Taking Profits in a Taxable Account

[buddtholomew]

How do others approach taking profits in a taxable account? I would like to pare back the dollar amount held in each of the below assets and return them to their original investment amounts. The proceeds of the sale will be re-invested into an Intermediate Term Tax-Exempt account to increase cash available for future investment.

Current PP Long-Term Gains (%)

SPY - 23%
TLT - 32%
GLD - 4%

Best-
Budd

[buddtholomew]

Interesting that there are no responses to this post. Do others never expect to sell their PP assets when held in a taxable account? Perhaps you only sell to restore the asset allocation to 4x25. Have you considered investing a fixed sum in each asset (e.g. 25K in GLD, SPY, LTT, SHY) and either buying or selling when the portfolio fluctuates by 5,10 or 15% of 100K in either direction?

[TK3]

My first step is to look at my charitable giving and to contribute appreciated securities to a community foundation with no tax conseqences.  I then fund my charitable contributions from that account.  If I have already funded my charitable contributions for the year and depending upon your tax circumstances, many different strategies you can take.   

[dualstow]

Interesting that there are no responses to this post.

I couldn't figure out exactly what the question is. For what it's worth, I own some Vanguard muni funds in my vp, and it definitely gives me a warm and cozy feeling to receive tax-exempt cash every month. But, it's a tiny percentage of pp+vp b/c my wiser half knows that it's not a great long term strategy.

How do others approach taking profits in a taxable account? I think the way pp'ers approach taking profits is mainly dictated by the rebalancing bands. if possible, it is done in nontaxable. If it must be done in taxable, then it must. But, I sincerely don't know what the specific question is.

Do others never expect to sell their PP assets when held in a taxable account?

Yes, if I have to rebalance out of gold.

Perhaps you only sell to restore the asset allocation to 4x25. Have you considered investing a fixed sum in each asset (e.g. 25K in GLD, SPY, LTT, SHY) and either buying or selling when the portfolio fluctuates by 5,10 or 15% of 100K in either direction?

Nope.

[buddtholomew]

Interesting that there are no responses to this post.

I couldn't figure out exactly what the question is. For what it's worth, I own some Vanguard muni funds in my vp, and it definitely gives me a warm and cozy feeling to receive tax-exempt cash every month. But, it's a tiny percentage of pp+vp b/c my wiser half knows that it's not a great long term strategy.

How do others approach taking profits in a taxable account? I think the way pp'ers approach taking profits is mainly dictated by the rebalancing bands. if possible, it is done in nontaxable. If it must be done in taxable, then it must. But, I sincerely don't know what the specific question is.

Do others never expect to sell their PP assets when held in a taxable account?

Yes, if I have to rebalance out of gold.

Perhaps you only sell to restore the asset allocation to 4x25. Have you considered investing a fixed sum in each asset (e.g. 25K in GLD, SPY, LTT, SHY) and either buying or selling when the portfolio fluctuates by 5,10 or 15% of 100K in either direction?

Nope.

Let me rephrase the question so that it is hopefully more clear. If you have gains in a taxable account, how do you go about deciding what, if anything, you do about it? Does it make sense to "take profits" when the PP has been so rewarding? Just because you make money, it doesn't mean that the absolute dollar amount you are comfortable putting at risk has changed.

[Pointedstick]

Seems to me there are basically two situations where you should be selling assets that would result in a capital gain:

1. You're rebalancing
2. You're taking some of the money out to spend it

In both of these situations, you've already decided to sell. Now, to minimize the tax hit, you can structure it so that you're selling individual blocks of shares that have been held longer than a year but appreciated the least, but in the end you're just going to have to let uncle Sam take his blood money and move on with life.

So I guess my answer to the question of "If you have gains in a taxable account, how do you go about deciding what, if anything, you do about it?" is "If I really need to sell, I just accept the taxes on the gain as a fact of life."

[dualstow]

Just because you make money, it doesn't mean that the absolute dollar amount you are comfortable putting at risk has changed.

As Clint Eastwood said in Unforgiven, dollar amounts have nothing to do with it.*

Well, you've gotten some good answers. And, you already had "take profits" in quotes so it seems you already know it's not really about taking profits, as PointedStick indicated. It's staying on course by way of rebalancing. If you've got the four-way split, you should feel safe with $4000 or $400,000.

