Seasonal investing question

[cswift01]

Dear all,

I have been wondering something lately and I would appreciate the insight that many of you could provide.

I'm considering for my own investments to stay in from late Oct. through late May or late July and then be out of the market for August, September and the first half of October. That means that any gains I make will be taxed at the short-term rate of 25%.

At what point would you make the decision to stay in the market as that 25% might be greater than a potential 5 to 10% correction? I.e. when is it interesting to sell your gains in a taxable account?

Please note that I do understand that it's one thing to be taxed 25% off of your gains and to receive a 10% correction on your entire portfolio.

I'm trying to see all points here.

Thanks,

Me

[evilanne]

New tax law will drop your marginal rate by 3% but it would really depend on the market outlook and whether you would want to wait for 3 months to get taxed at the lower taxable gains rate which would have been best move last year. I would not select a strategy that would sell off everything on an annual basis in a taxable account. If you are looking at potential unknown 5-10% correction vs paying a guaranteed 7-10% more in taxes, it doesn't make sense to me.

[RGEN]

If you are using your TSP or a 401K then you gain is not taxed. I am sure you knew that.

[Scorpio70]

A 5% correction does not make a good bargain when you miss out on a 20% net gain.

[mattch45]

At what point would you make the decision to stay in the market as that 25% might be greater than a potential 5 to 10% correction? I.e. when is it interesting to sell your gains in a taxable account?

Wouldn't that be when:

0.9 x perceived risk of 10% loss as a decimal x portfolio < portfolio - 0.75 x taxable gains

How's my math?

edit: catching my own bad math. equation should be more like:

(0.9 x perceived risk of 10% loss as a decimal x portfolio) + (portfolio x perceived likelihood of no loss as decimal) < portfolio - 0.25 x taxable gains

[mindofmush]

Save that strategy for an IRA, use strategies that benefit a taxable account like dividend growth stocks and tax-loss harvesting:

https://www.madfientist.com/tax-loss-harvesting/

Also see tax GAIN harvesting at the Mad FIentist website, interesting.

[cswift01]

At what point would you make the decision to stay in the market as that 25% might be greater than a potential 5 to 10% correction? I.e. when is it interesting to sell your gains in a taxable account?

Wouldn't that be when:

0.9 x perceived risk of 10% loss or greater as a decimal x portfolio < portfolio - 0.75 x taxable gains

How's my math?

May you show an example?

[mattch45]

May you show an example?

Running an example I see my math was way off; I forgot to add in the countervailing chance of NOT losing 10% and put in the taxes wrong. Should be more like:

(0.9 x perceived risk of 10% loss as a decimal x portfolio) + (portfolio x perceived likelihood of no loss as decimal) < portfolio - 0.25 x taxable gains

So say portfolio is $120,000 of which $20,000 is taxable gains, and you perceive 60% chance of a 10% loss, then:

value of leaving in fund, taking the correction hit =
0.9 x .6 x 120,000 + .4 x 120,000
$64,800 + $48,000
$112,800

value of taking tax hit =
120,000 - .25 x 20,000 =
$120,000 - $5,000
$115,000

Therefore in this scenario, it's advisable to take the tax hit.

[cswift01]

May you show an example?

Running an example I see my math was way off; I forgot to add in the countervailing chance of NOT losing 10% and put in the taxes wrong. Should be more like:

(0.9 x perceived risk of 10% loss as a decimal x portfolio) + (portfolio x perceived likelihood of no loss as decimal) < portfolio - 0.25 x taxable gains

So say portfolio is $120,000 of which $20,000 is taxable gains, and you perceive 60% chance of a 10% loss, then:

value of leaving in fund, taking the correction hit =
0.9 x .6 x 120,000 + .4 x 120,000
$64,800 + $48,000
$112,800

value of taking tax hit =
120,000 - .25 x 20,000 =
$120,000 - $5,000
$115,000

Therefore in this scenario, it's advisable to take the tax hit.

Ah, this makes more sense. I was stuck on a totally different area, the 0.9 part, but that is (1-.1).

There is another point to consider. If there is a dip in the market, then there's a second benefit which would be cheaper stocks. Of course most financial companies require you to wait 30 days before you purchase the same fund (wash rule).

Thanks again!

Best,

Me

[cswift01]

May you show an example?

Running an example I see my math was way off; I forgot to add in the countervailing chance of NOT losing 10% and put in the taxes wrong. Should be more like:

(0.9 x perceived risk of 10% loss as a decimal x portfolio) + (portfolio x perceived likelihood of no loss as decimal) < portfolio - 0.25 x taxable gains

So say portfolio is $120,000 of which $20,000 is taxable gains, and you perceive 60% chance of a 10% loss, then:

value of leaving in fund, taking the correction hit =
0.9 x .6 x 120,000 + .4 x 120,000
$64,800 + $48,000
$112,800

value of taking tax hit =
120,000 - .25 x 20,000 =
$120,000 - $5,000
$115,000

Therefore in this scenario, it's advisable to take the tax hit.

First, thanks for the formula. That is absolutely outstanding!

Just one question. I'm looking at the "value of taking tax hit" part. Why do you subtract the 120000-5000? The reason I ask is because, shouldn't it be 20000x0.25=5000. Then, we pay $5000 in taxes and my final tally becomes 120000+15000 (as opposed to 20000)? I.e. in the example you gave I'm losing 5k off of my principal as opposed to only the gains I made.

Maybe I'm wrong somewhere?

This is great work.

Thanks,

Me

[mattch45]

Just one question. I'm looking at the "value of taking tax hit" part. Why do you subtract the 120000-5000? The reason I ask is because, shouldn't it be 20000x0.25=5000. Then, we pay $5000 in taxes and my final tally becomes 120000+15000 (as opposed to 20000)? I.e. in the example you gave I'm losing 5k off of my principal as opposed to only the gains I made.

$120k was full balance of portfolio, not just principal. Does that make sense?

Also the two perceived risk/likelihood numbers must add up to 1. You can add other possible scenarios to the equation as long as you maintain that total risk/likelihood ends up at 100%.

[cswift01]

Just one question. I'm looking at the "value of taking tax hit" part. Why do you subtract the 120000-5000? The reason I ask is because, shouldn't it be 20000x0.25=5000. Then, we pay $5000 in taxes and my final tally becomes 120000+15000 (as opposed to 20000)? I.e. in the example you gave I'm losing 5k off of my principal as opposed to only the gains I made.

$120k was full balance of portfolio, not just principal. Does that make sense?

Also the two perceived risk/likelihood numbers must add up to 1. You can add other possible scenarios to the equation as long as you maintain that total risk/likelihood ends up at 100%.

Ok, I didn't realize it was 100k + 20k. That makes more sense.

Thanks again, this is great.

Best,

Me

[cswift01]

I saw this article as an update to this discussion. Enjoy!

https://www.aol.com/article/finance/201 ... /23339124/

[mindofmush]

Everybody just loves bad news, don't they?