Asset Readjustments
Hi everyone, I was hoping that I can get some advice for my brokerage account with Fidelity. I'm still in the process of minimizing my mutual fund portfolio from a managed agency to now self-management. I have currently 50K invested in LCEAX and I wanted to transfer the funds to either FXAIX or FZROX which are both in my account. What would be a wise choice? Any other recommendations? I also have other mutual funds that I want to consolidate, but LCEAX is a large percentage of my investments that I do not want to keep anymore. Appreciate the insight.
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Just want to confirm—LCEAX is held in a taxable brokerage account and not a retirement account like and IRA?
Assuming this is a taxable account, you need to be mindful of the tax consequences of selling shares. How much of your LCEAX position is basis versus gains?
Exchange-traded funds (ETF) are more tax efficient than mutual funds because of the way they are structured. An ETF will throw off fewer (or sometimes no) in-fund capital gains than an equivalent mutual fund and these in-fund capital gains are taxable when they occur inside a taxable account.
FXAIX and FZROX are both large-cap blend (LCB) mutual funds so you might consider holding an equivalent LCB ETF like VOO instead of the Fidelity mutual funds. I know the appeal of FZROX is that it has a $0 expense ratio, but inside a taxable account you want also to consider what in-fund capital gains and dividends a fund throws off because these events create taxable income for you. All of FXAIX, FZROX and VOO are LCB funds, all have very low expense ratios and all throw off similar dividends so the main difference among them is their in-fund capital gains.
Correct it is held in a taxable brokerage. LCEAX cost basis $49687; total gains ($785.12), FZROX ($21770)/($3164) and FXAIX ($6281)/($299.39). Originally I used the wrong symbol and went with FZROX but wanted FXAIX, so now I have both. Would you recommend moving my FZROX to VOO and Keeping FXAIX? I wanted a total stock market index fund. Thanks for your feedback.
Basis is what you paid to purchase an investment. That money has already been taxed and so it is not taxed again when you sell your shares. Only gains are taxed. If you sell all $51,257.12 of your LCEAX position, only $785.12 of that sale is taxable. If you're in the 22% tax bracket, you would owe $172.73 in tax on the sale.
FXAIX, FZROX and VOO are all going to behave almost exactly the same as each other. You can check for yourself how closely funds tend to behave by looking at their correlations . A correlation of 1.0 means two funds tend to behave perfectly like each other. A correlation of -1.0 means two funds tend to behave perfectly opposite each other. Numbers between -1 and +1 indicate how closely two funds behave. I say "tend to behave" because correlation measures past behavior over a specific time period so isn't a guarantee of future behavior. FXAIX, FZROX and VOO all have a correlation of 1.0 with one another from 2018 to present.
While you don't gain an advantage by holding multiple funds that are highly correlated with each other, it also doesn't hurt anything to keep holding what you already purchased. No need to pay tax moving out of those funds. Keep what you have. Going forward you can put new money into just one. You might look at the ETF VTI if you prefer a total US stock market index fund.
Thank you so much!
With gains of only $785, I’d sell it all and eat the taxes just to never have to think about it again.
Going forward, use only ETFs in taxable accounts, e.g. VOO rather than FXAIX.
I'd recommend giving this a thorough read:
www.bogleheads.org
https://www.bogleheads.org/wiki/Three-fund_portfolioThanks I’ll check it out!