Q1: I dont fully understand the meaning of completion portfolios , also
when the book talks about the single asset completion portfolios, it talks about investing different industries alongside the low basis stock. Does that mean multi-asset class ?
Q2: a constuctive sale is allowed for average investors, but not for investors with low basis stocks? how does IRS differentiate these two investors?
my head doesnt go straight today
Completion portfolio in its simplest sense you have a whole bunch of other assets present with you (a well positioned investor). you reduce your low basis stock position. Since it is low basis - you would incur a capital gain. you use sales from other parts of your portfolio (losses on those parts) to be able to offset the loss. [concept of HIFO tax stuff] used in a portfolio context. single asset class completion - not sure where you read that multiple industries are allowed. It is using a desired index or basket of securities to complete the portfolio along with the low basis stock. IRS would differentiate between the two by looking at the holdings of the person. Also given the name of the person itself (given that at some point in time he must’ve been someone famous and the company he started (given that he must’ve been a famous entrepreneur) - it should be pretty easy.
What I understood is as follows: Single Asset class completion: You have a concentrated holding along with other liquid assets. To achieve diverisification or try to mimic a broad index, you use either liquidating liquid assets or cash to diverisify. You purchase a basket of securities to diversify…Text says other the funds for diversification can be cash or stock which doesnt have any undue tax penalty. It doesnt talk about selling these stock in losses & harvesting these losses aginst the low basis stock gains…Any takes on it… Multi asset class completion: You dont restrict ur self to same asset class to which low basis stock belongs. Problems: (1) If you do not have other liquid assets or cash , you may have to liquidate some portion of your original stock which will trigger huge tax implications.(2) Its time consuming
rahuls please read the following passage on the book (end of pg 340 ) The portfolio may actually be constructed and managed in at least two dif- ferent ways. The simplest approach involves managing the completion portfolio through the systematic reinvestment of the dividends paid out by all stocks, thus including those paid out by the low-basis stock, in order to purchase further diversification. —> this part below especially … A more sophisticated approach involves the use of the passive structured strategy. The manager would go beyond using dividends to generate diversification over time, and use all available opportunities to harvest the inevitable losses experienced by one or several of the stocks in the completion portfolio. These losses would be used to chip away at the concentrated holding, sheltering the capital gain realized each time any of that low-basis stock is sold.
cpk123 But then if this is the case then investor is accumulating losses from secuirites other than the concentrated one by selling it below market price. She is also selling concentrated stock slowly & using those accumulated losses to offset CG tax. Two Views: 1) Incurred losses on Sold Securities should be less than the loss had she sold low basis stock without offsetting against accumulated losses.?? I think this should be the case. 2) She booking losses on other securities & using the proceeds to buy other low correlated stocks for diversification. She is accumulating losses using it to offset against low-basis stock. Proceeds of low-basis stock are further used to buy new low correlated securities. Now am i missing anything there??
you are entirely missing the point I think. you are doing two transactions. 1. Sell the portions of the remaining portfolio - which are expected to make losses. 2. Sell your low basis stock … which will make gains. ending position (over time) --> you arrive at a more diversified portfolio. selling the low basis stock is going to make you a gain. you obtained it at throw away prices a long time ago in the past. now its market value is considerably higher. that gain (capital gains) you make here on the sale of the low basis stock will be offset against losses on the sale of the remaining portfolio. This is purely for the tax purposes. Otherwise you are incurring a cost on the sale on your low basis stock (the tax cost). This is a longer term strategy. So I do not think factors such as accumulated losses etc. happens. you might end up selling say 5% in year 1 (depending on what stocks on your portfolio you are able to offset against). Hence 1. longer time horizon. 2. need for a large and liquid (other) portfolio. End result: arrive at a more diversified, less concentrated portfolio.
I also think (I may not be entirely correct) that getting rid of your low basis stock over time - will reduce the concentration on your portfolio - and therefore you are getting more diversified. The sale of loss making portions is to avoid the tax. In the first strategy - dividends from the low basis stock and the remaining portfolio is being used to buy other assets which have low correlation with your low basis stock - and that way the diversification is being obtained.