Adventures in cost-basis

This is a post from the 2011 archives… I never actually finished it…

Once upon a time, my stocks were single stocks instead of index funds.  I am only now recovering from those dark dark times.  (Very long story involving family etc.)

Used to be I just held on to the stock because I was so terrified of having to deal with the outcome come tax time.  However, with the recession and time passing and stuff… well, some of the companies have gone out of business or been bought off or spun-off etc… and like it or not, I’m having to deal with the tax implications.  Even worse, some of these companies get more and more complicated the longer I put off selling.  I currently have 1 AOL stock.  I used to have a lot of AOL stock… but then Time Warner and a bunch of other stuff happened.

Here’s information from a 2008 USA Today article on how to calculate cost basis.

Update in 2022:  I currently have zero AOL stock.  Eventually everything got bought out/spun-off or sold.  I think in 2011 I may have actually just gotten rid of the single stock, but it may be that there was another spinoff and there just wasn’t enough left for a full share.

We spent a LOT of time with old Brown and Co (which itself got purchased by Etrade and didn’t keep its records) printouts trying to figure out what the cost of various points in time when my father bought the stock on my behalf.  (Which we could do only because I never throw things out.) Then trying to figure out when various things got bought/spun-off/sold and putting things through various formula.  We probably could have just made stuff up since there really seems to be no record of anything ever happening other than our best guess from these print-outs.  But unfortunately for us we’re too honest for that and did our best to figure out what the actual numbers were.

I don’t think our tax burden was that bad because, well, AOL and Time Warner weren’t actually doing all that well in 2011 compared to whenever it was those stocks were bought.  Previously we’d actually been able to take losses when a pharmaceutical stock went to zero.  Single stocks are not a great investment if you’re buy and hold, and boy can they be a huge hassle.

Of course, now when you buy individual stocks, the company is supposed to keep track of when you bought them so they can figure out your cost basis when you sell.  That is likely a good thing as most people with stocks are likely not as honest as DH and I are and are perfectly happy to cheat the US government of tax $$.

My current hope is that any other things we have left will stick around until I die and then my heirs won’t have to worry about cost-basis because everything will be stepped up.  But we’ll see.

I definitely only invest in broad-based indices and ETFs myself.

Have you ever had to deal with figuring out cost-basis?  Do you invest in individual stocks?

RBOC

• I hadn’t updated our net worth calculations in I don’t know how long.  (I literally do not know how long– if I did this would probably be a full post instead of a bullet).  But, since the time I updated it, it has increased 50%, meaning that it was X before but now it is 1.5 X.  The stock market alone seems to have been responsible for much of the increase.
• The reason I updated things was because I was curious to see what our stock portfolio looks like in terms of stocks/bonds/etc.  It’s mostly stocks.  There’s some bonds.  My accounts that are just Target Date funds and my university Fidelity account are both currently ~85% stocks and 15% bonds.  The rest… pretty heavily stock.  Mostly US stock (though both Target Date and university Fidelity accounts have emerging markets and foreign markets).  Some accounts are entirely S&P 500 because that’s the lowest fee in an otherwise high fee work account.  So I think I need to focus on adding more foreign markets and emerging markets, and maybe more munis.
• My father has been sending increasingly deranged emails.  (Most recently he sent DH a very fragmented email that seemed to be telling DH that DH had to contact my father NOW in order to protect my children from their narcissistic mother, aka me.  We think that’s what it was saying, anyway. Previous emails have attacked my mother and sister as gaslighting or narcissists etc.  Once he cc’d the author of a book on narcissism.) But he’s refused to get an evaluation and my mother won’t force him to.  She’s also somewhat in denial or attributes it all to a potential stroke he may have had a few years ago.  They are adults, and my mother still seems to be in full control of her faculties, so not really anything my sister or I can do at this point.
• One of my colleagues says his age 80+ mother is engaged to a much younger man (like 50+ years younger) that she met online who seems to be interested in her money.  I will probably end up not getting an inheritance but at least the money my parents have saved is likely to either go to my sister or to actually worthy charities and not someone who preys on older women.
• My MIL has started Christmas shopping already.  I just got a copy of Hillary Clinton and Louise Penny’s new book from her!  (Also, fairly clear she’s ignoring the “kids only” rule, but as long as we don’t tell SIL nobody need know. We’re either getting her a sewing machine or we’re taking her newish memories book to the local printer to get copies for the kids, depending on if she’s finished filling out the memories book yet or not.)
• We have zero idea what to get for DC1 for Christmas + Birthday.  At first we were like, how about a ukelele, but then realized zie probably doesn’t want one given zie hardly has enough time for piano, violin, and theramin as it is!  I have fidget stuff on hir wishlist for relatives and a few fiction books, but we’re mostly drawing blanks.  We may have to resort to SAT prep and AP prep guides.  There’s always money, but it would be like, “Here’s $100” then a few days later “Here’s another $100!” and zie doesn’t actually use it.
• Speaking of AP exams, DC1 is taking 4 AP classes this year.  Zie is probably not going to take the Physics 1 AP because zie will be taking Mechanics and E&M next year.  Zie will have to decide about Spanish soon.  Zie will definitely be taking the BC calc exam.  Then there’s psychology… It’s hard to know what is optimal for a junior whose scores might affect college admissions positively or negatively.  It seems ridiculous to decide these things Fall semester when the exams are pretty late Spring semester.
• I’m not really sure how DC1 ended up so not consumerist.  DH likes shopping more than actually owning/using.  DC2 is delighted with new things. I’m a bit of a pack rat. But DC1 is just a natural minimalist.  Zie also listens to hir hunger and will stop eating say, an ice cream, if full.  Zie has been this way since a baby.
• I bought more pens I didn’t need from jetpens and I’m really enjoying them.  These vintage color Sarasa pens from Jetpens (not an affiliate, I’m just addicted) are perfect for writing postcards to voters this fall.  VIP Voters in Ohio got in the Blue-black this past week.

