How Index Investing Failed Me Last Year
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- เผยแพร่เมื่อ 28 มิ.ย. 2024
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The fact that 2000, 2001, 2002, 2008, and 2022 were all among the worst years for the market since the depression, yet you’d still have a solid 25-year return shows how powerful index investing is. Of course, other investing avenues are great to have as well!
Another great and helpful video. We took a $9k loss last December and look forward to enjoying the tax consequences over the next few years.
As a accountant, I am not sure I have heard anyone explain capital gains/losses so well😂
I'm about to create my first taxable brokerage account, as I've the good fortune of recently filling my RRSP and TFSA accounts here in Canada. (These are the equivalent to the IRA and the Roth IRA, respectively.) I also manage some taxable accounts for family members, and the details here on tax loss harvesting (which Canadians have too) are greatly helpful. Like you, Erin, I'm all in for index investing, in my case using iShares ETFs, but blend that with a selection of blue-chip stocks. Thanks for another thoughtful video, and on a topic that is a little technical but affects many investors.
Nice video...I would focus on ETFs rather than mutual funds...for example for Vanguard look at VOO, VTI or VYM
way more efficient and lower expenses.
I have been using the same fund you mentioned and tax loss harvested my VTSAX & VTIAX last year by selling them & sitting in a different enough fund for a month to avoid wash sale (ex: VXAIX). Note: you also need to make sure you don't have an auto-reinvest in the same fund in a retirement account that can trigger a wash sale too. It sounds like the failure was not index funds, but using average cost basis reporting. If you bought the fund in 2016 & were continuously buying it you could use your purchases from 2021 & 2022 to tax loss harvest. This requires 'spec id' cost basis. Vanguard & most brokers allow 'spec id' cost basis, so your shares' cost basis are based on the purchase of that specific lot. Vanguard defaults to average cost basis IIRC, but you can change it on your account/holdings. Hope this helps someone!
If you use a vanguard advisor, they will do your tax loss harvesting for you.
Erin, thank you for making this video. As much as I enjoyed the description of how index funds have dropped, along with the market, the real nugget of information for me was the tax lost harvesting section. I've watched a lot of videos about that subject and was intrigued, but wasn't sure it was for me. Little did I know that it was really not relevant to my portfolio, which is basically all index funds in a 401k. Your explaination really cleared up the issue and was easy to understand. Honestly, I think you could change the name of the video to Tax Loss Harvesting and your 401k and even more people could realize that this tax management technique isn't for them and it would be one less distraction when planning for retirement.
Thanks 🙏 so much, I’m glad you found it helpful!!
I do some tax loss harvesting. I think the concept is a bit overrated though. Sure if you can claim $3k in losses you can offset $3k ordinary income and that is great. However the downside is that you are lowering your cost basis and that means that if tax laws change in the future (say, by eliminating special treatment for long term capital gains), you could end up paying more tax overall. So I mostly use tax loss harvesting to offset gains and a small amount of ordinary income and don't try to get crazy with it.
You have one of the best personal finance shows on TH-cam. I learn so much from you!
Oh man.. the wash sale rule. I got buried in tax paperwork one year, because I had no idea what that was, and it looked like I was going to owe a bunch of taxes because of it.
I wasn’t trying to tax harvest, it just made my taxes a nightmare. Fortunately I found a tax professional who really knew her stuff and sorted everything out for me, it ended up not being a big deal.
The wash sale rule would be a good topic for Erin to cover in another video.
I'm glad you found a good tax pro, they are absolutely worth their weight in gold!
The brokerages will adjust your tax basis on the 1099s to reflect the wash sale rule. So there shouldn't be anything you have to do, other than to report the gains/losses per the 1099.
@@joeb1522 yeah, I understand that. but when you get 40 pages of "wash sale rule" documents to sort out, and you have to enter all of that stuff for taxes - it's not so simple. I didn't just get a 1099, I was buried in other paperwork.
@prosteeltraining7490 That's annoying. The brokerages with the highest fees typically have the best 1099s. Vanguard 1099s used to be terrible, and now they are average. Merrill Lynch's are pretty good.
We did tax loss harvesting for the first time this year. We had two managed bond funds that, because of the rise in interest rates, showed a tax loss against their cost basis, despite showing a gain owing to accumulated income. We sold both and reinvested both in similar funds a couple of months later as bond pricing hadn't changed much in the intervening time - thereby avoiding the 30 day wash rule. We parked the sale proceeds in a Money Market account between the sale and repurchase.
