The wealth-building thread

[Chromatischism]

you forgot to mention the sage advice of buying and holding because retail investors sell when they should be buying and vice versa. Like audio, its plagued with bias, emotion and brain tricks

I didn't forget.

My post specifically addressed the analysis in my case:

If all they're doing is sticking you in index funds or even a mix of mutual funds, just do it yourself and save the money.

If you're curious, it was EJ. I don't know how their fees compare to others.

The point is I don't need to spend $100k for someone to put me in mutual funds that have high-ish fees themselves.

I am not exaggerating when I say this: pulling out of that arrangement and putting the money into an index fund in my own Fidelity account was a savings of over $100k in fees over a period of 25 years. If these companies were up front about the real costs of fees, there would be a massive shakeup in the advisor market. You may see a fee of 1% or a fraction of 1%...but what they don't tell you is how that number can compound over time to eat 10-20% of your portfolio!

 

[levimax]

I am not exaggerating when I say this: pulling out of that arrangement and putting the money into an index fund in my own Fidelity account was a savings of over $100k in fees over a period of 25 years. If these companies were up front about the real costs of fees, there would be a massive shakeup in the advisor market. You may see a fee of 1% or a fraction of 1%...but what they don't tell you is how that number can compound over time to eat 10-20% of your portfolio!

For the fixed income part of your portfolio you can open a "Treasury Direct" account with the government. You get to buy the bonds or notes at the auction price just like the big boys with no commission and no ongoing management fees and no "bid" / "offer" price friction. This has the same effect of increasing long term returns. Since no one advertises this option many people don't know about it.

 

[muslhead]

I didn't forget.

My post specifically addressed the analysis in my case:



If you're curious, it was EJ. I don't know how their fees compare to others.

The point is I don't need to spend $100k for someone to put me in mutual funds that have high-ish fees themselves.

I am not exaggerating when I say this: pulling out of that arrangement and putting the money into an index fund in my own Fidelity account was a savings of over $100k in fees over a period of 25 years. If these companies were up front about the real costs of fees, there would be a massive shakeup in the advisor market. You may see a fee of 1% or a fraction of 1%...but what they don't tell you is how that number can compound over time to eat 10-20% of your portfolio!

as with everything investing, you are both right and wrong.
Maybe THEY didnt tell you but good IA's do. Sounds like you didnt do a good enough job screening your advisor. Its not like you to blame others, why now?

 

[muslhead]

Just to provide facts instead of some of the other biased, linear thinking nonsense being written on this post

 

[levimax]

Just to provide facts instead of some of the other biased, linear thinking nonsense being written on this post

View attachment 541846

Love this chart, I have a few questions, do you have a link as to how these number were calculated? I assume all the percentages are annulized?

 

[Chromatischism]

as with everything investing, you are both right and wrong.
Maybe THEY didnt tell you but good IA's do. Sounds like you didnt do a good enough job screening your advisor. Its not like you to blame others, why now?

I didn't say they did not tell me the fee rates. I just eventually got smarter and did the math on what it was really costing me in dollars. THAT information is not calculated and shown to you by any advisor that I know of. Imagine telling people up front you would take 15% of their profits as they go through their years of saving. Compounding is why a seemingly low fee of 1% can be so devious. Financial advisors shouldn't take more than 0.1% for managed retirement accounts. My 2 cents, of course.

 

[Mort]

Financial advisors shouldn't take more than 0.1% for managed retirement accounts.

I don't think you have much of an idea of what it takes to financially execute a decumulation strategy for a retired household. That's aside from the behavioral support.

 

[MRC01]

Active wealth advising is a wide range services and people pay whatever it's worth to them. As long as the pricing is stated up front, there's no deception. Percentages and compounding are high school math, they shouldn't be confusing.

My experience is that most institutions are fair and honest in (A) whether their wealth management services are appropriate for clients, and (B) what the service does, and (C) what the service costs. Not because they are angels, but because it's in their best long-term interest. The clients who are candidates for this often have 7+ figure balances (often much more), if the institution pisses them off it stands to lose everything - customers can easily move all of their assets elsewhere.

Also, most brokerages offer free investment advice from CFPs. They meet with customers, review their life & financial situation, and offer advice targeted to them. The quality varies (as does all advice, even from professionals), but at least it lets people know if they're pointed in the right general direction, and how to steer toward it if they're not. Even folks who DIY can occasionally touch base with a CFP as a status check; it costs them nothing and they might get some good ideas.