Retirement ideas from reading Bogleheads Guide to Investing

I figured with our current money situation, I could do with a refresh on retirement planning ideas.  You know, things that I used to ignore because we weren’t there yet like what to do with long-term money outside of retirement accounts or how to get more diversification once you have room to play with things that aren’t just the basics.

So I checked out Bogleheads Guide to Investing (all amazon links are affiliate).  (I actually own Bogleheads Guide to Retirement, but it is more scattered and not as useful.)  I skipped several chapters because like… I know low fees are important, I understand the basics of diversified portfolios using a small number of low-cost indexes etc.  Those are important, and they’re really all most people need to know– once you have that down and have enough money to put it into action, you’re likely going to have a nice retirement.

But right now we’re at a point in which adding to a Target-date fund doesn’t make sense– we have enough money set up for safety.  (I’m not saying that we could stop contributing to retirement, but we are at the point where if we keep doing what we’re doing we will be fine.)  And we have possibly too high of a percentage in the US Vanguard Total Stock Index because in some of our retirement accounts that was the cheapest broad-based fund in a sea of expensive alternate options.  (It’s also a really great choice on its own!  But a little more diversification at this point would not go amiss.)

What happened to cause this decision to go back to basics?  We had some extra money in savings that we hadn’t spent down when DH got re-employed, so I figured we should put it in taxable stocks since there wasn’t really anywhere else to put it.  I was like, maybe I should get more Nasdaq because historically I’ve tried to balance riskier stock indexes/ETFs with safer ones like the Dow or just the S&P 500.  (Back in the day!)  But then I had a hard time finding a cheap index and didn’t feel like dealing with the ETF aspects of QQQ (which is really just simple math– this is me not at all being logical).  And then I was like, if I’m going to have to think about this at all I might as well do a little more thinking.  So I thought… hey, this is a taxable fund, why don’t I buy some tax-advantaged Muni Bonds.  Which is adding LESS risk to the portfolio instead of more!  But also, I didn’t have any tax-advantaged bonds in taxable accounts, and it seemed reasonable to get some at this point since we have a sensible retirement plan locked up in our retirement accounts.  So I bought a Vanguard municipal bond fund.

At that point, I thought… I should get some rhyme and reason to these additions.  I shouldn’t be in a situation in which I go in to buy Nasdaq and end up buying municipal bonds instead.  That makes no logical sense.

So while I am really not wanting to go through all of our different accounts to figure out what’s small cap vs. large cap and so on, I really ought to at least figure out what we have in domestic vs. international, what we have in emerging markets, how much we have in bond funds and what kind of bond funds etc.

And it’s time to start thinking about increased diversification through funds that don’t just track the US stock or bond market and about increased tax advantaging via asset allocation.  Bogleheads makes it clear that these things are *OPTIONAL*.  If you’re not yet maxing out your retirement accounts, just stick to a Target-date fund or a mix of a total stock index and a total bond index based on your predicted retirement date and preferred asset allocations.

