Key Moves After a Quarter to Forget

October 20, 2015

Author: Dave Gardner

The third quarter was the poorest one in years for many stock asset classes. We’ll take a look at market performance and a strategy to consider if some of your investments have declined, as they likely have, in your taxable account.

It’s been a while since we’ve considered our Laid Back Portfolio. Laid Back is about as basic as you can imagine, but its simplicity has staying power. It’s invested 60 percent in the S&P 500 and 40 percent in the US Aggregate Bond Index, a mixture of government and corporate bonds with an average maturity of about 8 years. We don’t use international equities, commodities, small cap stocks, international bonds, REITs or any other asset class.

Laid Back is superlative in its own way. In some studies it has outperformed the many professionally managed pension portfolios. When you consider that those who manage pensions command high six-figure checks in many instances, this is quite an accomplishment.

First the bad news with the S&P 500: its Total Return index, which includes dividends, was down 6.4 percent for the quarter and 5.3 percent for the year. We experienced the first market correction, defined as a 10 percent decline from the top, in years. Bonds were stronger as interest rates continued to decline. The Aggregate Bond index was up 1.2 percent for the quarter, and is now up 1.1 percent for the year.

With Laid Back we rebalance at the beginning of the year to our 60-40 target, and then a 1 percent annual fee is deducted on a quarterly basis, which should be enough for a basic portfolio like this. At the end of the third quarter it was down 3.65 percent for the year. From when we started tracking it in 2010, Laid Back is still up over 40 percent.

Of course not every asset class fared equally last quarter. Energy stocks were down over 18 percent, basic materials (commodities) declined close to 17 percent, and small growth stocks were down over 11 percent. The international large cap EAFE Index slid over 10 percent, while emerging markets also fared poorly.

As you read this, many of these indices have recovered much of last quarter’s decline, but remain below this year’s highs. If they are in your taxable investment account, you are able to sell investments that are worth less than you paid for them. That enables you to take a capital loss, which can offset gains in the rest of your portfolio. If you have losses that exceed your gains, you can take $3,000 against your ordinary income every year. Tax losses not used for 2015 can be used in future years through the carry forward process.

Even though tax loss harvesting could save you thousands in taxes, I don’t want you to make investment allocation decisions simply for tax reasons. The challenge is that IRS will not permit a loss when you sell and then immediately repurchase an investment. This is called a wash sale. You need to wait at least 30 days after you sell an investment to repurchase it in order to recognize the loss. But you may avoid the wash sale rule by selling a mutual fund that follows one index, and immediately purchase one that follows a different (albeit similar) index.

Imagine selling Vanguard 500 Fund (VFINX) at a loss. You could then purchase Vanguard Large Cap Index Fund (VLCAX) with the proceeds. The second fund does not follow the S&P 500, but rather the more esoteric CRSP US Large Cap Index. Although you won’t find too much difference in the performance in the two funds, your accountant may give you a green light to sell one fund, recognize the loss, and then purchase its replacement.

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About Dave Gardner

David Gardner is a certified financial planner with a practice in Boulder County and can be reached at and at