In the most recent podcast, Craig mentioned that a lot of people are focused on the gold portion of the pp, but that it's never been about buying a ton of gold and just holding it all forever, because it has rich years and lean years. Rebalancing at 35% seems far more important to me than taxes. You're only going to pay taxes when you sell at a profit. On the other hand, if you let gold (or bonds or whatever) become 60% of your pp and then it comes tumbling down after you have neglected to sell it down (or buy the lagging assets), then you have lost your profits along with any potential tax burden. On one of Harry's 'Money Talk' shows, a guy calls in to say that he has let gold get down to 10% and at least one other asset was way out of wack. Harry paused and said something to the effect of, "You don't really have a permanent portfolio anymore."

On the other hand, I guess a 5 or 10% fluctuation doesn't merit the taxes or even the trading fees, BUT Browne also said, If it helps you to sleep at night to rebalance more frequently, then do it. Somewhere in this forum you can find members knocking their gold share down a bit -- this was when it hit 1800 -- because it had been on such a tear. In retrospect (so far), it seems like a pretty good move. And even if gold were at US$2000/oz today and not 1588, it would have been a justifiable peace-of-mind move.

*{slight paraphrase}

[buddtholomew]

Just because you make money, it doesn't mean that the absolute dollar amount you are comfortable putting at risk has changed.

As Clint Eastwood said in Unforgiven, dollar amounts have nothing to do with it.*

Well, you've gotten some good answers. And, you already had "take profits" in quotes so it seems you already know it's not really about taking profits, as PointedStick indicated. It's staying on course by way of rebalancing. If you've got the four-way split, you should feel safe with $4000 or $400,000.

It has never been about percentages for me. I am more concerned with the number of months my PP can sustain in the event of a job loss. If it costs $100K to live per year and a 400K portfolio loses 25%, I have lost a year's worth of living expenses. If the portfolio is 200K and I lose 25%, I have lost 50K and approximately 6 months worth of expenses. Percentage wise they are identical, but the absolute dollars lost have a more significant impact on my EF as the portfolio increases in value.

[Pointedstick]

It has never been about percentages for me. I am more concerned with the number of months my PP can sustain in the event of a job loss. If it costs $100K to live per year...

You might be interested in http://earlyretirementextreme.com/ and http://www.mrmoneymustache.com/, which are sites whose info I've used with great success to cut my yearly living expenses. Just to throw some numbers out there, my wife and I live on 34K/yr in a very expensive area. Aggressively reducing living expenses isn't for everyone of course, and there may be circumstances that limit it, but if your PP's purpose is to sustain a family in the event of a job loss, cutting expenses can pertty dramaticaly multiply the effect of the balance.  If you can live on 50k per year, that 400k PP can sustain you for eight years instead of four!

...and a 400K portfolio loses 25%, I have lost a year's worth of living expenses. If the portfolio is 200K and I lose 25%, I have lost 50K and approximately 6 months worth of expenses. Percentage wise they are identical, but the absolute dollars lost have a more significant impact on my EF as the portfolio increases in value.

25% is an awfully large loss for a PP to sustain. Maybe I'm being naive, but part of the appeal of the PP for me is avoiding something as huge as a 25% yearly loss. It's hard for me to imagine a situation in which the PP is losing 25% where every other portfolio isn't losing 50 or 90%. I'm curious to know what kind of economic conditions you're worried about that would cause that kind of massive loss.

[buddtholomew]

The $ amounts and percentages used in the above post were for illustrative purposes only. A loss in a larger portfolio will impact my EF to a greater extent than an equivalent percentage loss in a smaller portfolio.

[craigr]

How do others approach taking profits in a taxable account? I would like to pare back the dollar amount held in each of the below assets and return them to their original investment amounts. The proceeds of the sale will be re-invested into an Intermediate Term Tax-Exempt account to increase cash available for future investment.

Current PP Long-Term Gains (%)

SPY - 23%
TLT - 32%
GLD - 4%

Best-
Budd

For taxable accounts, I would try to make as few adjustments as possible. So that's the first thing I recommend doing unless you absolutely feel like you need to rebalance at these levels.

