavioral psychology seem to be the factors. Is there a way to combine TLH with sales and moving these funds to retirement accounts, for example?

Tim
TLH and moving these funds to tax efficient index funds should be explored.
Every time there is a significant market downturn, like this year and spring 2020, I rush off to see what I can TLH. Now, however, there are no more TLH possibilities remaining, unless these funds were to decrease 50% more from here.

Like I have said, the funds are fine, the run-up in their valuations from the last millennium is fine, it is just that these funds that I cannot sell continue to cause me tax problems every year by their large capital gain distributions.

It is not just the paying of the capital gain tax but also how it causes me problems with other tax issues like reduced/disallowed credits because it pushes me beyond certain MAGI levels. It also keeps me from doing any Roth conversions.

I see no way out of this dilemma until my post-death basis step-up.
cas
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Re: Captial gains: Friend or foe?

Post by cas »

restingonmylaurels wrote: Wed Jun 29, 2022 6:23 am On the plus side, it does imply that your fund is doing well when they can make annual capital gain distributions
It is important taxable account hygiene to try to understand *why* the consistent capital gain distributions (CGD) are occurring.

As exodusNH mentioned above, there are a lot of reasons why a CGD might occur.

The situation you really want to watch out for is a fund that has gone into a death spiral, where the shareholder rats start jumping ship in big waves, causing the fund managers to have to sell assets bought many years previous with a lot of unrealized appreciation (sometimes due just to stuff like inflation rather than because the asset had a return better than other possible assets), which causes more CGD, which causes more rats to jump ship, rinse/wash/repeat, rinse/wash/repeat. See this Morningstar article for example and discussion: "Zombie Index Funds Are Delivering Frightening Tax Bills"

To some extent ... often without the actual "death spiral" occurring ... the same thing is at work with many actively managed mutual funds now. Actively managed funds used to be the only mutual funds on the market (so older investors may have made a good choice when they bought them long ago). Then index funds came along and eventually became popular. This change in consumer tastes has led to the increased probability that an actively managed fund will experience net outflows during the year and be forced to sell older and older assets in order to meet redemption requests. Hence, CGDs ... which eventually irritate more and more long-term investors to finally decide to bite the bullet and contemplate bailing. The CGDs don't necessarily have any correlation to recent out-performance in these funds. This sort of consistent big CGDs might mean nothing more than that the market in general has been rising recently or that the fund has been around a long time and is being forced into selling highly appreciated assets that they have held a long time and have a lot of inflation built into the price.

One way to try to get a handle on the net inflow/outflow situation for a given fund is to go look at the "Investment Flows" graph on the Performance Tab of the Morningstar page for the fund. If you can see that the fund had a heyday way back when of big inflows, but it has been in consistent net outflows for many years recently, it is probably time to dig deeper.

It might end up being a relatively innocuous cause - like an actively managed fund that has responsibly closed to new purchases, combined with outperformance of the fund since it closed combined with active management that necessitates selling some assets in order to buy ones the managers think have better prospects going forward.

Or it might end up being a problem cause, like the example of the Zombie Index Funds above, where they were excessively expensive "me too" index funds that 401(k) plan providers created to round out their 401(k) offerings ... but which the rats eventually got wise to (with the help of 401(k) class action lawsuits) and bailed.
rockstar
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Re: Captial gains: Friend or foe?

Post by rockstar »

Pay the taxman. Check out the intelligent investor book. Makes a lot of great points about paying taxes to maintain a good portfolio.
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burritoLover
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Re: Captial gains: Friend or foe?

Post by burritoLover »

You don't want distributed capital gains in a taxable account. It isn't benefiting you at all. You don't need active funds that have a tendency to distribute these either. In a lot of cases, those are generated from fund managers making a lot of trades trying to beat the market.
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Re: Captial gains: Friend or foe?

Post by Jack FFR1846 »

If you are carefully juggling dividends, income and distributed cap gains to stay under one of the various cliffs that exist out there, if could be the difference of an insignificantly low cost vs an OMG, that's a huge cost.

To me, uncontrollable income is the enemy and the reason I've been slowly but surely converting my equity positions to non-dividend producing positions in my taxable accounts. In tax deferred, I could care less.
Bogle: Smart Beta is stupid
cas
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Re: Captial gains: Friend or foe?

Post by cas »

The wiki has an article "Paying a tax cost to switch funds" which is a more rigorous discussion of the pros/cons and numbers involved, since "one size fits all" statements do not necessarily apply to this type of situation. For people comfortable with spreadsheets, a spreadsheet is provided.
sevenseas
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Re: Captial gains: Friend or foe?

