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[hockeypuck]

To the investing/accounting/tax pros out there, I have another question on tax loss harvesting.

I just opened a taxable account this year, and only have VTI (US total market) and VXUS (international total market) in it. I plan on performing tax loss harvesting only once a year, in the Fall or Winter. I do not plan on realizing any capital gains until I retire.

Say 2017 is a bad year for VTI and I'm down $9000 for the year. Using SpecID cost basis, I am able to pick the losers to sell for my harvesting. I sell off the losers and buy VV or MGC. 31 days pass and I'm ready to return to the comfy home of VTI.

Scenario 1:
Market is still down and I lose another $1000 on VV. I sell all of VV and buy back VTI. So now I have totaled $10000 of harvested losses to carry forward, right? In this scenario, do I end up with the same number of VTI shares compared with not doing any TLH in the first place?

Scenario 2:
Market went up after I TLH and VV is up $9500 after 31 days, netting me an unrealized $500 capital gain. Since I don't want to pay any capital gains taxes, either I wait for Scenario 1 to happen or I just keep VV until I retire, right?

(This topic came to me as I was reading Why Smart People Make Big Money Mistakes and How to Correct Them by Belsky and Gilovich. For a book published in 1999, I was surprised to see that the IRS hasn't inflation-adjusted the $3000 "subsidy" all this time!)

 

[Husker86]

If my 401k allows me to rollover an IRA into it, I can roll over my Traditional IRA and do a backdoor Roth the next year without having to pay (extra) taxes, right?

Basically, I think I made a mistake rolling over a previous workplace retirement account into a Traditional IRA and want to get back to a state where I can do a backdoor Roth without having to pay taxes based on the percentage relative to what's in a Traditional IRA account I own.

 

[Chumly]

If my 401k allows me to rollover an IRA into it, I can roll over my Traditional IRA and do a backdoor Roth the next year without having to pay (extra) taxes, right?

Basically, I think I made a mistake rolling over a previous workplace retirement account into a Traditional IRA and want to get back to a state where I can do a backdoor Roth without having to pay taxes based on the percentage relative to what's in a Traditional IRA account I own.

You still have to pay income taxes on the portion of your IRA that you took pre-tax

 

[Husker86]

You still have to pay income taxes on the portion of your IRA that you took pre-tax

But I won't have a traditional IRA anymore if I roll it over into my 401k. Is it not that easy? I can understand if I have to wait for the next tax year before I do the backdoor Roth.

 

[tokkun]

To the investing/accounting/tax pros out there, I have another question on tax loss harvesting.

I just opened a taxable account this year, and only have VTI (US total market) and VXUS (international total market) in it. I plan on performing tax loss harvesting only once a year, in the Fall or Winter. I do not plan on realizing any capital gains until I retire.

Say 2017 is a bad year for VTI and I'm down $9000 for the year. Using SpecID cost basis, I am able to pick the losers to sell for my harvesting. I sell off the losers and buy VV or MGC. 31 days pass and I'm ready to return to the comfy home of VTI.

Scenario 1:
Market is still down and I lose another $1000 on VV. I sell all of VV and buy back VTI. So now I have totaled $10000 of harvested losses to carry forward, right? In this scenario, do I end up with the same number of VTI shares compared with not doing any TLH in the first place?

Scenario 2:
Market went up after I TLH and VV is up $9500 after 31 days, netting me an unrealized $500 capital gain. Since I don't want to pay any capital gains taxes, either I wait for Scenario 1 to happen or I just keep VV until I retire, right?

(This topic came to me as I was reading Why Smart People Make Big Money Mistakes and How to Correct Them by Belsky and Gilovich. For a book published in 1999, I was surprised to see that the IRS hasn't inflation-adjusted the $3000 "subsidy" all this time!)

Yes, the scenarios you described are accurate, provided VTI and VV moved in lockstep.