So things to think about:

munis (We now have some!  Bogleheads doesn’t seem to limit the amount but they do say that only people who have maxed out tax advantaged retirement should even consider these.)
REITs (They suggest no more than 10% of a portfolio should be this– currently our house is more than 10% of our total savings, so maybe we’re not ready for these yet.)
TIPS (we will probably never do this, but they recommend up to 40% based on where you are in retirement)
International funds (I have dipped into this, but I can’t remember where or how much.  Bogle says no more than 20%, but the book authors say 20-40%.)
Tax loss harvesting– I’m never going to do this myself because I will stick with broad-based indexes, but it is magical when it happens.  Still, it might be worthwhile looking into tax-advantaged funds to put in my taxable accounts.

I’m still not sure if it is better to have low yield/safer bond funds in taxable or tax-protected accounts.  The argument Bogleheads makes is that taxes on stocks that have been held a long time are currently capped at 15%, but they’re not capped for bonds.  The counter-argument is that the earnings on stocks are going to be a lot larger than the earnings on bonds, so it will be 15% of a larger number vs. whatever your tax rate is on bonds of a smaller number.  (And one’s tax rate in retirement could be 15%!  It’s hard to predict the future!)  Buying munis and putting those in taxable means that you’re not paying federal taxes so that kind of allocation is pretty obvious.

Several sections of the book have slightly different charts with most tax efficient vs. least tax efficient investments.  High yield bond funds (like junk bonds) should definitely only go in tax-advantaged (I think it is unlikely we will ever buy junk bonds since I prefer bonds to decrease, not increase, risk).  Then they say REITs should go in tax-advantaged, so that’s something I would eventually want to think about in terms of what Fidelity has to offer since that’s my work account.  Then balanced funds.  Then active stock funds (presumably because managers can realize losses?).  Then all the various stocks you can think of become more tax efficient, and finally low yield cash or cash equivalents.

Did you know that IRAs don’t get a step-up in cost-basis at death like taxable stocks do?  I did not!

Anyhow, this is just initial thinking– I do not have any recommendations for anybody yet including myself.  I do think that I need to come up with a plan though, otherwise cash will just sit in my saving account accumulating no interest until next summer.  I don’t get paid until October so I have a while to set out a strategy and I should do that before school starts up again while I have the mental space for it.

Next steps:
1. Update my asset allocation numbers (I have a spreadsheet, but I only tend to update when I log into the respective website, so I don’t have a snapshot of everything at any one point in time), especially the stocks vs. bonds percentages and the domestic vs. international percentages.
2. Think about how often I want to put money into taxable. Do I want every other month no matter what is in there? Do I want a benchmark of 10K or 30K over what I need for summer savings? I will also need to make sure we have enough for our backdoor Roths come January since those are tax-advantaged.
3. Related: I should figure out how much to put in the dependent daycare account for DC2. What will zie be doing next summer? I have no idea! Daycamp options in town aren’t the best for middle schoolers.  [Update:  decided just to go with the after school care costs and if daycamp happens we just won’t get tax credit for it.]
4. Figure out an investment strategy going forward based on diversification and what to put in taxable Vanguard vs. tax-advantaged Fidelity. (DH’s retirement option sucks so it’s all in their lowest cost S&P 500 and then my 457 is in its own weird thing we don’t have any choice over.)

How do you figure out your asset allocation?

I guess I’m not going to front-load DC2’s 529?

I’d been waiting for our emergency fund to refill after all of the big expenses we had had.  (March has been so long that I don’t even remember what the last big thing was… I mean, I know we hired a handyman to fix some stuff because I haven’t finished that post yet, and I know we bought a car this summer, paid for lots of summer travel and camps that probably won’t happen now, maybe it was front-loading DC1’s 529… probably that.  Bad market timing there, eh?  Shoulda kept dollar cost averaging!)  Since our tax bill and estimated taxes ended up being a wash again this year, we’re back to having more money than we need for the long unpaid summer.

I still don’t know how much college is going to cost for DH’s relative’s kid next year.  They weren’t clear about if the number given was just for summer semester (which they mistakenly put down as the first semester of attendance) or the full year or what.  They also didn’t know if that number included loans etc. etc. etc.  So they were going to move his start to the Fall with everyone else and then get the page with the full work-up of the costs to us.  That hasn’t happened yet because the ‘Rona shut the university down and so on.