Post by sevenseas »

I have this exact issue due to being unaware of the tax implications when I purchased two active Vanguard funds for a taxable account in the 90's. In addition to turning off reinvestments and TLH, I use these funds as sources for charitable contributions (to my DAF). Hopefully over the years I will continue to whittle down my positions in both, though will take a long while.
BabaWawa
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Re: Captial gains: Friend or foe?

Post by BabaWawa »

Uncontrolled, unwanted capital gains from mutual funds in taxable are definitely a foe. Invest in index ETFs instead, where you can control your capital gains as needed in the most tax efficient manner.
delamer
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Re: Captial gains: Friend or foe?

Post by delamer »

You don’t like paying taxes on the capital gains thrown off by the active funds.

You don’t want to pay taxes on the unrealized gains if you sell shares.

This is a “pick your poison” situation.

If you expect that your heirs will get the shares with a step-up in cost basis, then keep them.

If you expect to need to sell the shares in your lifetime, then you should develop a disinvestment plan.
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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restingonmylaurels
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Re: Captial gains: Friend or foe?

Post by restingonmylaurels »

cas wrote: Wed Jun 29, 2022 10:49 am
restingonmylaurels wrote: Wed Jun 29, 2022 6:23 am On the plus side, it does imply that your fund is doing well when they can make annual capital gain distributions
It is important taxable account hygiene to try to understand *why* the consistent capital gain distributions (CGD) are occurring.

As exodusNH mentioned above, there are a lot of reasons why a CGD might occur.

The situation you really want to watch out for is a fund that has gone into a death spiral, where the shareholder rats start jumping ship in big waves, causing the fund managers to have to sell assets bought many years previous with a lot of unrealized appreciation (sometimes due just to stuff like inflation rather than because the asset had a return better than other possible assets), which causes more CGD, which causes more rats to jump ship, rinse/wash/repeat, rinse/wash/repeat. See this Morningstar article for example and discussion: "Zombie Index Funds Are Delivering Frightening Tax Bills"

To some extent ... often without the actual "death spiral" occurring ... the same thing is at work with many actively managed mutual funds now. Actively managed funds used to be the only mutual funds on the market (so older investors may have made a good choice when they bought them long ago). Then index funds came along and eventually became popular. This change in consumer tastes has led to the increased probability that an actively managed fund will experience net outflows during the year and be forced to sell older and older assets in order to meet redemption requests. Hence, CGDs ... which eventually irritate more and more long-term investors to finally decide to bite the bullet and contemplate bailing. The CGDs don't necessarily have any correlation to recent out-performance in these funds. This sort of consistent big CGDs might mean nothing more than that the market in general has been rising recently or that the fund has been around a long time and is being forced into selling highly appreciated assets that they have held a long time and have a lot of inflation built into the price.

One way to try to get a handle on the net inflow/outflow situation for a given fund is to go look at the "Investment Flows" graph on the Performance Tab of the Morningstar page for the fund. If you can see that the fund had a heyday way back when of big inflows, but it has been in consistent net outflows for many years recently, it is probably time to dig deeper.

It might end up being a relatively innocuous cause - like an actively managed fund that has responsibly closed to new purchases, combined with outperformance of the fund since it closed combined with active management that necessitates selling some assets in order to buy ones the managers think have better prospects going forward.

Or it might end up being a problem cause, like the example of the Zombie Index Funds above, where they were excessively expensive "me too" index funds that 401(k) plan providers created to round out their 401(k) offerings ... but which the rats eventually got wise to (with the help of 401(k) class action lawsuits) and bailed.
This is a very helpful response.

I checked M* and sure enough, there have been steady outflows for many years. What I cannot tell is how the current CGDs are split between redemption-forced liquidations of older appreciated shares and those generated by current buy-sell operations.

For the former category, you would expect for a going-concern fund that they would diminish at some point as older appreciated shares are sold off, while the latter would continue for the life of the fund. It is hard to separate the two without further data. Are you aware of any source that might provide such information, e.g., annual reports?
cas
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Re: Captial gains: Friend or foe?

Post by cas »

restingonmylaurels wrote: Thu Jun 30, 2022 1:46 am I checked M* and sure enough, there have been steady outflows for many years. What I cannot tell is how the current CGDs are split between redemption-forced liquidations of older appreciated shares and those generated by current buy-sell operations.

For the former category, you would expect for a going-concern fund that they would diminish at some point as older appreciated shares are sold off, while the latter would continue for the life of the fund. It is hard to separate the two without further data. Are you aware of any source that might provide such information, e.g., annual reports?
This might be a good question for the Bogleheads Live: Submit ?s on Capital Gain Distributions thread.