As for why the $3000 deduction cap hasn't changed, I can't imagine it is politically attractive to do so. Not that many people tax loss harvest, and those that do tend to be financially well-off, so it could be cast as a tax break for the rich. However, the really rich people don't need an increase because the cap only applies to deductions on earned income. Deductions on capital gains are unlimited.

If my 401k allows me to rollover an IRA into it, I can roll over my Traditional IRA and do a backdoor Roth the next year without having to pay (extra) taxes, right?

Basically, I think I made a mistake rolling over a previous workplace retirement account into a Traditional IRA and want to get back to a state where I can do a backdoor Roth without having to pay taxes based on the percentage relative to what's in a Traditional IRA account I own.

That's right.

 

[SafeinSound]

Wow. I am so glad I found this thread. I'm 29 years old and my job doesn't offer a 401k that matches pay, and have been thinking heavily over the last couple months about how and where to start my retirement planning. Will be reading deeply into this thread over the next couple days off work. Thanks so much for everyone who has shared precious information.

 

[SourBear]

You still have to pay income taxes on the portion of your IRA that you took pre-tax

Wrong. If he rolls the IRA into his 401k he doesn't. But there are few 401k's that actually let you do this. If your company offers it, you are lucky.
This is called a reverse rollover btw.

 

[Husker86]

Wrong. If he rolls the IRA into his 401k he doesn't. But there are few 401k's that actually let you do this. If your company offers it, you are lucky.
This is called a reverse rollover btw.

Yeah, I just noticed mine offers it. Downside is...I think I'm accepting another job tomorrow. Wonder how quick this can happen. Or I wonder if I can do it even after I leave since the account will still be open obviously.

 

[Chumly]

Wrong. If he rolls the IRA into his 401k he doesn't. But there are few 401k's that actually let you do this. If your company offers it, you are lucky.
This is called a reverse rollover btw.

So when I looked into it previously I thought you sill had to pay taxes. So you can back door a traditional IRA into a 401k Roth without paying any taxes aka you take the tax deduction and then convert it into a Roth penalty free?

 

[Smiley90]

So this is Canada-specific possibly:

I know loan payments on investment loans are tax-deductible. Can I carry-over those payments for future tax returns (like tuition) or not?

 

[BeforeU]

So this is Canada-specific possibly:

I know loan payments on investment loans are tax-deductible. Can I carry-over those payments for future tax returns (like tuition) or not?

Yes, I used all my tuition credit 1 year after I graduated.

 

[tokkun]

So when I looked into it previously I thought you sill had to pay taxes. So you can back door a traditional IRA into a 401k Roth without paying any taxes aka you take the tax deduction and then convert it into a Roth penalty free?

No, you can't do what you are describing. However, you are misunderstanding the goal. He doesn't want to put the money in a Roth 401k, he wants to put it in a traditional 401k. You can do that tax and penalty-free. The purpose is simply to eliminate the traditional IRA, because having a traditional IRA causes complications when doing a backdoor Roth IRA contribution in the future (in a way that having a traditional 401k doesn't).

 

[Husker86]

So when I looked into it previously I thought you sill had to pay taxes. So you can back door a traditional IRA into a 401k Roth without paying any taxes aka you take the tax deduction and then convert it into a Roth penalty free?

The 401k I'm rolling it into isn't a Roth, it's a standard pre-tax.

What I'm doing is getting rid of my Traditional IRA so that, in the future, I can contribute $5,500 to a Traditonal IRA, and roll it into a Roth (backdoor Roth) without having to pay additional taxes (I would have already used after-tax money to put the $5,500 into the Traditional IRA).

Essentially, the "traditional" 401k plan is making my Traditional IRA disappear.

 

[Chumly]

The 401k I'm rolling it into isn't a Roth, it's a standard pre-tax.

What I'm doing is getting rid of my Traditional IRA so that, in the future, I can contribute $5,500 to a Traditonal IRA, and roll it into a Roth (backdoor Roth) without having to pay additional taxes (I would have already used after-tax money to put the $5,500 into the Traditional IRA).