In any case, I’m hoping he’s still planning to go in the fall [update:  currently unlikely– he’s moved out and may not finish high school] and I’m thinking that selling stocks is not such a great idea right now, even if they’re only down to 2017 levels.  So instead I’ll keep stockpiling in cash.  There seems much less of a reason now to try to figure out where to put money.  I can’t predict the future, but I somehow doubt we’re in a temporary market low that will immediately zoom back up making me regret not having invested more than our usual right now.

Potentially excess money can sit a while in savings until we find out whether or not it will all be turned into tuition next year or regular spending if DH gets laid off.  We can re-evaluate on frontloading DC2’s 529 in the future, and in the mean-time we will continue to put $750/month in there.

All the good personal finance bloggers out there will say stay the course, and we are… I’m not dropping 403b/457/regular 529 investing.  But I’m also not looking at this as a huge opportunity to get in the market.  Who knows how long the recession will last.  Maybe things will bounce back after a vaccine is out.  But maybe all the things that the Trump administration did to hurt the economy will be exposed and it will be a while before we dig out of this one, just like with W’s recession.

Are you changing any money plans because of the pandemic/upcoming recession?

 

Ask the grumpies: How do you approach diversification?

Ali asks:

We are good savers but I fear not great investors (i.e., I have a good bit just sitting in the bank now because I don’t know what to do). How do you approach diversification?

Disclaimer:  We are not professional anything except academics.  Consult with a fee-only financial planner with fiduciary responsibility and/or do your own research prior to making major decisions about your money.

If you don’t know what to do and your money is just sitting in savings, the easiest thing to do is to pick out a retirement date (or house purchase date or whatever) and buy some of Vanguard’s target date fund for that year.  It will take care of diversification for you both right now and over time and you’re done.  (You can also mimic it on your own by purchasing the major indices in it.  Mimicking it will save you some money early on (far from the target date) when there’s not much movement because you’re not actually doing much rebalancing early on– you’re mostly in stocks.  It is still better just to buy the target date than to leave it in the bank trying to figure out how to mimic.)

Here’s #1’s original post about how she decided on percents in her retirement account.  They’re probably a bit conservative (too bond-heavy) for when she was younger, but are more appropriate now.  But #1 wasn’t trying to optimize– diversification isn’t about optimization, it’s about getting decent returns while still staying safe.  In fact,  diversification will always return lower than some subset of undiversified portfolios (it will do better than another subset though!).

Let’s step back a little bit an think about why we diversify.

Diversification is all about moderating risks.  We put some money in stocks, which are high risk/high return and some money in bonds which are lower risk/lower return because bonds keep their value in downturns while stocks are likely to lose value (but stocks shoot up high in up-turns while bonds… keep their value).  We keep some money in cash in the bank because it keeps its value and can be drawn on quickly in an emergency.  In general, we want money that we will draw on decades from now to be in stocks and money we will draw on within the next 5 years in something more accessible like cash or bonds.  The closer you get to your target date, be it retirement or buying a house or starting college payments, the more safe and accessible you want your money to be (with some disclaimers for college savings as where those are put can affect financial aid).

More advanced asset allocation will have you thinking about blue chips vs. tech stocks or emerging markets and international markets.  But the thing is, if you’re at the point where you’re not sure what to do with your money, you can just ignore these.  International stock indices tend to have higher fees.  If you get a broad-based index fund it will already include blue chips and tech stocks.  If you get a target-date fund, it will most likely include emerging markets and international markets in addition to bonds.

Diversification can also hide money from creditors like colleges or debt collectors.  Your primary residence has certain safety threshholds depending on where you live, but it can also be taken away if you use it to secure debt (as with a mortgage).  Your retirement savings is often protected.  Trusts and companies are other ways of protecting assets.

So… I recommend some thought exercises.

1.  Do you have an emergency fund that can cover reasonable emergencies (ex. water heater explosions, a delayed reimbursement, etc.) until your next paycheck?  That should be your first priority.

2.  Are you investing up to the match in your employment retirement account?  If you have low-fee options, put it in a target-date fund.  If you don’t, then compare the fees for the different index funds and pick a broad-based fund (if all things are equal, try to get one that matches the total market or the Russell 5000, but if the cheapest fund is the S&P 500 get that, and it’ll be ok).  For additional retirement savings it’s all about your employer fees and whether you qualify for an IRA and if you want to do a backdoor IRA.