Listening to that book by John Bogle now. I guess I never really understood what the stock market really was until hearing him explain why index investing is the best option. Definitely solidified nothing but index funds for me from now on.
I used TLH to a larger extent in 2020 and 2022. I was able to sell some long held mutual funds with lots of gains without driving up my AGI. I made sure to reinvest the money in other investments, otherwise it would be just market timing. This year I may use some of the losses to offset getting more of my IRA out of hock. (Roth conversion)
Thank you Erin. Great content, as always.
It's definitely a complexity that may or may not even be worth it, especially in the beginning, but I recommend having two funds that serve the same purpose to swap out for tax loss harvesting. For example, VOO/VFIAX and VTI/VTSAX. They serve the same/similar purpose in most portfolios (US market exposure) and their historical returns have been comparable but they are not substantially similar.
I don't recommend using SPY and VOO as trade-offs, though. They both track the same index so good luck convincing the IRS out of the wash rule for that one.
Erin. For investments made in 2022, you can use identification lots to take your loses, right?
If I understand correctly, you have to tell your brokerage what method of selling (e.g. FIFO, LILO,identification lots, etc) you want before you make your first sale/redemption
Hi Erin - was wondering about your take on ETFs vs mutual funds. Can’t remember if you’ve addressed this topic in a prior video but I feel like it would be really valuable in this discussion!
Always or almost always choose the ETF if one is available for the index or strategy you want. Think of ETFs as a more modern, more easily traded, and more tax efficient version of a mutual fund. Many mutual funds are even converting over to the legal ETF structure. ETFs are the way to go 95% of the time.
I ran into the wash sale rule for the first time this year. It wasn't evident exactly where the future savings in cost basis was going to end up that I had to negate this year, but it seems like it will be baked into additional share of the thing I still have.
Maybe this could be another topic, but I've tried to just hang onto things that I have at a loss to wait for them to go up versus taking the loss and using it to my advantage for taxes. This strategy seems to be working okay since the market as gone up so much over the last ~10 years, but I don't know if it is optimal.
Given the latest banking crisis, would be helpful to see your thoughts on confidence in banks and brokerage firms. Great video.
It is possible to tax loss harvest in DCA index funds using LIFO, you just might not be incurring much loss depending on how much you’re investing.
Well done Erin. Excellent explanations.
Epic video, breakdown, and amazing information showing index funds don’t solve all the Buffet pipe dreams gains and certainty!! Sometimes picking individual Stocks wins 👍🏾✌️
You can sell specific lots of ETFs not sure if this is possible with mutual funds. Say you buy VTI monthly then in 2022 you would have some recent purchases that could be sold at a lost but you would have to switch to purchasing something like VOO to avoid wash sale rules or when you sale you would have to hold for 30 days before purchasing again. Avoiding the wash sale rule is the tricky part and be aware reinvested dividends would trigger it as well.
Betterment actually does aggressive tax loss harvesting using the typical large index funds. They do it automatically for you in your account, as part of the fees your paying. Not pushing Betterment, but if you look at the funds they use in each category, it’s an example of tax loss harvesting while sticking with the big index funds. Great video!
I have a homemade spreadsheet that I use to determine my tax burden for the year. Last year, I needed to make a $4,000 estimated payment to the Federal Government via EFTPS Online. This was to pay the taxes on the final one-third of the money I took from my IRA in 2020 via the Cares Act. I didn't want to risk a penalty by not paying it by January 15th. This is why I tend to do a tax burden "sanity check" around October so I can ensure I save enough money to make such payments.
Quite an interesting video. For someone like you I would think the lower prices for the index meant that you were getting some assets on sale.
Erin: I’m a retired CPA. Tax loss harvesting can be very useful and should be used when appropriate. Another tool people should consider is the charitable donation of long term capital gain assets. This can be done in a variety of ways. The one I would look into is transferring L/T capital gain assets to a self directed charitable fund. Fidelity has a good one. You receive a charitable donation for the fair market value of the asset when contributed, but can direct the charitable distribution over current or future years. You do not pay tax on the gain. Please keep in mind you cannot get the funds back. They must go to IRS approved 501(c)(3) charities. However you can use this tool as a way to alternate between itemizing deductions and the standard deduction thereby lowering your tax bill. This can also help with estate planning if that is a concern. Remember I’m retired so all of this should be discussed with a current tax advisor. Great videos by the way!
