Reallocating QQQ

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AUTHOR: Dan Malone on 6/22/2024

First a question and then the backstory.

Mid-60’s and nearing retirement with 80% domestic allocation of stocks (60% domestic/40% international) in tech heavy QQQ. Sold 20% of my shares yesterday, and now have $200k+ to reinvest. Tax basis is 13% of the current market price. Long term capital gain rate of 15% applies, plus 3.8% NIIT. Gain is $192.5k.

How would you reinvest the sales proceeds to slowly sell off this concentrated QQQ position in a taxable account? Goal is to reduce QQQ to just 1/2 of domestic stock allocation over the next few years (spread out to avoid going into the 20% capital gains rate) with goal to better diversify in retirement, and perhaps lock in gains from Magnificent 7 outperformance.

The two main options I am considering are small cap value, like VBR, because it is the most opposite in makeup to QQQ. After selling 1/2 of my QQQ over the next year years, then I’d be holding 50/50 of each; and total U.S. stock market index, like VTI, allowing me to “buy and hold.” Any suggestions?

Now for the backstory. In the late 90’s, I enjoyed reading a borrowed copy of the Wall Street Journal on Wednesdays as I walked into my office building, mainly to read a column called Getting Going by a no-nonsense author named Jonathan Clements. He repeatedly wrote on the various advantages of index funds, which made sense to a guy who had been reading Money Magazine for fund tips (and chasing recent outperformance). Clements had also written about a new investment vehicle called ETFs and their virtues. Then came the dot com crash in 2000, which decimated tech stocks that were down 50%. I learned QQQ was an index of the Nasdaq 100, concentrated in tech stocks, and also a new ETF. Since it was down 50%, from its market high I bought 1400 shares at what I considered a “half off sale.” When QQQ went down another 50% — down 75% from its high — if figured if it was a good buy at 50% off it must be a better buy at 75% off. So I “doubled down” and now owned 2800 shares.

For almost ten years — until after the Great Rescession of 2008-09 — QQQs flailed and went basically no where, and I thought I’d made another dumb purchase. For the last 15 years though, QQQ had the highest average annual return of all ETFs, as the Magnificent 7 took off. I nearing a “10 bagger,” to use the phrase of Peter Lynch when a stock purchase went up 10x. It took me 23+ years to get there though.

The lesson for younger investors. Research your reasons when buying, and stick to your plan through thick and thin. It will pay off in the end. I’ve donated over 10% of my shares — then valued at $100k — and the remaining shares have created a nice retirement buffer.

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