(Note that the actual interview is occurring TODAY 2pm eastern, so questions would need to be in ASAP.)
dbr
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Re: Captial gains: Friend or foe?

Post by dbr »

Tax management is an exercise in detail, but getting tax costs that are out of your control is not a good thing.

The better decision is to not get invested in that sort of thing from the get go. Once invested it gets awkward.
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restingonmylaurels
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Re: Captial gains: Friend or foe?

Post by restingonmylaurels »

dbr wrote: Thu Jun 30, 2022 8:17 am Tax management is an exercise in detail, but getting tax costs that are out of your control is not a good thing.

The better decision is to not get invested in that sort of thing from the get go. Once invested it gets awkward.
Yes, if I could go back and tell the nearly 30 years ago version of me, "don't invest in VG's best performing fund, it is active and you will regret this in the future for tax reasons," I would.

Maybe something that younger investors don't think about too much but certainly a word to the wise. Active has a role but I am not sure it is in US stocks.
Mike Scott
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Re: Captial gains: Friend or foe?

Post by Mike Scott »

Do you have current losses in something else which would offset the gains of selling some or all of this plus not reinvesting may decrease your holding and future capital gains.
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restingonmylaurels
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Re: Captial gains: Friend or foe?

Post by restingonmylaurels »

Mike Scott wrote: Thu Jun 30, 2022 10:31 am Do you have current losses in something else which would offset the gains of selling some or all of this plus not reinvesting may decrease your holding and future capital gains.
This year I think everyone has current losses. I have been TLHing like crazy while maintaining market exposure. Even with all that activity, there is not a chance I can generate a realized loss sufficient to offset but a small part of these unrealized capital gains.

This morning I went through the painful exercise of quint-secting the most offending fund into quintiles of increasing larger ltcg, grouping those with the similar bases together, to see what the damage would be to reduce the fund's shares.

The least-large ltcg/share quintile still requires a significant realized capital loss to offset it, which I could only get by exchanging into a fund VG does not have, as I do not wish to change my overall PF exposure. Feel stuck, waiting for either further significant declines or the redemption-fueled DGCs to cease.
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Charles Joseph
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Re: Captial gains: Friend or foe?

Post by Charles Joseph »

When I retire shortly, realized capital gains will simply be additional income and I'll be glad for them. I've always been in a relatively low income tax bracket so I've put up with them along the way and they haven't bothered me. Other than Wellesley Income Fund, I haven't had much other gains.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
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restingonmylaurels
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Re: Captial gains: Friend or foe?

Post by restingonmylaurels »

Been trying to figure out some way to parse these older VG active funds to find any pieces I can sell without incurring a significant capital gain.

As part of the exercise, I went back and reconstructed every transaction into a spreadsheet, grouping those with similar purchases prices.

After doing so and totaling all the entries, while the number of shares is exactly as displayed in the costs basis summary at VG's website, the actual basis I calculated is about 1/3 higher than VG displays (meaning the gain would be that much less).

All of these purchase transactions are pre-2012, for which VG says they only have average cost information. But I wonder what they are taking an average of? Is this a stable average share price value, such that if you sold off some part of the pre-2012 shares, it would not change?

This concerns me, if the (correct) cost basis I would show on my Schedule D differs materially from the cost basis that VG shows on the 1099-B. Has anyone run into trouble due to this when selling pre-2012 shares?
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Re: Captial gains: Friend or foe?

Post by cas »

restingonmylaurels wrote: Sat Jul 02, 2022 7:05 am As part of the exercise, I went back and reconstructed every transaction into a spreadsheet, grouping those with similar purchases prices.

After doing so and totaling all the entries, while the number of shares is exactly as displayed in the costs basis summary at VG's website, the actual basis I calculated is about 1/3 higher than VG displays (meaning the gain would be that much less).
On the surface of it, it sound like you are doing the right thing, putting each transaction share # and purchase price on a line in the spreadsheet, and totaling at the end. (Although, personally, I'd start out just listing them in date order and keeping a running total of share # and total cost basis that you can check against old statements to see where in time you and Vanguard started to diverge.)

A big discrepancy in total cost basis is a big flashing danger sign. You need to figure out where the discrepancy was introduced before you start selling anything.

Some possibilities that jump into my mind are:

1) Have you EVER sold any shares of this fund? If so, I'd start poking around to see if you and Vanguard made different assumptions about how cost basis was calculated for the sale(s), e.g. what cost basis method was used or exactly which shares were sold.

2) Is this the sort of fund that might possibly have had some sort of "return of capital" distribution? That wouldn't seem to be overly likely for most Vanguard funds of the type you seem to be talking about, but this might be getting to the point where you need to say what the fund is, so you might get some Boglehead eyes who are familiar with its history on the problem.