Essentially, the "traditional" 401k plan is making my Traditional IRA disappear.

Ah sorry I did misunderstand what you were trying to do. That makes more sense

 

[Smiley90]

Yes, I used all my tuition credit 1 year after I graduated.

that wasn't the question - I'm asking about tax deductible investment loan interest payments. I know tuition is deferrable, I'm asking whether the interest is!

 

[NetMapel]

that wasn't the question - I'm asking about tax deductible investment loan interest payments. I know tuition is deferrable, I'm asking whether the interest is!

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/319-eng.html
Is this what you're looking for?

 

[Smiley90]

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/319-eng.html
Is this what you're looking for?

Investment loan interest repayment, not student loan! I only brought up tuition as an example of something that's a tax deduction deferrable indefinitely

 

[Mr.Mike]

Investment loan interest repayment, not student loan! I only brought up tuition as an example of something that's a tax deduction deferrable indefinitely

I don't know shit about taxes, so take this with a grain of salt. But I think I recall hearing that interest could be deducted as a business expense. So maybe try looking under the business parts of the CRA website if you haven't yet?

 

[TrAcEr_x90]

Are these apps like Acorn worth getting into? I'll I really do is invest into my work 401k. Reading up on Acorn it seems to make things simple and I don't have to really spend alot of time on it. Is there a #1 app I should look into that is better than Acorn?

 

[NetMapel]

Investment loan interest repayment, not student loan! I only brought up tuition as an example of something that's a tax deduction deferrable indefinitely

Smelly pls. Soooo, like this? http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html

I do not believe you can carry over non-student loan interest to be claimed another year.

 

[SyNapSe]

Are these apps like Acorn worth getting into? I'll I really do is invest into my work 401k. Reading up on Acorn it seems to make things simple and I don't have to really spend alot of time on it. Is there a #1 app I should look into that is better than Acorn?

From what I've read Acorns is really only good if youre in college due to it being free.

If you want really simple with neat apps look at the original robo advisors (Betterment and Wealthfront). They'll ask you some questions that gauge risk tolerance, intent of investment, your age, income then give you a portfolio. If all you do is work 401k then you'd choose retirement and create an IRA with them if that's your goal.

You can save yourself some fees by going direct to a broker like Vanguard and buy their target retirement date fund. Itll self manage as you age and move you from riskier to less volatile assets.

 

[Yaboosh]

Everybody here likes to talk about how trying to time the market is completely foolish and a pure gamble. I can accept that, I don't know what I am talking about so that makes investing far easier. Just throw money into the market, easy peasy.

But what about buying a house?

Buying a house in Colorado right now, at the beginning of the Trump presidency which introduces tons of unknowns seems foolish to me. But isn't this the same thing as trying to time the market? Can you time a house purchase more reliably than timing a market investment?

 

[Moppet13]

From what I've read Acorns is really only good if youre in college due to it being free.

If you want really simple with neat apps look at the original robo advisors (Betterment and Wealthfront). They'll ask you some questions that gauge risk tolerance, intent of investment, your age, income then give you a portfolio. If all you do is work 401k then you'd choose retirement and create an IRA with them if that's your goal.

You can save yourself some fees by going direct to a broker like Vanguard and buy their target retirement date fund. Itll self manage as you age and move you from riskier to less volatile assets.

Acorn can be a good way to add a little extra savings to your retirement plan, but with the $1 monthly fee if you're under 5k you'll need to add some of your own money if you want to see any sort of return. You can't make it work with the change from your purchases unfortunately.

 

[tokkun]

Everybody here likes to talk about how trying to time the market is completely foolish and a pure gamble. I can accept that, I don't know what I am talking about so that makes investing far easier. Just throw money into the market, easy peasy.

But what about buying a house?

Buying a house in Colorado right now, at the beginning of the Trump presidency which introduces tons of unknowns seems foolish to me. But isn't this the same thing as trying to time the market? Can you time a house purchase more reliably than timing a market investment?