erin , I think you’re incorrect a little bit here on this past year I am I’ll have all index funds that are ETFs and was able to do tax harvesting here. This is because I only sold shares within the index that were at a loss purchased a suitable off investment. Now when you do tax plus harvesting you do not need to sell all of the shares or all of your position. Just make sure that you’re not reinvesting back like dividends or anything into that shares for it’s actually over 30 days I think it’s like 45 days before you can re-purchase the the shares now the challenge I have is going back from one index to another when the other index is starting to fall go back up so sometimes you may not be able to get back into the other position until you know there’s a dip or something like that because then you’re you’re gonna have capital gains when you sell and not actually have the tech floor harvesting because of the of the sea upside on on your stocks
From an inherited portfolio from my brother's estate in 2020. I am 98% individual stocks in the taxable account 2% sector index and market index covered call ETFs. I sold some overweighed stocks for a gain. I sold some stocks my brother had and some I added myself for a loss. So I use tax lost harvesting. My Roth IRA which has about $23000 is 100% etfs 31% State Street SPDR 1500 Value Tilt ETF (VLU) 36% Schwab U.S. Dividend Equity ETF (SCHD) rest sector, market index covered call, commodity futures ETFs
Thanks for the great tips and insights!
Hi Erin, you just posted a video Friday morning 3-24 about the current bank failures and just minutes later, it’s no longer available to view. Did TH-cam censor it and take it down? It was a really good video and you did an awesome job on it! I love watching your videos! And I miss your outtakes 😊
Great vid! Just for my own edification, do you happen to know if, say, VTSAX (total market index) and VFIAX (S&P 500 index) are too similar to use for tax-loss harvesting?
Difficult question to answer as the IRS has never given clarification of what they consider "not the same."
Most people, though not all, would consider a Total Market and an SP500 to be different enough.
With that said, last year I swapped back and forth between VTI and VOO for harvesting some losses.
A question I would ask a good accountant :-)
If u r intested in the economy and business news it like a hobby and a great investing style which is sector investing… i’ve done sector EFT investing and love it.. fun, hobby, and investment….
Another great educational video on investing!
Took $5,500 in intentional losses last year. Then invested in similar but not the exact index so the losses stuck. Offset some of my investment income and some of my earned income. Still have $2,500 to carry over to next year too.
TAA or quant investing might help there (investing only in index funds). It has me.
Great video Erin!
Get your money in a 401k and Roth IRA and 529, problem solved! I never had much outside these accounts when I was working. Extra money went to home repair/improvements and vacations. Most in my generation paid for their own car, college, etc. Nothing was given to most of us baby boomers. It's pay me now, pay me later. When that stock recovers, you don't pay taxes on that. Sell it and buy stocks and you pay taxes on every dollar you gain. Just semantics, hope I'm never lucky enough to sell at a loss to improve my tax situation.
I have used tax loss harvesting, probaby by accident ha ha. Outside of my target date funds in my retirement accounts, I invest in a tax efficient mutual fund at Vanguard. The tax efficiency is a goal of the fund but not guaranteed. So far it seems to be working out well. I'm sure all brokerages have them.
If I sell stocks for a loss in my taxable brokerage account, and then do a Roth conversion from a traditional IRA, will that qualify for tax loss harvesting?
I use Tax Loss Harvesting when I realize I made a BIG mistake in an indiviual stock purchase. Nobody is perfect!!😢
How many years can I carry a loss forward? For example, if I have a $20K loss, can I carry it for the next 7 years?
Sure can!
Fidelity allow you to sell a specific lot for tax lot harvesting. I think Vanguard and Schwab allow that too, but I don't use them
Are you talking about only realized profits and losses? If you are long and not selling does this harvesting apply to you?
Erin needs to talk more of her expertise on reits and individual stocks. Specifically on ⛏️ mining such as gold miners that pay quality dividends. More talk on dividend income…
Wouldn’t a long term investment strategy in only ETF kind of do this loss harvesting automatically? I mean any negatively performing underlying stock will automatically compensate gains from other underlying assets…
Or am I missing something?