3. Did you make any of these purchases at another brokerage and then transfer the shares over? Do you have records showing that the cost basis transferred over correctly?

4. Were any of these shares inherited?

5. Another possibility that it is popular to bring up on this forums, but is best to maintain some humility about is "Vanguard messed up." It isn't impossible, but having read these forums for several years with a tendency to click on these "cost basis" sorts of threads, having the shareholder not understand some subtlety of cost basis calculation or mess up their spreadsheet is magnitudes more common than it actually ending up being Vanguard's fault.
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Re: Captial gains: Friend or foe?

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restingonmylaurels
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Re: Captial gains: Friend or foe?

Post by restingonmylaurels »

cas wrote: Sat Jul 02, 2022 8:56 am
restingonmylaurels wrote: Sat Jul 02, 2022 7:05 am As part of the exercise, I went back and reconstructed every transaction into a spreadsheet, grouping those with similar purchases prices.

After doing so and totaling all the entries, while the number of shares is exactly as displayed in the costs basis summary at VG's website, the actual basis I calculated is about 1/3 higher than VG displays (meaning the gain would be that much less).
On the surface of it, it sound like you are doing the right thing, putting each transaction share # and purchase price on a line in the spreadsheet, and totaling at the end. (Although, personally, I'd start out just listing them in date order and keeping a running total of share # and total cost basis that you can check against old statements to see where in time you and Vanguard started to diverge.)

A big discrepancy in total cost basis is a big flashing danger sign. You need to figure out where the discrepancy was introduced before you start selling anything.

Some possibilities that jump into my mind are:

1) Have you EVER sold any shares of this fund? If so, I'd start poking around to see if you and Vanguard made different assumptions about how cost basis was calculated for the sale(s), e.g. what cost basis method was used or exactly which shares were sold.

2) Is this the sort of fund that might possibly have had some sort of "return of capital" distribution? That wouldn't seem to be overly likely for most Vanguard funds of the type you seem to be talking about, but this might be getting to the point where you need to say what the fund is, so you might get some Boglehead eyes who are familiar with its history on the problem.

3. Did you make any of these purchases at another brokerage and then transfer the shares over? Do you have records showing that the cost basis transferred over correctly?

4. Were any of these shares inherited?

5. Another possibility that it is popular to bring up on this forums, but is best to maintain some humility about is "Vanguard messed up." It isn't impossible, but having read these forums for several years with a tendency to click on these "cost basis" sorts of threads, having the shareholder not understand some subtlety of cost basis calculation or mess up their spreadsheet is magnitudes more common than it actually ending up being Vanguard's fault.
VG only has individuals transactions back 10 years. Prior to that, they only have average cost, so you cannot get individual transaction bases from them.

My current records go back 20 years but I suspect that when transferring from my records of the prior millennium, I may or may not have captured the prior basis correctly.

Without diving into the dusty archives, I do not know if my records from 20-30 years ago are more accurate than VG's average cost. And I don't know if they update their average cost value if you sell part of shares from that period. Not sure how they could if they don't keep the old transactional information.

In looking at the gains from more than 20 years ago, it is so large that I doubt I will be selling it at any point. Instead I will focus on more recent transactions that have a higher and certain basis.
Statistical
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Re: Captial gains: Friend or foe?

Post by Statistical »

It is never good to pay taxes early. I would much rather pay the taxman in a decade instead of today. So capital gain distributions are only bad. You are simply "prepaying" taxes. If Uncle Sam said hey you can make estimated tax payment for all your income taxes for the next decade (with no discount) today would you do it? Of course not. Nobody would. A dollar paid in taxes today is a dollar that can't be invested.

You are now between a rock and a hard place but for anyone else use ETFs in taxable accounts. The sole exception to that is Vanguard dual share funds (i.e. VTI/VTSAX) as it allows Vanguard to have ETF like tax efficiency in MFs. That patent expires in May 2023 so I assume we will see other funds adopt that in the future.
Statistical
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Re: Captial gains: Friend or foe?

Post by Statistical »

AerialWombat wrote: Sat Jul 02, 2022 9:15 am Have you considered just ripping the stitches out?

Meaning, sell off 100% of both funds right now, to create one really horrendous tax year, but then it’s over.

“Rip and replace” is expensive in almost every context, but it stops the pain and bleeding going forward. That expense may be worth incurring to eliminate the stress.
As long as it doesn't push you into the 20% LTCG bracket. If so then spread it across two years. No sense paying 20% vs 15%.
Statistical
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Re: Captial gains: Friend or foe?