If I had to take a guess, I'd say that you can probably time the market on buying a house somewhat more reliably than the stock market, but still not particularly reliably. That is based on the assumption that housing markets are less efficient because they are much less liquid.

It may help your decision-making process to try to articulate:
1. Why you want to buy a house.
2. Why - specifically - you are worried about buying a house at the beginning of the Trump presidency.

I can imagine an argument being made in favor of buying a house now - namely that the Fed has said it plans to continue raising interest rates, and the stock market performance is going to encourage them. Higher interest rates make new mortgages more expensive.

 

[Unknown Soldier]

Everybody here likes to talk about how trying to time the market is completely foolish and a pure gamble. I can accept that, I don't know what I am talking about so that makes investing far easier. Just throw money into the market, easy peasy.

But what about buying a house?

Buying a house in Colorado right now, at the beginning of the Trump presidency which introduces tons of unknowns seems foolish to me. But isn't this the same thing as trying to time the market? Can you time a house purchase more reliably than timing a market investment?

If you're buying the house because you want to live in it and you plan to stay there long term, what difference does it make?

 

[GhaleonEB]

I'm definitely in the "buy a house to live in, not to invest in" camp. It may be a good investment over the long term depending where you are, but there's so much more about owning a house than the near-term property values. Buy a place to live, and let the market do its thing in the meantime.

 

[Randolph Freelander]

Should Yaboosh buy a house? Let's consult with Coach Bowden.

https://www.youtube.com/watch?v=IdPpm1Jxrqo

I think that means yes.

 

[King of GAF]

Not sure if I am crazy or smart but decided to put in sell orders to get out of the market tomorrow. im only 33, but remember the crash a decade ago. I am normally the type to go sp500 index and thats it but I cant shake the feeling of overwhelming risk with this presidency. I can always jump back in. I am in bonds , REITs and other commodities and ok with earning a lower return. I am just worried after this whole mexico thing. Not because of trade with mexico but more because of what it represents. there is a real lack of understanding of international trade agreements in the white house and why should i bet the house on it anymore? is anyone else doing this or should i get some tin foil? I was ok with riding this rally but things are getting real. i am more concerned with asset preservation at the moment.

 

[Randolph Freelander]

Not sure if I am crazy or smart but decided to put in sell orders to get out of the market tomorrow. im only 33, but remember the crash a decade ago. I am normally the type to go sp500 index and thats it but I cant shake the feeling of overwhelming risk with this presidency. I can always jump back in. I am in bonds , REITs and other commodities and ok with earning a lower return. I am just worried after this whole mexico thing. Not because of trade with mexico but more because of what it represents. there is a real lack of understanding of international trade agreements in the white house and why should i bet the house on it anymore? is anyone else doing this or should i get some tin foil? I was ok with riding this rally but things are getting real. i am more concerned with asset preservation at the moment.

You're 33. Cancel your sell orders.

 

[King of GAF]

You're 33. Cancel your sell orders.

ya i understand what you are saying and it is what i would usually prescribe, but i cant help but get a different feeling about it now

 

[Prax]

America has 20ish years to recover from whatever trump is gonna do.. so I will hope.. the investments pay off anyway.
Otherwise, I got my meagre pension from my job if I can stick the course.

 

[Moppet13]

ya i understand what you are saying and it is what i would usually prescribe, but i cant help but get a different feeling about it now

If you look back to 08 it took what, 5 years to go past its previous high? That's nothing when you're 33. Since you seem to be worried about short term gains and losses, interest rates are going up which means bonds are going down.

 

[ClosingADoor]

ya i understand what you are saying and it is what i would usually prescribe, but i cant help but get a different feeling about it now

Don't do this stuff based on feeling. It has been proven that if you are in broad ETFs, the time in the market will mean more then timing it. You will also be missing out on dividend payments for the period you are out. I could understand it if you were in your 50s or something, but in your 30s? You are not going to be touching this money for 30 years.

