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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.
If you’re considering 50% VTI and 50% VBR, I’d suggesting comparing the total return of VBR with RSP (an equal weighted S&P500 Index fund). I think you’ll find fairly similar performance between VBR and RSP (other than during covid) with RSP providing the added security of larger cap stocks. The first time I compared the S&P 500 equal weighted index to several of the small cap indexes I was surprised how closely they track. Be sure to compare them both in market up cycles and down cycles. Then you can decide which better fits your investment plan.
Hi Dan,
Your plan sounds reasonable to me.
I will be 74 soon and I wish I had put some of my financial plans, like Roth conversions, into action sooner. It does not sound like you have claimed your social security benefit yet which could limit your planned CG tax rate benefits when you do claim if you delay selling off your QQQ over a number of years and after you claim SS. Unknown from your post when you plan to claim your SS benefit. I claimed mine at age 70.
Signing up for Medicare may also limit your options if you have IRMAA additional surcharge premiums that offset the benefit of waiting to sell your QQQ to stay in a lower capital gains bracket.
A big unknown for me is what will happen to our current tax rules as the TCJA is scheduled to expire at the end of 2025. My guess is that many taxpayers will choose to accelerate income into 2025 because of the uncertainty of what the tax rules will be in 2026 and future years. I will likely be one who takes actions on accelerating income in the second half of 2025 if congress fails to take actions to give us some tax rule certainties for 2026.
I am also thinking about the likelihood of an approximate 25% cut in the social security benefits in 2033. In my long-term plans I hope to be ready to replace our possible decrease in SS benefit if congress fails to act. For that I am thinking about a TIPS ladder in a Roth and/or I Bonds in a taxable account to cover a 10 year period of joint life expectancy for my wife and me for possible loss of SS benefits. I like and agree with your thinking of having equities in your Roth accounts (which I do) but I also want to insure that our guaranteed income, including inflation protection, remains in place and/or that if I die early my wife will not be thrown in a higher tax bracket for assets that do not get a stepped up basis upon my death. Thus I may soon include some TIPS in our Roth accounts until the social security benefits issues are addressed. Currently we own some TIPS in traditional IRA accounts and I am still buying I Bonds at TreasuryDirect, a taxable account.
Our financial decisions actions are often uniquely based on our life circumstances so I am trying to not let my uncertain future perfection tax planning to override my safe, good enough, decisions that have tax certainty. I struggle to do so but I try to plan and decide with the matters I can control and the facts as they exist.
Best wishes, Bill