Post by Statistical »

restingonmylaurels wrote: Thu Jun 30, 2022 10:24 amMaybe something that younger investors don't think about too much but certainly a word to the wise. Active has a role but I am not sure it is in US stocks.
And not in taxable account. I would avoid even (non-vanguard) passive index funds in taxable and go with ETFs. Due to differences in transaction limits MFs sometimes have to pass through CG distributions that an ETF would not have to (using redemption instead). Vanguard MF which are dual share structures (i.e. VTSAX and VTI share the same asset pool) gain ETF like efficiency but most MF don't at least not until next year.
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restingonmylaurels
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Re: Captial gains: Friend or foe?

Post by restingonmylaurels »

AerialWombat wrote: Sat Jul 02, 2022 9:15 am Have you considered just ripping the stitches out?

Meaning, sell off 100% of both funds right now, to create one really horrendous tax year, but then it’s over.

“Rip and replace” is expensive in almost every context, but it stops the pain and bleeding going forward. That expense may be worth incurring to eliminate the stress.
The short answer is that doing so would move me into higher marginal rates and disallowed credits and would also bring forward tax into the current period. From a PV perspective, that would seem to be sub-optimal.

As I have discovered that these distributed capital gains are likely due in large part of redemptions exceeding purchases, these may pay out over years, giving me the ability to deal with them each year for many years instead of all at once.

I know that someone is going to suggest either that I offset against capital losses (have already used almost all of those already) or I use the 0% capital gains rate (have too much other income to ever have any 0% available).

I have gone back and segregated all the buy transactions and grouped them by similar purchase prices. I am thinking of selling the highest basis group, while also realizing my last cohort of remaining capital loss.

Still, that would only get me about 10% of the way there. With SS, pensions, and RMDs in the coming years, this tax landscape will not improve, short of significant further losses in the markets, at least as far as I can tell.
MathWizard
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Re: Captial gains: Friend or foe?

Post by MathWizard »

This is irrelevant in a retirement account, so I assume this is in a taxable account.

It depends on the tax bracket that you are in.

Long-term cap gains is better than the rate at which you pay on dividends, interest income,
or wage income assuming you are working.

Unrealized cap gains are even better, since this is deferred taxes, but this is on top of the
above.

Your heirs also get a step up in basis, so unrealized cap gains may never be taxed.

For taxable accounts, cap gains are your friend, unrealized cap gains are your best friend.
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restingonmylaurels
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Re: Captial gains: Friend or foe?

Post by restingonmylaurels »

Statistical wrote: Sat Jul 02, 2022 11:40 am
restingonmylaurels wrote: Thu Jun 30, 2022 10:24 amMaybe something that younger investors don't think about too much but certainly a word to the wise. Active has a role but I am not sure it is in US stocks.
And not in taxable account. I would avoid even (non-vanguard) passive index funds in taxable and go with ETFs. Due to differences in transaction limits MFs sometimes have to pass through CG distributions that an ETF would not have to (using redemption instead). Vanguard MF which are dual share structures (i.e. VTSAX and VTI share the same asset pool) gain ETF like efficiency but most MF don't at least not until next year.
I often hear people on this forum talking about putting things only into non-taxable accounts. It has been a few years but as I recall, there were limits on the amount of funds one could save into a 401(k) or transfer into an IRA. As such, the vast majority of my savings had to go into taxable accounts.

Has this changed, can you put an unlimited amount of compensation into tax-deferred vehicles these days?
Statistical
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Re: Captial gains: Friend or foe?

Post by Statistical »

restingonmylaurels wrote: Sat Jul 02, 2022 12:05 pm
Statistical wrote: Sat Jul 02, 2022 11:40 am
restingonmylaurels wrote: Thu Jun 30, 2022 10:24 amMaybe something that younger investors don't think about too much but certainly a word to the wise. Active has a role but I am not sure it is in US stocks.
And not in taxable account. I would avoid even (non-vanguard) passive index funds in taxable and go with ETFs. Due to differences in transaction limits MFs sometimes have to pass through CG distributions that an ETF would not have to (using redemption instead). Vanguard MF which are dual share structures (i.e. VTSAX and VTI share the same asset pool) gain ETF like efficiency but most MF don't at least not until next year.
I often hear people on this forum talking about putting things only into non-taxable accounts. It has been a few years but as I recall, there were limits on the amount of funds one could save into a 401(k) or transfer into an IRA. As such, the vast majority of my savings had to go into taxable accounts.