Say you have two options:
1) invest in 2 stocks of company A and B, $5,000 each
2) invest $10,000 in an etf that holds company A and B
If company A goes to $6,000 and company b falls to $4,000, in case 1) you can sell stock b, harvest the $1,000 dollar loss, and use it to compensate the $1,000 gains of company A, so you don’t pay any taxes
But in option 2) your ETF is still worth $10,000, so you also don’t pay any taxes..
so, what’s the advantage that ETFs supposedly do not have?
not quite the same, they do have passively managed funds that do tax loss harvesting though
can you tax loss harvest from a taxable account to off set withdrawals from gains you made in a IRA option trading ?... in other words lets say i made 30k from option trading in an ira account and i withdrew that about... so to help to pay for the taxes i sell some loser stocks in my other taxable account for a 15k loss...
I don't dollar cost average due to the tax complications. Maybe a new purchase during a seasonal weak period in the market like in June thru Oct. I use first in first out to sell a gain to match a loss on a single stock or whatever.
What is your opinion of RYLD now in March 2023??
that's a lot of work for 1%. i'd rather not lock in my losses and i don't have any stocks that are losers - i.e. won't bounce back when the overall market improves.
The video skip important points. It failed to describe clearly hat tax loss harvesting applies only to taxable account. It does not apply to tax deferred accounts (IRA, 401K, Roth IRA, HSA..). The argument that index investing is not good for tax harvesting seems to rely on the fact that index grow over time. It is not specific to index fund: If you buy an investment, it is with the expectation that it grows, not to loose money so you can tax loss harvesting! I did some relatively small tax harvesting in the past but I would have prefer that the funds grow instead of loosing money and tax harvesting it! Another point is tax loss harvesting increase your average cost for the replacement investment. Unless you plan to never withdraw the money in that investment, sooner or later you will pay back some of the tax loss harvesting (granted, you might hope to be in a lower tax bracket later).
As someone who did a bulk of tax loss harvesting in 2020, I can’t take advantage. I love indexing though!
Looking to take a loss to offset a gain is ridiculous. It should be rare that you have such a catastrophic position that the only sensical action is to sell.
Most people who were looking to sell for that reason would have gotten back in the green long term.
This must be part of the reason most people suck at investing.
Unsubscribing for mispronunciation of Bogle. :-) . Great video as always!
Hi Erin, Live listening to your videos. However, in this one you mispronounce the name Bogle as Bagel. If you truly admire his path of Index investing the error would not have cleared editing. Hmmm now what else are you not telling us?
Have you done a Cast on Rule of 72?
I sure have:
th-cam.com/video/5MgRjJE6kFM/w-d-xo.html
It's an older one - and I feel like I'm yelling at the start of it, so I'm sorry about that! 😂
@@ErinTalksMoney That was fun to look back on your old set up Erin!
@@ErinTalksMoney Well Done!
What? How did index investing fail you? the basic tax efficiency rule is: mutual funds in tax deferred accounts, and stocks and ETFs in taxable brokerage and roth accounts. So, you should have the corresponding index ETF in your brokerage and roth accounts and hold the index mutual funds in tax deferred accounts. This allows you to tax loss harvest where it counts, especially if you hold individual stocks. So, index funds shouldn't have failed you last year if you held the corresponding security that best matches the tax efficiency of the account. I like Vanguard has given more flexibility now in choosing your cost basis, so you can tax loss harvest easier. Vanguard, and believe most brokerages, do allow you to change your cost basis method for mutual funds, so you can choose specific lots for mutual funds, too, to TLH.
Dollar cost average
Since you was in your 20’s. You may still be there young lady.
I appreciate the complement- but I’m far closer to my 40s than my 20s 😂
Citing "average return" of the market gives away a fundamental lack of mathematical understanding. You are about to learn that.
I view tax loss harvesting as a way to get rid of failed investments. However, I don't think anyone investing looks forward to losing money.
APPLE and Tesla. That’s it.
You're too young to state that "Index Investing Failed Me" If by Indexes, you mean the S&P 500 or the Total Stock Market, you are nearly guaranteed to win if you leave your money in the market for 20+ years. If you are claiming you failed, it's because you were playing the timing the market game. That's a game for losers that never wins. Doesn't matter if it's individual stocks or index funds. Time in the market is more important than timing the market.
I definitely don't believe in market timing! My saying is always be invested and always stay invested. I started investing 27 years ago, never try to time the market :-) Tax loss harvesting isn't about timing the market. And you are absolutely right, time in the market is what matters most
VOO🥇 SCHD🥇
Maybe you should learn to pronounce Jack Bogle’s last name if you claim to be a bogle head.
I also read his book and always suggested it to friends, I pronounced it the same as Erin, I feel bad but as John died in 2019 I am willing to bet he's okay with how we say it.