In my post titled Six Investment Pitfalls I commented:
Yep, I've done all of these in my lifetime. Early on in my investing career, when I knew little about the subject and thought I could pick killer stocks better than anyone on the planet, I did all of these -- several times. Then, when I learned a bit more, I became somewhat smarter, but didn't quite get all the facts right again. Now I have some mutual funds that I should have never been in (and want to get out of) but yet have huge capital gains tax implications if I sell them. Making bad decisions early on can certainly have long-term consequences. Hopefully, someone can learn from my mistakes.
Let me add a bit more detail to this.
After I figured out that I wasn't a stock-picking pro (10 to 15 years ago), I decided that I'd invest in mutual funds instead. But I 1) didn't have a strategy and 2) didn't know how important it was to control investing costs. So I picked a NUMBER of funds here and there in various accounts -- taxable accounts, IRA for my wife, and an IRA for me (rolled over from a 401k). In fact, I never met a mutual fund I didn't like. I ended up with somewhere around 40 different funds in three accounts.
I eventually realized that this was foolhardy (investing without a strategy) and I studied the topic a bit more. That's when I decided index funds were for me and I developed a strategy around investing in them. That was several years ago and since that time index funds have become the mainstay of my portfolio.
But I still had the other 40 funds. When I moved over to index fund investing, I simply started new funds -- I didn't sell the old ones. So I ended up with money in a wide number of funds I didn't really want. So I could have simply sold them, right? Not unless I wanted a big capital gains tax hit. After all those years, the funds had made some decent gains, so if I sold them all at once, I'd have a hefty tax bill.
Of course I could have sold them when I sold loser funds/stocks (then the gains would be offset by other investment losses), but I didn't have any losers because I was never selling. So I ended up with a huge number of funds that were difficult to track and manage.
That's when a reader suggested that I give away my appreciated mutual funds. If I gave them directly to a charitable organization, I could avoid the capital gains tax altogether (for more info on this, see How Shrewd Investors Save on Taxes.) So this is what I did in 2007 and the first half of 2008. I gave mutual fund shares directly to my favorite charities. I then took the amount I would have given in cash during normal times and invested that in index funds. This got rid of several funds in a couple years, but I still had a long road to go (BTW, in case you're interested, I gave a boatload away in early 2008 -- enough to cover my giving for the whole year -- so I got a good amount of value from some of these funds before the market tanked.)
Then the market crashed big-time. In the span of a few weeks, my capital gains were eroded and I had losses. Now I didn't need to wait to sell all the funds I owned, so I sold them all and invested the proceeds into the following index funds:
- Vanguard Total Stock Market Index (VTSMX)
- Vanguard Total Bond Market Index (VBMFX)
- Vanguard Total International Stock Index (VGTSX)
Of course I would have preferred that the market stayed high and I would have gotten myself out of the funds as originally planned, but I'm trying to make lemonade out of lemons here. At least my investments will be much simpler to manage in the future and will reflect the strategy I want them too. Then again, they'll be easier to manage because they're a lot lower in value too. :-(
For additional perspective, check out this piece from the Wall Street Journal on getting a portfolio do-over.