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WSJ had an article today singing the praises of several software-based portfolio management services that do portfolio rebalaning and tax-loss harvesting. These services charge annual fees ranging from 0.15% to 0.35% of assets.

http://online.wsj.com/news/articles/SB1000142412788732474710...

If you look at a 60-year investing time frame (i.e., 30 years saving for retirement, 30 years in retirement) adding a 0.35% annual fee to your portfolio results in an 18% reduction in your wealth at the end of 60 years.

There's got to be a cheaper way to do it.

intercst
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If you look at a 60-year investing time frame (i.e., 30 years saving for retirement, 30 years in retirement) adding a 0.35% annual fee to your portfolio results in an 18% reduction in your wealth at the end of 60 years.

Strictly looking at your analysis, you've overlooked the tax savings from using a tax-loss harvesting strategy. To include that, you'd have to make some estimate of the marginal tax savings attributable to this strategy. I have no idea how to estimate that.

Getting out of analysis mode and into a more gut-feeling mode, the cheaper way is probably to ignore the issue. I've never seen a tax loss harvesting strategy that makes sense.

--Peter
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ptheland writes,


Getting out of analysis mode and into a more gut-feeling mode, the cheaper way is probably to ignore the issue. I've never seen a tax loss harvesting strategy that makes sense.


Really? I thought tax-loss harvesting was the kind of run-of-the-mill blocking and tackling that any competent investor does.

http://www.bogleheads.org/wiki/Tax_loss_harvesting

My beef with paying a 0.35% annual fee (and losing 18% of my wealth as a result) is that tax-loss harvesting (and portfolio rebalancing) are such simple concepts that you don't need a whole lot of expertise to accomplish it.

intercst
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Really? I thought tax-loss harvesting was the kind of run-of-the-mill blocking and tackling that any competent investor does.

Perhaps I see the issue differently as a working tax professional.

From my point of view, tax loss harvesting simply cannot stand by itself. Instead, considerations of selling an investment to recognize a loss is part of your overall annual tax planning.

You can't just look at an investment portfolio and decide if selling for a loss is a good idea or not without looking at the entire tax picture - other sources of income and deduction, projections into the next year and sometimes the next few years, the capital gains and losses which have already been recognized for the year.

And you can't forget the investment considerations. Some investments are more speculative than others, or have lumpy returns. Staying out of an investment for the 30 days necessary to avoid wash sale treatment might cost more in foregone investment returns than it saves in taxes. Doubling up on an investment for 30 days (again to avoid wash sale treatment), can have the same effect in a falling market.

I just don't see how all of this can be rolled up into some simple formulaic approach to tax loss harvesting. It is by nature quite complex with many variables and estimates to consider.

I do agree with you that considering taxes is one of the basics of investing.

--Peter
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ptheland writes,

And you can't forget the investment considerations. Some investments are more speculative than others, or have lumpy returns. Staying out of an investment for the 30 days necessary to avoid wash sale treatment might cost more in foregone investment returns than it saves in taxes. Doubling up on an investment for 30 days (again to avoid wash sale treatment), can have the same effect in a falling market.

From my point of view, tax loss harvesting simply cannot stand by itself. Instead, considerations of selling an investment to recognize a loss is part of your overall annual tax planning.


How so? I'm careful about taking capital gains, but anytime I can harvest a capital loss, I take it. If I can't make use of the capital loss against this year's taxes, it rolls over to next year, or the year after that.

If I'm missing something, perhaps you can give an example of where harvesting a capital loss is detrimental to the taxpayer?

I understand your concerns with being out of the investment for 30 days. What I do is replace the investment with something similar during the 30 day period (e.g. Sell Exxon, buy Chevron and hold for 30 days. Sell an S&P500 index fund, replace it with a Total Stock Market index for 30 days, etc.)

intercst
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If I'm missing something, perhaps you can give an example of where harvesting a capital loss is detrimental to the taxpayer?

I'm not saying harvesting losses is detrimental. But the timing of harvesting the loss can easily be less than optimal.

Let's say some particular long term investment has worked out well and you have decided to sell it for investment reasons (management changed and no longer suits your style, your price target has been met, the tea leaves said "sell", or whatever). So you've got a long term capital gain booked for the year.

If you harvest a loss in the same year, that loss will only save you taxes at the long term rate. But if you wait to a following year with no LT capital gain, the loss can offset up to $3k of ordinary income and save taxes at a higher rate. If you sold that stock on Dec 30 instead of waiting a couple of days to sell on Jan 2, you might have passed up some notable tax savings.

Now if you want to make that even worse, perhaps this hapless taxpayer is in a lower tax bracket, so that capital gain would be taxed at a 0% rate. Harvesting a loss in that situation to offset the gain won't save any taxes.

Except that maybe this taxpayer is also collecting Social Security benefits. So by harvesting the loss he reduces his AGI and therefore reduces the amount of SS benefits subject to taxation. Now harvesting a loss might make sense. But you'd still have to compare it to waiting until the following tax year to see if the offset against other ordinary income is more valuable.

And we haven't begun to think about the affect of AGI on itemized deductions. Starting in 2014, we'll also need to consider the affect of AGI on potential health care credits under the ACA.

So harvesting losses just cannot be done properly without thinking about your overall tax situation.

Don't get me wrong - I'm agreeing with your OP that paying a couple dozen basis points of your assets for loss harvesting advice almost certainly is a bad idea. I'm just trying to explain why loss harvesting is complicated.

--Peter
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All great points, Peter..

...and let's not forget that now AGI is used to determine if one pays extra for Medicare and Medicare drug coverage---up to about 4 times the normal rates/month.

Cheers!
Murph
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