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When I started investing, I made the mistake of trying to pick individual stocks and actively managed funds. I now believe that low-cost, passive total market index funds are the best strategy for me long-term.

My new monthly contributions have been going into indexes for awhile, but I still have several individual stocks and active funds in my portfolio. What's the best way to transition those to index funds?

Sell all the stocks & active funds right now, regardless of their current price, how much I've lost/gained since I bought them, and overall market conditions? Or sell the high ones now, but wait until the low ones have regained value before selling them? Or something else?

  • How much money do you have in these stocks? Unless it's a very large amount, it would be best to just sell everything, take the capital loss to offset income, and buy the index. – Nosjack Mar 26 at 14:18
  • They account for 7% of my portfolio, about a month's worth of income. – Ian Dunn Mar 26 at 15:07
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    There is nothing wrong with continuing to hold on to the individual stocks. Unlike the actively managed funds, they don't have expenses. I don't see the advantage of selling them, unless you just feel it's more trouble than it's worth to administer the account for yourself. – Ben Crowell Mar 26 at 21:16
  • I think the main problem is that they'll get lower returns than index funds over the long term, potentially even going to 0. Or, at least, whether or not they'll get better returns is a crap shoot. I'm not a professional investor, and 99% of professional investors can't beat the index consistently for 30 years, so why would I try? – Ian Dunn Mar 26 at 21:52
  • @IanDunn: I think the main problem is that they'll get lower returns than index funds over the long term, No, pretty much by definition they'll get the same returns as index funds. An index fund is defined as an average of a whole bunch of stocks, so on the average, any given stock will do about as well as an index fund. Or, at least, whether or not they'll get better returns is a crap shoot. Yes, the variability of a small collection of stocks will be somewhat higher than the variability of an index fund. But since the amount have in them is trivial, why worry about that variability? – Ben Crowell Mar 27 at 20:44
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The only certain things about investing are taxes and fees.

So, calculate how much you lose to taxes when making the transition. Calculate how much you would save on fees every year after making the transition.

You didn't specify the details of the taxation scheme. I'm not familiar with US tax system, but at least in Finland we pay 30% capital gains tax on all profits when selling the funds.

So, in Finland, it might make sense to sell those funds that are cheaper than when you bought them, AND at the same time sell an equal amount of profits to make your total profits zero.

If the total profits is negative, you can use the losses for N years from now in taxation (I don't remember the exact value of N).

If the total profits are positive, you have to pay the tax right now, or to be precise, on the next taxation date.

Now that the markets are not very highly valued, might be the best time to do the transition. If you wait, you might have to pay even more taxes when doing the transition.

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  • Thanks! 88% is in a Roth IRA, with the rest in an individual taxable account. – Ian Dunn Mar 26 at 16:30
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To me, there are two great reasons to invest passively. The first is that it is impossible to time to market. Bargains may come along and you may choose to do some individual stock investment then, but it will be for meaningless amounts of your portfolio (< 5%).

The second is that you are far better off concentrating on your chosen career then trying also to be a stock picker. Doing a better job, at your career, will probably yield much better results then trying to pick stocks. You will likely receive more income that can be funneled into your passive investments, so those extra income dollars compound. This is especially true for those who's active investing result in losses!

What I would do is a little bit at a time, perhaps like 5% of your portfolio per day. You could be very wrong on timing, like perhaps tomorrow is the worst day of the decade to make the trades. Sell your stock, then go with your chosen asset allocation to buy the funds. If it was a horrible time, so what, it was a small part of your portfolio.

On the other hand, doing the above is a form of active investing. You could just "rip the band aide off", sell all stocks and buy the funds. Be done with it.

No one can tell you the best way to do this, again we cannot time the market.

Keep in mind if this is in a taxable account, it could greatly reduce or increase your income due to gains or losses.

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  • I like picking stocks the same way I like going to the roulette wheel. It's fun and exciting and I don't expect to win, but it's neat when I do. My retirement is in the hands of people who know what they're doing!! – corsiKa Mar 27 at 4:40
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Assuming you are sure you want to make the move (and I agree, I did the same):
The best time is when they are (both) rather low. That way, you 'harvest' losses for taxes. You get less when selling, but you also pay less when buying, which about evens out. This is true for any taxable investments, so do it on a (near) bottom-day.

It does of course not apply for tax-deferred and tax-free investments, like a IRA or an IRA Roth - any time is equally good or bad for those; you are basically trying to time the market, which is impossible (unless you think you are better than us all). So just do it.

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