If you feel you do need to rebalance you'll have no choice but to pay the tax bill. In that case, you want to obviously take the long term gains first and distribute those as you see fit. It may also help to use some losses to offset gains if you are still able to do that with tax loss harvesting. Although that technique is not available to every situation. Also, consider only rebalancing the single asset that is too much for you and leaving the others alone. That can put off taxes even further as well.

Sometimes though you just can't avoid taxes and just need to absorb them if it means keeping your portfolio in correct proportions. Just remember that you'll owe taxes on the profits so you should factor that into your calculations during your sales as that much less money you'll have during the rebalance.

[dualstow]

[quote=""Buddtholomew"]The proceeds of the sale will be re-invested into an Intermediate Term Tax-Exempt account to increase cash available for future investment.[/quote]

Just a quick follow-up question. This thread seems to be more about loss avoidance (like the "I'm Done!" thread) than taking profits. If your aim is to shrink the entire pp in order to put some more money into a tax-exempt fund, ie munis, this invites the question: are muni funds safer than the permanent portfolio?

[buddtholomew]

I was struggling with an entirely different set of emotions when I created the "I'm Done" thread, but I see how parallels could be drawn between the two posts.

The PP has had some generous returns over my holding period and I am wondering what, if anything, to do about it. Does it make sense at any point to reduce the amount invested and prepare to contribute to lagging assets from a cash surplus at a later date in the event one or more assets become less than 15% of the portfolio? What is the difference between selling now and restoring the portfolio to 4x25 or waiting until one or more assets decline to 15% of the total? I don't want to risk losing what I've already gained.

[MediumTex]

I was struggling with an entirely different set of emotions when I created the "I'm Done" thread, but I see how parallels could be drawn between the two posts.

The PP has had some generous returns over my holding period and I am wondering what, if anything, to do about it. Does it make sense at any point to reduce the amount invested and prepare to contribute to lagging assets from a cash surplus at a later date in the event one or more assets become less than 15% of the portfolio? What is the difference between selling now and restoring the portfolio to 4x25 or waiting until one or more assets decline to 15% of the total? I don't want to risk losing what I've already gained.

Why not just stick with the basic recipe and rebalance when you hit the 20/30 bands or the 15/35 bands?

Based upon your posts, I assume that the 20/30 bands would be a better fit for you.

Why not just do that and not worry about it?

In so many ways, the PP is what you might call "pre-optimized."  I would just follow the recipe.

Your concerns are not a lot different from mine and many others here.  That's why I like the PP.  It's simple, safe and sturdy.

[dualstow]

Pre-optimized indeed.
Although adding to the post above is probably "painting eyes on the dragon" (gilding the lily), I'll just add, Bartholomew, that you should not think of realized gains as being better than realized ones, as counter-intuitive as that sounds. Of course, we all have to realize gains at some point and at some age, otherwise there is no point investing in the first place. But, if taking profits frequently were so important, I think Browne would would have designed the pp (or at least the rebalancing instructions) differently.

Yes, it might be painful to watch large gains in treasuries slowly vanish if things should change course. But chances are, your stocks will be rising when treasuries finally fall. In the meantime, selling off too much of your treasuries would mean losing the protection they've been giving you in the first place. And who knows how long we'll need that protection.

Although things don't balance out perfectly every day, you should be alright in the long run. Even if the entire pp loses out for an entire year, it *should* be temporary. And you can buy more shares from the tax-exempt fund's interest when the pp is low.

But again, Harry (and MT) have stated that if it makes you feel better, you can rebalance early.

[buddtholomew]

I appreciate the comments and sound advice. Although I would prefer to sell the portfolio down to a more comfortable psychological level, I realize that this action is emotionally driven and would un-necessarily result in a taxable event.

I have decided to contribute new funds to the cash portion of the PP and rebalance when an asset breaches the 15/35% threshold (de facto choice on this board). I've watched GOLD surrender ~30% gains in the past, but the PP has absorbed this loss and gone on to produce a steady positive return. Capturing these outsized returns when they present themselves (even when they do not trigger a rebalancing event) may not be the best way to manage the portfolio as a whole.