 

[MRC01]

With mutual funds, the tax inefficiency isn't necessarily the fees. Many good index funds have fees below 0.1%. The inefficiency comes from the transactions the fund executes to stay aligned with the index as some of the companies in the underlying index grow more than others. These internal fund transactions pass through to fund holders as capital gains (sometimes long term, sometimes short term) even if those fund holders never sell anything. The dividends also pass through, and they may be unqualified since fund holders don't have any control over how long the fund holds them. ETFs don't pass these internal transactions through to fund holders the way mutual funds do, which makes them more tax efficient.

For example compare S&P 500 index funds, like SWPPX (mutual fund) and VOO (ETF). SWPPX fees are capped at 0.02%, VOO at 0.03%. Both so low, no real difference. Their overall returns are identical. But when you compare the after-tax returns, VOO is consistently about 0.5% better. That half percent totally swamps their fees.

Of course, none of this matters for tax deferred accounts (401K, IRA, etc.) but it can make a big difference for after-tax accounts.

 

[ahofer]

With mutual funds, the tax inefficiency isn't necessarily the fees. Many good index funds have fees below 0.1%. The inefficiency comes from the transactions the fund executes to stay aligned with the index as some of the companies in the underlying index grow more than others. These internal fund transactions pass through to fund holders as capital gains (sometimes long term, sometimes short term) even if those fund holders never sell anything. The dividends also pass through, and they may be unqualified since fund holders don't have any control over how long the fund holds them. ETFs don't pass these internal transactions through to fund holders the way mutual funds do, which makes them more tax efficient.

For example compare S&P 500 index funds, like SWPPX (mutual fund) and VOO (ETF). SWPPX fees are capped at 0.02%, VOO at 0.03%. Both so low, no real difference. Their overall returns are identical. But when you compare the after-tax returns, VOO is consistently about 0.5% better. That half percent totally swamps their fees.

Of course, none of this matters for tax deferred accounts (401K, IRA, etc.) but it can make a big difference for after-tax accounts.

Generally index tax efficiency is quite high (particularly if the fund is growing). ETFs do even better through a technique that is specific to them (basket creation/redemption in kind).

 

[Timcognito]

This year I have started a direct indexing account for the purpose of tax harvesting because my wife and I were successful in are careers, always maxed our 401ks, and now have to start redeeming our savings there because of our age and the requirement here in the US. Instead of just of EMFs where one buys the index one buys the stocks in the index so that loosing stocks can be sold to offset gains. We are new to the game and of course the buying and selling is done by a professional manager. If you have a good sized nest egg and approaching the 401k liquidation requirements you should look into it. This an FYI not advice to necessarily to do it.

 

[levimax]

This year I have started a direct indexing account for the purpose of tax harvesting because my wife and I were successful in are careers, always maxed our 401ks, and now have to start redeeming our savings there because of our age and the requirement here in the US. Instead of just of EMFs where one buys the index one buys the stocks in the index so that loosing stocks can be sold to offset gains. We are new to the game and of course the buying and selling is done by a professional manager. If you have a good sized nest egg and approaching the 401k liquidation requirements you should look into it. This an FYI not advice to necessarily to do it.

That is an interesting concept. Have you seen any historical returns for this strategy compared to just owning the index? I would be concerned that this strategy might fall behind the index but don't know.

 

[tmtomh]

That is an interesting concept. Have you seen any historical returns for this strategy compared to just owning the index? I would be concerned that this strategy might fall behind the index but don't know.

Good question - yes, one has to be careful with tax-loss harvesting setups, not only because the returns on the financial instrument itself might be lower (and therefore partially offset the loss-harvesting benefits), but also because I'm not aware of any automatic or managed loss-harvesting product that doesn't charge a fee. The fees are generally modest, but on a large portfolio they can add up, and in any event they are an added cost.

Finally, my understanding is that while capital losses can be used to offset capital gains taxes with no limit, capital losses can only be used to offset up to $3,000 a year in ordinary income - and 401k and IRA withdrawals/required distributions are taxed as ordinary income (as is interest from savings, money markets, and CDs, and as is the taxable portion of Social Security, and as are non-qualified dividends). So their utility for offsetting taxes on retirement account income is very limited, and I would argue virtually nil.

 

[Mort]

Millions have been spent to save thousands on taxes.

 

[ahofer]

That is an interesting concept. Have you seen any historical returns for this strategy compared to just owning the index? I would be concerned that this strategy might fall behind the index but don't know.

There are two versions: tax-managed equity and long-short tax managed equity. Many firms do the former, in which the tax benefits tend to decay over time, and AQR and a division of Blackrock are the early movers in long-short, which can theoretically keep the tax savings going much longer.