Has this changed, can you put an unlimited amount of compensation into tax-deferred vehicles these days?
No there are still limits although generous if you are lucky with right combination of accounts and plan options. My point was that active is pretty easy to fix in tax sheltered not so easy in taxable accounts. Even some passive index MF will be passing through capital gains in a taxable account. ETFs should be the first choice for taxable accounts.
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Re: Captial gains: Friend or foe?

Post by AerialWombat »

deleted
Last edited by AerialWombat on Thu Aug 25, 2022 7:19 pm, edited 1 time in total.
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
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restingonmylaurels
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Re: Captial gains: Friend or foe?

Post by restingonmylaurels »

MathWizard wrote: Sat Jul 02, 2022 11:49 am This is irrelevant in a retirement account, so I assume this is in a taxable account.

It depends on the tax bracket that you are in. Long-term cap gains is better than the rate at which you pay on dividends, interest income, or wage income assuming you are working.

Unrealized cap gains are even better, since this is deferred taxes, but this is on top of the above. Your heirs also get a step up in basis, so unrealized cap gains may never be taxed.

For taxable accounts, cap gains are your friend, unrealized cap gains are your best friend.
Unless something has changed, are not LTCGs and QDI both taxed at the same rate?

Also, if you follow the discussion above, sometimes unrealized capital gains trap you in funds that then realize some part of the gains when redemptions repeatedly exceed purchases. They are not always your best friend, at least in the active fund world.
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restingonmylaurels
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Re: Captial gains: Friend or foe?

Post by restingonmylaurels »

AerialWombat wrote: Sat Jul 02, 2022 12:10 pm
restingonmylaurels wrote: Sat Jul 02, 2022 11:47 am
AerialWombat wrote: Sat Jul 02, 2022 9:15 am Have you considered just ripping the stitches out?

Meaning, sell off 100% of both funds right now, to create one really horrendous tax year, but then it’s over.

“Rip and replace” is expensive in almost every context, but it stops the pain and bleeding going forward. That expense may be worth incurring to eliminate the stress.
The short answer is that doing so would move me into higher marginal rates and disallowed credits and would also bring forward tax into the current period. From a PV perspective, that would seem to be sub-optimal.

As I have discovered that these distributed capital gains are likely due in large part of redemptions exceeding purchases, these may pay out over years, giving me the ability to deal with them each year for many years instead of all at once.

I know that someone is going to suggest either that I offset against capital losses (have already used almost all of those already) or I use the 0% capital gains rate (have too much other income to ever have any 0% available).

I have gone back and segregated all the buy transactions and grouped them by similar purchase prices. I am thinking of selling the highest basis group, while also realizing my last cohort of remaining capital loss.

Still, that would only get me about 10% of the way there. With SS, pensions, and RMDs in the coming years, this tax landscape will not improve, short of significant further losses in the markets, at least as far as I can tell.
Yes, that's my point: It's absolutely sub-optimal, but it puts it behind you. You could bite the bullet now -- for one year -- and just be done with it, removing it as a sticking point for future RMD, SS, pension, etc. taxation issues.

I'm not advising you to do such a thing, I'm just reminding you that it's an option, I guess.
I have tried to figure this out mathematically, but because I cannot get a read on how future capital gains will be emanating from the old active funds, it appears impossible. As these capital gains seem to be coming mostly from net outflows, there is no way to predict the other side of the equation. If the forced DCGs would mostly cease, then I would not need to take action.

It is like jumping off a moving train in a tunnel. The next station may be just ahead, but because it is dark, you really have no idea.
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Re: Captial gains: Friend or foe?

Post by VanGar+Goyle »

Charles Joseph wrote: Thu Jun 30, 2022 5:56 pm When I retire shortly, realized capital gains will simply be additional income and I'll be glad for them. I've always been in a relatively low income tax bracket so I've put up with them along the way and they haven't bothered me. Other than Wellesley Income Fund, I haven't had much other gains.
If you are in a 0%, 10% or 12% tax bracket, then qualified dividends and long term capital gains are a great tax-free thing.
If you never will be in the lower brackets, then you may want to take advantage of the 15% LTCG tax bracket, as compared to later 20% or 18.8% ( NIIT ).
And rarely, a capital gains distribution comes at the top of a bull market.
This worked out to be passive re-balancing by an active fund, though we can not always be as lucky as last year.
A less likely scenario is if a capital gain distribution allowed you to put more money in a Roth account.

These are all advantages that you could actively harvest yourself by selling funds, but sometimes the capital gains gods are generous to the lazy. ;)
Last edited by VanGar+Goyle on Sat Jul 02, 2022 1:04 pm, edited 1 time in total.
cas
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Re: Captial gains: Friend or foe?