Best-
Budd

[dualstow]

I have decided to contribute new funds to the cash portion of the PP and rebalance when an asset breaches the 15/35% threshold (de facto choice on this board).

Sounds good. I'm going to do the same.

It's pretty basic, but if anyone's interested, last night I happened to come across one of the radio shows in which Harry talks about rebalancing.
It's the 05-05-01 (May 1, 2005) archive.

You can skip the description of the four-way split and scrobble over to the three-minute mark of the mp3 to hear Harry state that the 35%/15% bands are not written in stone, but are designed so that you don't have to look at your portfolio often, let alone tinker.

1 min 40 sec Rebalancing Question
3 min "You don't tinker. You just hold on."
4 min 40 "There is no scientific basis for (the exact rebalancing points)."

[buddtholomew]

I would like to revisit this topic now that LTT have begun their descent. Whether they continue to decline or rise from here is irrelevant for the purposes of this discussion.

Assume for this thread that all PP components are well within their rebalancing bands. However; I have considerable long-term gains in Treasuries that I would prefer not to watch evaporate. Help me understand when it is appropriate to pay the taxes due? If you don't "take profits" when opportunities present themselves, then how will a PP investor achieve gains in the portfolio over time? I truly need someone to explain this to me.

[rickb]

I would like to revisit this topic now that LTT have begun their descent. Whether they continue to decline or rise from here is irrelevant for the purposes of this discussion.

Assume for this thread that all PP components are well within their rebalancing bands. However; I have considerable long-term gains in Treasuries that I would prefer not to watch evaporate. Help me understand when it is appropriate to pay the taxes due? If you don't "take profits" when opportunities present themselves, then how will a PP investor achieve gains in the portfolio over time? I truly need someone to explain this to me.

You lock in gains by rebalancing when any component drifts outside your rebalance bands.  If everything is within rebalance bands, you do nothing - although aside from any expenses involved it shouldn't cause any problems to rebalance any time you feel like it.  Say for example that you're using 35/15 rebalance bands and you're currently at >30% LT treasuries.  You don't have to, but certainly can lock in gains on these now by rebalancing to 25/25/25/25.  You don't ever "cash out" completely from any of the assets, because then if whatever economic condition that asset protects you against subsequently occurs (while you're cashed out) you're not protected - and, since no one knows what the future holds, no one knows whether an asset that fell yesterday will continue falling tomorrow.

The goal is for your overall portfolio to be OK, no matter what happens - individual assets rising and falling is to be expected, and (although it might be difficult) you should really ignore daily, monthly, or basically any fluctuations in the values of the individual assets.  As long as the sausage tastes good, try to ignore how it's made.

Directly answering your question, the value of your overall portfolio reflects the gains in each of the assets. If any asset exceeds its rebalance band, you rebalance.  If it doesn't, then the asset going up and down doesn't affect you very much because you're broadly diversified.  Long term gains come from both rebalancing when asset valuations get totally out of whack (outside the rebalance bands) AND from the long term trend in all of the assets being UP.

[buddtholomew]

You lock in gains by rebalancing when any component drifts outside your rebalance bands.  If everything is within rebalance bands, you do nothing - although aside from any expenses involved it shouldn't cause any problems to rebalance any time you feel like it.  Say for example that you're using 35/15 rebalance bands and you're currently at >30% LT treasuries.  You don't have to, but certainly can lock in gains on these now by rebalancing to 25/25/25/25.  You don't ever "cash out" completely from any of the assets, because then if whatever economic condition that asset protects you against subsequently occurs (while you're cashed out) you're not protected - and, since no one knows what the future holds, no one knows whether an asset that fell yesterday will continue falling tomorrow.

The current scenario offers me the opportunity to rebalance from LTTs to CASH and remain within the 15/35 tolerance bands for all assets.

Should a PP investor rebalance when there is a substantial gain in any asset class even if the asset does not breach the 35% tolerance band? I would rebalance more frequently in a tax-deffered account, but 90% of the portfolio is in taxable.

[Pointedstick]

I say do whatever's most comfortable to you. I can envision scenarios where I'd be happy rebalancing at 30 or 20% rather than 35 or 15, especially if it was in a 401k or Roth and the funds were commission-free.