The performance of the long-only is as unreliable as any long only equity manager, which is why most TME strategies are designed to use your tax savings potential to get you to something like an index exposure.

AQR publishes a lot and advertises kind of eye-popping alpha. This is necessary because if you advertise it as “only for the tax savings” the IRS will look at it as a sham transaction.

I need to stop short of specific advice in this forum, but I think I’m safe saying you should read broadly about the long-short version. Adding the short leg has a lot of *possible* implications. I think AQR et al do a good job, but that doesn’t mean you shouldn’t understand the potential risks. Schwab published a good write-up on these strategies.

 

[MRC01]

This year I have started a direct indexing account for the purpose of tax harvesting because my wife and I were successful in are careers, always maxed our 401ks, and now have to start redeeming our savings there because of our age and the requirement here in the US. Instead of just of EMFs where one buys the index one buys the stocks in the index so that loosing stocks can be sold to offset gains. We are new to the game and of course the buying and selling is done by a professional manager. If you have a good sized nest egg and approaching the 401k liquidation requirements you should look into it. This an FYI not advice to necessarily to do it.

This works, and it is more efficient due to 2 factors. First, loss harvesting (which can also offset dividends). Second, strategically sloppy index tracking in order to reduce rebalancing transactions that can trigger cap gains. However, the efficiency gains are a fraction of a percent. And they diminish after the first few years, since by that point you've already sold any losers and even the slow growers are in gain territory. Also, if one is already invested in standard funds that must be sold to start doing this, liquidating those funds can trigger taxes that swamp the gains. The efficiency gains can be real but since they are marginal, it's a careful decision looking at the big picture to avoid spending a dime to save a penny.

BTW, Ben Felix on YouTube talked about low-cost index funds that use strategically sloppy index tracking to reduce rebalancing and boost efficiency. It's an interesting subject for those interested in marginal gains.

 

[Mort]

BTW, Ben Felix on YouTube

Is the single most accurate and reliable source of investment principles and practice on the internet right now. He's got the best knowledge of the academic side of investment analysis and the results are often contrary to general consensus or wall street wisdom.

 

[ahofer]

This works, and it is more efficient due to 2 factors. First, loss harvesting (which can also offset dividends). Second, strategically sloppy index tracking in order to reduce rebalancing transactions that can trigger cap gains. However, the efficiency gains are a fraction of a percent. And they diminish after the first few years, since by that point you've already sold any losers and even the slow growers are in gain territory. Also, if one is already invested in standard funds that must be sold to start doing this, liquidating those funds can trigger taxes that swamp the gains. The efficiency gains can be real but since they are marginal, it's a careful decision looking at the big picture to avoid spending a dime to save a penny.

BTW, Ben Felix on YouTube talked about low-cost index funds that use strategically sloppy index tracking to reduce rebalancing and boost efficiency. It's an interesting subject for those interested in marginal gains.

401ks come in a few varieties, taxable (as INCOME) at withdrawal (“pretax”), taxable (as INCOME) at withdrawal with account-level tax basis (“post-tax”) and ROTH (not taxable at all). I’m not sure I understand why TME advantages any of these, as the tax basis is at the plan level (all IRAs together). Unless you are using losses earned outside a 401k to offset a (statute-limited) amount of income.

Now, if you are funneling the mandatory withdrawals into an indexed, tax-managed fund, I get that. But I know of precious few ways to reduce the taxable income from non-ROTH retirement accounts. Mostly it’s about planning the timing to coincide with years where there is no other income to lower one’s tax bracket.

 

[just1n]

401ks come in a few varieties, taxable (as INCOME) at withdrawal (“pretax”), taxable (as INCOME) at withdrawal with account-level tax basis (“post-tax”) and ROTH (not taxable at all). I’m not sure I understand why TME advantages any of these, as the tax basis is at the plan level (all IRAs together). Unless you are using losses earned outside a 401k to offset a (statute-limited) amount of income.

Now, if you are funneling the mandatory withdrawals into an indexed, tax-managed fund, I get that. But I know of precious few ways to reduce the taxable income from non-ROTH retirement accounts. Mostly it’s about planning the timing to coincide with years where there is no other income to lower one’s tax bracket.

Please don’t mislead people. Roth 401ks are post-tax contributions.

 

[muslhead]

Please don’t mislead people. Roth 401ks are post-tax contributions.

dont mislead people LOL
what you meant to say is they are treated as post tax contributions. They can be pretax contributions originally and then converted to a roth, by paying the tax owed in the year of conversion. As such, they are/were pretax contributions. If not a conversion, then yes, you are correct. Like everything in investing, without the details you can be right and wrong depending.