Post by cas »

restingonmylaurels wrote: Sat Jul 02, 2022 11:31 am
VG only has individuals transactions back 10 years. Prior to that, they only have average cost, so you cannot get individual transaction bases from them.
If you go to Vanguard's "Transaction History" page and choose "Custom" as the timeframe, you can get transaction history going back to 1/1/1993.

However, more to the point ...
Without diving into the dusty archives, I do not know if my records from 20-30 years ago are more accurate than VG's average cost.

[ ... switch to later post]

I have gone back and segregated all the buy transactions and grouped them by similar purchase prices. I am thinking of selling the highest basis group, while also realizing my last cohort of remaining capital loss.
If all your shares are non-covered, as you said above, then - if you have EVER sold non-covered shares of this fund using average cost - you can't just switch to using specific id NOW. You are stuck with average cost for the non-covered shares forever.

The thing is ... when I see people say *their* cost basis records majorly disagree with mutual fund average cost records for non-covered shares, very frequently the root cause turns out to be that they DID sell some shares at some point, whether they remember it or not.

If you have NEVER sold non-covered shares of this fund - and can prove it to the IRS if asked to do so - then you can start using specific id cost basis accounting based on your own detailed records (and maintaining your own cost basis records for your non-covered shares forevermore). However, you have to follow the IRS procedures for doing this, which involves notifying the brokerage (notice has to contain certain information about each lot) and getting an acknowledgement from the brokerage. The details for this procedure are in one of the investment related IRS publications (don't recall which one). Frequent boglehead's poster grabiner also writes about doing it occasionally. For example, see grabiner's post within a thread titled "Non-Covered Cost Basis" .

For that matter, now that I just scanned through it, that whole "Non-Covered Cost Basis" thread is very relevant to your recent questions; it goes through everything I just said in much more detail and more comprehensibly. You should read it.
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Re: Captial gains: Friend or foe?

Post by restingonmylaurels »

cas wrote: Sat Jul 02, 2022 1:01 pm
restingonmylaurels wrote: Sat Jul 02, 2022 11:31 am
VG only has individuals transactions back 10 years. Prior to that, they only have average cost, so you cannot get individual transaction bases from them.
If you go to Vanguard's "Transaction History" page and choose "Custom" as the timeframe, you can get transaction history going back to 1/1/1993.

However, more to the point ...
Without diving into the dusty archives, I do not know if my records from 20-30 years ago are more accurate than VG's average cost.

[ ... switch to later post]

I have gone back and segregated all the buy transactions and grouped them by similar purchase prices. I am thinking of selling the highest basis group, while also realizing my last cohort of remaining capital loss.
If all your shares are non-covered, as you said above, then - if you have EVER sold non-covered shares of this fund using average cost - you can't just switch to using specific id NOW. You are stuck with average cost for the non-covered shares forever.

The thing is ... when I see people say *their* cost basis records majorly disagree with mutual fund average cost records for non-covered shares, very frequently the root cause turns out to be that they DID sell some shares at some point, whether they remember it or not.

If you have NEVER sold non-covered shares of this fund - and can prove it to the IRS if asked to do so - then you can start using specific id cost basis accounting based on your own detailed records (and maintaining your own cost basis records for your non-covered shares forevermore). However, you have to follow the IRS procedures for doing this, which involves notifying the brokerage (notice has to contain certain information about each lot) and getting an acknowledgement from the brokerage. The details for this procedure are in one of the investment related IRS publications (don't recall which one). Frequent boglehead's poster grabiner also writes about doing it occasionally. For example, see grabiner's post within a thread titled "Non-Covered Cost Basis" .

For that matter, now that I just scanned through it, that whole "Non-Covered Cost Basis" thread is very relevant to your recent questions; it goes through everything I just said in much more detail and more comprehensibly. You should read it.
Wow, that transaction history tool is very helpful. Thanks!

A few thoughts.
1. I have verified that my records are accurate using this tool and as such, VG's basis seems to not be correct. I will triple check before asserting which of us has got it wrong.
2. I am specific id, not average cost, and have never sold any of the non-covered shares, as that would have triggered the capital gains I have been discussing. The site says "For shares acquired before January 1, 2012, Vanguard has only average cost information." I get a different basis calculation using specific id for these non-covered shares.
3. The transaction history appears to only let you find transactions based upon the current registrations you are using. For example, if you were previously registered as an individual and changed your registration to married or a trust, the transactions associated with the individual registration do not appear.

I will read the thread you suggested and revert.
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restingonmylaurels
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Re: Captial gains: Friend or foe?