 

[NetMapel]

ya i understand what you are saying and it is what i would usually prescribe, but i cant help but get a different feeling about it now

Yeah I took out my investment in the s&p500 index yesterday myself. Feeling uncertain about this market, you know.

 

[sazabirules]

Why would you take your money out if you're not retiring in the next few years? Following your emotions results in poor financial decisions.

 

[GhaleonEB]

ya i understand what you are saying and it is what i would usually prescribe, but i cant help but get a different feeling about it now

Yeah I took out my investment in the s&p500 index yesterday myself. Feeling uncertain about this market, you know.

This runs counter to all sound retirement investing advice. When would you get back into the market, and how do you know you'll be better off pulling out now vs. saving and investing straight through? I started investing in 2000 and have been through two stock market crashes. I kept money in, and invested on the way up and on the way down, and it's working out just fine.

http://www.neogaf.com/forum/showpost.php?p=225831653&postcount=5423

 

[Moppet13]

This runs counter to all sound retirement investing advice. When would you get back into the market, and how do you know you'll be better off pulling out now vs. saving and investing straight through? I started investing in 2000 and have been through two stock market crashes. I kept money in, and invested on the way up and on the way down, and it's working out just fine.

http://www.neogaf.com/forum/showpost.php?p=225831653&postcount=5423

I have quite a few coworkers who like to brag about how they pulled their retirement funds out of the market before the crash, I always ask them when they put the money back in and none of them ever have. They pulled out at around 1550, saved the fall to 680 but they don't realize the S&P 500 is practically at 2300 now. They think they saved big, when really they're down 800. If they had never touched it they would have seen around 50% more growth.

You're right when you say, how will you know when to get back into the market.

 

[NetMapel]

This runs counter to all sound retirement investing advice. When would you get back into the market, and how do you know you'll be better off pulling out now vs. saving and investing straight through? I started investing in 2000 and have been through two stock market crashes. I kept money in, and invested on the way up and on the way down, and it's working out just fine.

http://www.neogaf.com/forum/showpost.php?p=225831653&postcount=5423

Oh I pulled that one out because it was in my short term investment account and not a retirement one. Need the money for a few things haha. The rest, including my retirement accounts, are still there intact.

 

[Yaboosh]

I have quite a few coworkers who like to brag about how they pulled their retirement funds out of the market before the crash, I always ask them when they put the money back in and none of them ever have. They pulled out at around 1550, saved the fall to 680 but they don't realize the S&P 500 is practically at 2300 now. They think they saved big, when really they're down 800. If they had never touched it they would have seen around 50% more growth.

You're right when you say, how will you know when to get back into the market.

People are too results oriented.

They treat 1% shots they hit like sure things and 99% shots that miss like terrible bets. And sometimes they don't even know if they actually hit or miss with their gambles because they don't track it well enough.

 

[Mrbob]

Oh I pulled that one out because it was in my short term investment account and not a retirement one. Need the money for a few things haha. The rest, including my retirement accounts, are still there intact.

Brah this is a how to invest for retirement thread. There is a stock thread for more short term focus.

 

[tokkun]

I have quite a few coworkers who like to brag about how they pulled their retirement funds out of the market before the crash, I always ask them when they put the money back in and none of them ever have. They pulled out at around 1550, saved the fall to 680 but they don't realize the S&P 500 is practically at 2300 now. They think they saved big, when really they're down 800. If they had never touched it they would have seen around 50% more growth.

You're right when you say, how will you know when to get back into the market.

Loss aversion is a bigger motivator for people than gains. Human nature acts against your best interests in investing. That's why most people should avoid reading market news and should structure their investments in boring ways that discourage action.

I'll take this as another opportunity to extol the virtue of Target Date funds (provided they are available to you at a reasonable expense). It is the most ignorable investment strategy you can take.

 

[Mr.Mike]

I did move to a much less aggressive 60% stocks and 40% bonds allocation. And to be honest maybe that is a bit market timey. But I'm still in the market. While it's true I have the time horizon to wait out volatility, it's also true that because I've started so early I don't need to take on as much risk to reach my financial goals.