3.  What are you doing about housing?  How much of your house is your net worth?  Do you want to buy a house in the future?  If you already own a house, how accessible is the money in case of an emergency (ex. having to move and the house not selling right away)?  For many people, the house is their main form of retirement saving besides Social Security, but in terms of diversification, this is not a great idea.  On average real estate goes up at the rate of the markets, but that’s the average– owning a single home doesn’t give you the average (it is the opposite of diversification).  If your housing market drops, you could lose a lot of savings (of course, it can go the other direction as well– we have friends in California who bought in 2008 and have gained a million dollars on paper since then).  So try not to invest so much in a house that having the market crash could devastate you.  Note though that whether or not you think it is ok to foreclose should also guide how much you’re willing to have in housing mortgage debt vs. equity (vs. renting).  In general, we do not recommend home-ownership unless you can put 20% down– yes lots of people manage ok putting less down, but lots of people were also put in bad situations having to short-sell or foreclose during the last housing crisis.  Basically, think about the worse case scenario and what would happen.

4.  When do you need the money that’s sitting in your bank account wanting to be invested?  If it’s less than 5 years, you can leave it there, or put it in cd ladders.  If it’s more than that, think about your time horizon–   are you investing for college?  Use a 529 (put it in one of their target-date funds).  Are you investing for retirement?  Use a target-date fund (or read some bogleheads forum about people in your situation).  Are you planning on buying a house in 8 years? Put it in a taxable mixture of stocks and bonds (what mix?  depends on how flexible your plans are given the vagaries of the market– to be honest, we just put it in the S&P 500 and cds as we got closer.)

Always do a mental run about what you expect on average to happen and what will happen in a reasonable worst case scenario (ex. 2008 stock market drop plus job loss, keeping in mind that the stock market increased before the drop, so it’s not like it’s 40% off what you put in, but 40% off what you put in plus your gains– the longer you’ve had it in the market, the more money you still have even after the drop).

Because a lot of diversification is about avoiding the low lows even if you miss out on the high highs.

And about acknowledging that long-run risk is different than short-run risk.  In the long-run, stocks will go up more than bonds or savings.  In the short-run, stocks are risky.

Satisficing will get you pretty close to optimizing risk vs. return.  A Vanguard target date fund is probably good enough, and it’s definitely better for long-term investing than just leaving money in a low interest savings account.

Here’s some next stage financial advice. Resources for asset allocation.

Grumpy Nation, how do you approach diversification?

Vanguard Admiral Shares are pretty cool

I wanted to add a little more international exposure to our portfolios (if I’m reading things correctly, the IRA Roth is a great place to put international exposure because there might be higher taxes with international stock gains?  I’m not 100% clear on this– I also read something that said the opposite), so when we recently did backdoor Roths, I put the money into an international index and an international ETF.   The index (VGTSX) has an expense ratio of .18% and the ETF (VXUS) has an expense ratio of .11%.

If I have 10K invested, then I can convert my VGTSX investor shares into  VTIAX admiral shares, which will decrease the expense ratio from .18% to .11% (same as the ETF).   For most of the index funds that have admiral shares at Vanguard, the switch from more expensive investor shares to cheaper admiral shares occurs when the account has more than $10,000 invested in that specific index.  Basically Vanguard gives you a discount on the index if you have a lot invested in them.

My 2017 IRA investment was only $5,500, but it is a new year so I contributed another $5,500, which, if the stock market doesn’t crash, adds up to more than 10K, meaning I should be able to switch to admiral shares to get the lower cost fund.  So that’s what I’ve done.

I’m wasn’t entirely sure where to invest DH’s IRA this year.  He had less invested overall and thus needs less international exposure and already had the lower cost ETF.  (I know that since we’re living in a community property state that I should be looking at our accounts as a complete whole, but since I don’t know what the future will hold, I want to make sure that he’s also protected.)  I will have to see what holdings he currently has one of these days.  I suppose we’re due for one of those financial fitness days sometime so I can go through and readjust our assets etc., but maybe I’ll wait another year.  We’ve got a lot of stuff going on and can afford to put it off, especially since I’m not really sure what asset mix we should be aiming for in the first place.  In the end  I gave him more VXUS.

Do you pay attention to expense ratios?  How do they change your investment patterns?  Any preferences between Index vs ETF?