Post by restingonmylaurels »

restingonmylaurels wrote: Sat Jul 02, 2022 2:32 pm
cas wrote: Sat Jul 02, 2022 1:01 pm
restingonmylaurels wrote: Sat Jul 02, 2022 11:31 am
VG only has individuals transactions back 10 years. Prior to that, they only have average cost, so you cannot get individual transaction bases from them.
If you go to Vanguard's "Transaction History" page and choose "Custom" as the timeframe, you can get transaction history going back to 1/1/1993.

However, more to the point ...
Without diving into the dusty archives, I do not know if my records from 20-30 years ago are more accurate than VG's average cost.

[ ... switch to later post]

I have gone back and segregated all the buy transactions and grouped them by similar purchase prices. I am thinking of selling the highest basis group, while also realizing my last cohort of remaining capital loss.
If all your shares are non-covered, as you said above, then - if you have EVER sold non-covered shares of this fund using average cost - you can't just switch to using specific id NOW. You are stuck with average cost for the non-covered shares forever.

The thing is ... when I see people say *their* cost basis records majorly disagree with mutual fund average cost records for non-covered shares, very frequently the root cause turns out to be that they DID sell some shares at some point, whether they remember it or not.

If you have NEVER sold non-covered shares of this fund - and can prove it to the IRS if asked to do so - then you can start using specific id cost basis accounting based on your own detailed records (and maintaining your own cost basis records for your non-covered shares forevermore). However, you have to follow the IRS procedures for doing this, which involves notifying the brokerage (notice has to contain certain information about each lot) and getting an acknowledgement from the brokerage. The details for this procedure are in one of the investment related IRS publications (don't recall which one). Frequent boglehead's poster grabiner also writes about doing it occasionally. For example, see grabiner's post within a thread titled "Non-Covered Cost Basis" .

For that matter, now that I just scanned through it, that whole "Non-Covered Cost Basis" thread is very relevant to your recent questions; it goes through everything I just said in much more detail and more comprehensibly. You should read it.
Wow, that transaction history tool is very helpful. Thanks!

A few thoughts.
1. I have verified that my records are accurate using this tool and as such, VG's basis seems to not be correct. I will triple check before asserting which of us has got it wrong.
2. I am specific id, not average cost, and have never sold any of the non-covered shares, as that would have triggered the capital gains I have been discussing. The site says "For shares acquired before January 1, 2012, Vanguard has only average cost information." I get a different basis calculation using specific id for these non-covered shares.
3. The transaction history appears to only let you find transactions based upon the current registrations you are using. For example, if you were previously registered as an individual and changed your registration to married or a trust, the transactions associated with the individual registration do not appear.

I will read the thread you suggested and revert.
I believe the difference between my specific ID basis calculation and VG's average cost on pre-2000 shares is due either to the lower basis amounts occurring under a different registration (the transaction history only lets you view your history using your current registrations) or the inability to properly account for an investor shares to admiral shares conversion. The latter works out mathematically, but without visibility to the former registration's transaction history, there is no way to ascertain which it is.

I guess only only remaining step is to dive into the dusty archives but even with my lower estimates of the gain, it is still too large to realize, so it will not matter in the end.
harikaried
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Re: Captial gains: Friend or foe?

Post by harikaried »

restingonmylaurels wrote: Sat Jul 02, 2022 12:13 pmUnless something has changed, are not LTCGs and QDI both taxed at the same rate?
Perhaps the distinction is when those taxes are paid (as well as potentially what LTCG rates are across years). It's similar to taking a deduction now for the basis of a traditional IRA/401k contribution at today's marginal regular income tax rate to then pay future marginal income taxes on where one intends future tax rates to be lower.

Then only looking at the gains from a traditional account, it's also future marginal income tax rates where generally these are higher than long term capital gains tax rates. So for buy and hold with low dividends, it could be much friendlier to have capital gains.

But as you've noticed, tax advantaged accounts also provide the ability to change investments without taxes.
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Re: Captial gains: Friend or foe?

Post by KlangFool »

restingonmylaurels wrote: Wed Jun 29, 2022 6:23 am
I have long viewed distributed capital gains as the enemy, requiring current payment of tax and pushing me into tax issues due to the impact on MAGI.
restingonmylaurels,

1) If you are at 0% long-term capital gain tax rate, where is the problem?

2) Either cases, sell down those funds at whatever capital tax rate acceptable to you.

3) I had 200K of VSMGX in my taxable account that I faced this problem. It took me several to sell down/off that fund. If not, I will be paying around $1,000 in taxes every year.

4) There is a middle ground. Sell down the funds gradually as opposed to doing nothing.

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Re: Captial gains: Friend or foe?

Post by KlangFool »

OP,

When you realize that you are in a hole, stop digging the hole deeper. Have you stop reinvesting the dividend and distribution of those funds?

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