Anyway, here's a chart of nominal bond yields over the past 300 years. One thing you might draw from this is that financial markets have survived some pretty huge events.

 

[Moppet13]

So I'm curious, I've been under the impression that I want majority of my stocks in large cap over midcap or small cap but I have trouble understanding why this is. Historically large cap has lagged behind both small and midcap.

Is it simply a matter of risk tolerance? If I'm young is there any reason why I wouldn't want to weigh midcap and small cap equally with large cap or possibly even more?

 

[Piecake]

So I'm curious, I've been under the impression that I want majority of my stocks in large cap over midcap or small cap but I have trouble understanding why this is. Historically large cap has lagged behind both small and midcap.

Is it simply a matter of risk tolerance? If I'm young is there any reason why I wouldn't want to weigh midcap and small cap equally with large cap or possibly even more?

Large caps make up the majority of the stock market, so if you simply follow the market you will have most of your stocks in large caps.

If you invest in large caps over the market percentage of large caps in relation to the total market, then that is simply a sector bet. You are betting that large caps will do better than the mid and small over the long haul.

My belief is that you should simply follow the market. Statistically, you are also better off simply following the market. Market timing and sector bets are the easiest way to do worse than you should. Sure, you might do better, but the odds are against you.

If the odds are against you, why make things more complicated?

 

[tokkun]

So I'm curious, I've been under the impression that I want majority of my stocks in large cap over midcap or small cap but I have trouble understanding why this is. Historically large cap has lagged behind both small and midcap.

You probably have that impression because of Warren Buffett.
http://www.usatoday.com/story/spons...-buffetts-15-minute-retirement-plan/85979746/

Another reason people may recommend S&P 500 funds is because they are available in most 401ks and tend to have very low expense ratios and transaction fees. It is also an easy way of saying 'passive index fund'. For many 401ks, the only small cap fund option will be actively managed with high fees. Lastly, small caps have historically had higher volatility than large caps. If you are giving general advice, you need to take behavioral risk into account, and a lot of people don't have the disposition for holding high volatility assets.

Is it simply a matter of risk tolerance? If I'm young is there any reason why I wouldn't want to weigh midcap and small cap equally with large cap or possibly even more?

For the first part of your question, the fact is that historically small caps - and particularly small cap value - outperform large caps on both a nominal and risk-adjusted basis. It's worth noting that this trend is only about 50 years old, so it is by no means some unalterable law of investing. I could come up with a couple speculative arguments about how the trend could reverse, but I won't get into that here. The bottom-line, though, is that there is no "catch" to that recent performance, and if you think it will continue in the future, then you may have higher long-term investment returns with a tilt toward small caps.

On to the second part of your question: The primary reason I would warn people about pursuing this sort of strategy is behavioral risk. If you are worried about min-maxing now, how are you going to feel in 3 years when large caps have outperformed small caps over that interval (which is entirely plausible given that small caps have been driven up a lot post-election). Are you going to be able to stay the course, or are you going to decide this was a mistake and rebalance? This is the risk incurred any time you introduce more complexity into your investment strategy.

 

[tokkun]

If you invest in large caps over the market percentage of large caps in relation to the total market, then that is simply a sector bet. You are betting that large caps will do better than the mid and small over the long haul.

I have always felt like there is a certain naturalistic fallacy about this argument. Yes, large caps make up 80% of today's markets, but isn't it also a 'bet' to assume they will capture 80% of future profits? Why is that less of a bet than basing your investments on historical performance?

 

[Piecake]

I have always felt like there is a certain naturalistic fallacy about this argument. Yes, large caps make up 80% of today's markets, but isn't it also a 'bet' to assume they will capture 80% of future profits? Why is that less of a bet than basing your investments on historical performance?

