lost cash, find cash

It’s best to avoid loans of any type against a 401k unless it is for something that will yield very substantial benefits for you. The only reason I think that generally works here is for the purchase of one’s primary home.

There is some wisdom and truth to the harvesting of gains. It’s actually harvesting of losses and it works something like this.

When you buy an index fund, lets use the S&P; 500 for example, you are buying an unmanaged basket of 500 companies. Let’s say that, like last year, the S&P; 500 provides you a positive return for the year. Obviously all 500 stocks in the S&P; 500 were not winners. Index returns are a result of averages, so if 400 of the stocks in the index were up and 100 were down you probably had a positive overall index return. But, when you buy an index that’s what you get and you end up with an unrealized capital gain and no losses.

Losses are good to harvest for a few reasons. The first is that you can deduct $3,000 per year of losses against ordinary income. What you have in excess of $3,000 you can carry forward indefinitely taking an additional $3,000 deduction every year as long as the loss carryforward remains.

Eventually though it is likely that you will realize a gain. This could take the form of a sale of real estate, or trimming a concentrated stock position that has grown over4%, actually changing your asset allocation as you get older. Other times you may own a stock that gets bought out for cash and not have a choice but to recognize your gain.

The point is that more than likely at some point in the future you can use losses harvested to avoid paying capital gains taxes.

You can’t do this with an index fund, you can do it with a stock portfolio though that approximates an index fund.

This is actually not that difficult to build. If you were to take the money you are committing to stocks and even buy random companies matching your sector and market cap weightings (random sampling works here) to an index fund (you could even look at an index funds holdings by percent and buy roughly the exact same stocks) and then each year sell the stocks that were down more than 10% while always letting your winners run you’d do pretty well at tax loss harvesting yourself.

Since as time goes on, theoretically, more stocks would be up than down, each year you’d have a smaller and smaller group of losers to trim.

With 4.5 million this is a superior strategy to buying an index fund outright. Why? Well you can harvest the losses but also with that much money you have enough money to properly diversify into say even 150 stocks — and if you did it right you could very well approximate an index.

The key would be to keep commissions low on your stock transactions by using a discount broker. Schwab would probably be fine via the internet.

Even at .20% (20 basis points) on an index fund, on $4 million investment that’s still $8,000 every year.

Assuming you were paying 1% for this management of $4 million that would be $40,000 per year.

Building a basket of stocks that approximate an index and tax loss harvesting is not that difficult. Once set up it’s mostly on auto pilot.

Any adviser that you are paying is unlikely to give you this advice. They will likely have lots and lots of reasons why this is a bad idea. It is not likely in their financial interest.

I love reading your photo blog entries, but this discussion of finance leaves me with some new questions.

Do you mind offering one more opinion? YMMV etc…, not professional advice, just trying to get an opinion from a somewhat objective party.

I’m fortunate enough to have recently sold shares in a company I cofounded – however I am an engineer not a businessman). After taxes this left me with about $4.5M. For the last couple of years I’ve been having this money ‘professionally’ managed because I had little time to think about finances what with work and family life.

Your comment about fees being evil rings true to me. Does ‘just moving my money into low fee’ index funds make sense even for someone in my situation? My money manger firm talks in terms of managing volatility and harvesting capital gains, but do they really add that much value?

Previously I was happy with keeping my various index funds at Schwab happily working away. When I was faced with this windfall I didn’t trust myself to just select a broad set of funds and let the money ride.

I know you are not giving official advice – and I’ll certainly do more reading and talk with someone I’m paying before making a big move, but I’d love to read your totally non guaranteed thoughts.

Do keep this in mind though. If I’m sitting on 113,000 from my original hundred I’m probably sleeping very well right now. Even if my my 113,000 at this point drops to 107,000 I’m still probably sleeping well (I made 7% right?). But irrespective, we’ll revisit this matter and continue our hypothetical on January 3, next year. Cheers, Happy New Year and thanks for taking our difference of investment opinion well and in the way that the blogosphere should work as a forum of ideas.

Before we started audionet, which turned into broadcast.com, i was retired and living very comfortably. Thank you very much.

i also started http://www.sharesleuth.com .

I still trade stocks, but far from actively. the stocks i own are typically stocks that are strategic to my businesses.

While I’m playing with a different starting number, I’m actually in this exact scenario and getting bogged down researching the endless list of options. Etrade or someplace I can walk in and meet with someone? What kind of funds? How much of each fund? AHHHHHHHHHHH! Need a swift kick of practical advice to get the money invested ASAP instead of continuing to sit on the sidelines.