I have never assumed that they would. They could and they could not. I have no idea. I don't think past performance is a predictor of future success, so why would I look at past performance to determine how I allocate my portfolio? That sort of thinking can lead to some risky and not very diversified choices

Moreover, following the market is a more firmer path that removes any additional decisions that I need to make. The less decisions that I need to make the better off I will likely be because those decisions certainly will not be made with me knowing all of the facts and certainly me not being able to predict the future.

For example, where are you going to begin calculating when that historical performance starts? Is it the past 200 years? Past 50? Past 20? What? What happens if that historical performance changes? Are you going to buy more of the better performing sector when that sector is doing well? That seems like the exact opposite of what you should be doing.

I think it can also create a mindset of chasing performance, which, if you are not careful, can ruin you. You aren't chasing performance if you are simply following the market. You are just following the market. Will others do better than you? Most certainly, but they will be few in number, and either lucky or among the few actual skilled investment people.

Recognizing that you aren't going to be either and taking steps to eliminate any sort of temptation to think that you might be seems like it will result in the greatest chance for long-term investment success for the vast majority of people - me included.

 

[Wellington]

Not sure if I am crazy or smart but decided to put in sell orders to get out of the market tomorrow. im only 33, but remember the crash a decade ago. I am normally the type to go sp500 index and thats it but I cant shake the feeling of overwhelming risk with this presidency. I can always jump back in. I am in bonds , REITs and other commodities and ok with earning a lower return. I am just worried after this whole mexico thing. Not because of trade with mexico but more because of what it represents. there is a real lack of understanding of international trade agreements in the white house and why should i bet the house on it anymore? is anyone else doing this or should i get some tin foil? I was ok with riding this rally but things are getting real. i am more concerned with asset preservation at the moment.

What about taxes? Hopefully you at least have held these equities for over a year or you could face short term gains taxes which would be very painful.

 

[Gallbaro]

Don't have kids!

 

[tokkun]

I have never assumed that they would. They could and they could not. I have no idea. I don't think past performance is a predictor of future success, so why would I look at past performance to determine how I allocate my portfolio? That sort of thinking can lead to some risky and not very diversified choices

Moreover, following the market is a more firmer path that removes any additional decisions that I need to make. The less decisions that I need to make the better off I will likely be because those decisions certainly will not be made with me knowing all of the facts and certainly me not being able to predict the future.

For example, where are you going to begin calculating when that historical performance starts? Is it the past 200 years? Past 50? Past 20? What? What happens if that historical performance changes? Are you going to buy more of the better performing sector when that sector is doing well? That seems like the exact opposite of what you should be doing.

I think it can also create a mindset of chasing performance, which, if you are not careful, can ruin you. You aren't chasing performance if you are simply following the market. You are just following the market. Will others do better than you? Most certainly, but they will be few in number, and either lucky or among the few actual skilled investment people.

Recognizing that you aren't going to be either and taking steps to eliminate any sort of temptation to think that you might be seems like it will result in the greatest chance for long-term investment success for the vast majority of people - me included.

We all utilize past performance data, though. Past data showing that expected returns on the stock market tend to converge over a 30-year period is the cornerstone of retirement investing. Without past data on volatility differences and risk premiums between stocks and bonds, we would have no idea how to do allocations. If you cannot get a ballpark estimate for longterm annualized real returns, you will have no point of reference for what an appropriate savings rate or retirement age is. There are a handful of things that we can approach from a purely theoretical standpoint - like diversification reducing risk - but all the rest depends on past performance data in some way.

I think people have taken this "past performance is not indicative of future results" mantra and sort of twisted it from its intent. It is supposed to be there to warn people against getting burned by cyclic markets and mean reversion, where if something has been performing well relative to the rest of the market that may mean it's over-priced. It's there to make sure people understand the existence of risk and take steps to mitigate against it. It isn't meant to discourage data-driven decision-making.

You're right that it is not easy to make a clear distinction on how long a trend must continue before you go from ignoring it to taking it seriously, but it's an unavoidable one that must be made by all investors.