When to fold 'em ... evaluating long term holds with losses

[mikes425]

I'm taking a hard look at relatively long-term-hold ETFs - that is, in most cases 2 years or longer -that have sustained and carry the biggest NAV losses in my PF. I recognize some tax consequences in 'taking' losses... and, the fact that dividend income is derived from many of these holdings and in some cases that return is improving and contributing (quite gradually) to offset of the losses. 
Each holding in theory does play a role in overall diversification i.e., various sectors or categories for a moderate-conservative AA. 
As is, my approximate total PF div. income will be around 86k this year in a 2.6m PF.

The cumulative NAV loss total (from inception) on these laggards is approximately 120k and YTD performance is about 3.1% --but this isn't entirely accurate as it doesn't figure in that dividend income....

All this said, i'm trying to take a logical approach in evaluating which to exit or otherwise substitute with better performing funds.  Here are the biggest losers:
PFFD, -14k
VNQI   11.5k
VNQ     -4.3k
EDD (EM) 7.4k
SCHP  -14k  (TIPS)
SCHO -11k
VCSH  -12k
SAMBX -6.6k  (Floating Rate)
GRX  -6k

I appreciate any thoughts/suggestions on specific red flags that might stand out here relative to either macro market outlook, or otherwise, and thanks as always for the helpful insights.

 

[Chahta]

Are those TR loses or loss of share price?

If you are using them for income and you are satisfied with the income amount why sell for a loss? Of course in a taxable account tax loss sellong can be helpful.

[mikes425]

Actually no, they're not the TR figures i.e. not factoring in divs/income generated.

[richardsok]

Mike:

I'll address your worst loser, PFFD.

1.   Why would someone consider leaving preferreds now that they are at former support levels and show better stream-of-income value than before?   I would immediately sell PFFD to gather some tax loss and replace it with PFF or SPFF.  The world is full of guys happy with 5.2% in treasurys and money markets.  You're continuing your long term income with 6.5 % (or better) with every reasonable oppty of gains when interest rates begin to ebb.

2. Preferred ETFs are some of my favorite vehicles for trading because they have such low volatility chart patterns.   I get it that you might not want to be an active trader, hopping in and out of positions.  But I REALLY would suggest you pay attention to medium-term (slower moving) technical indicators and vow never again to hold onto any asset that is eroding in value.
      It couldn't be simpler.   Go to Stockcharts.com. Punch in a TWO YEAR chart. Enter WEEKLY under "Period" and apply 3 x 14 week simple moving averages.  The crossovers are your signals, and they shouldn't come more than two or three times a YEAR.  Ignore everything else on the chart.  You won't have to trade often and you'll make (and save!) some serious coin down the road.
      People are sick of me quoting my book, saying we should have observations instead of opinions -- so I won't repeat it now.

[steelpony10]

mikes425 ,

         Well you listed under 4% in the loss column at this time in a good economy that is bad for investors because of multiple poor headlines which are there each day forever and Fed raises, for equities at least.

          As Chahta , mentions are these for income or TR, why did you invest in these? What has changed in your plan for these? Your reasoning seems murky. 

           Forget values you have no control or crystal ball on future values. Are you prepared to switch to something “better” and have those values goes south because of headlines? 

           My whole portfolio is down in value between 2-3% presently. I hold about 18 investments with 4 showing losses of over 15%. As an income investor that’s good, I can invest in more cheap income and I do.

           In my opinion you look to be over allocated and diversified. Start with a income goal and work backwards. For example growth of principle, 1 fund, income, 1 fund, balanced 1 fund, safety 1 fund, cash I fund, like that. Whatever area seems risky to you chop that up to 2 or three max that don’t duplicate positions. VTI or VOO with more sure income and a safe reserve and/or cash might do it.

[mikes425]

That’s great advice richardsok, thanks!  I’ll do some exploring and x-ray a few of the others using the Stockcharts analysis…
you describe.
Presumably similar tax loss substitutions could be in order for value-eroding holdings, so technically i wouldn’t be reducing dividend income by replacing any others, using this criteria you mention - with very similar, but-better performing funds..

[mikes425]

steelpony10 -thanks and very good points to consider.  I guess seeing the value losses on paper can lead to the impulse to ”do something” and explore at least - whether there are possibly better alternatives for the funds i’ve held long term and as richardsok mentions, it wouldnt hurt to do  tax loss sales and identify any true underperformers…but no, i don’t want to discount the fact that some of these ‘biggest losers’ are indeed generating significant div income, and i wouldn’t want to do anything to disrupt that flow. Theoretically, held long enough the Rule of bonds holds true and eventually despite their NAV- given rising returns i will break even by holding them long enough. Impatience is not a virtue of course👍🏼

[steelpony10]

mikes425 ,

     We hold CEF’s. With many we have received all our initial investment back and may have placed that money someplace else, snowballing returns long term. So your correct concentrate on meeting your goals long term. The present headlines will disappear someday and of course will be replaced by others.

[Chahta]

mikes425 : "I guess seeing the value losses on paper can lead to the impulse to ”do something” and explore at least - whether there are possibly better alternatives for the funds i’ve held long term..."

Never buy bond funds for quick CGs, unless you are an adept trader. You can but why not use equities instead. If you buy bond funds I say buy cheap. Reinvest divs so your cost basis is reduced then take income, where there is built in buffer to not lose principal. JMHO.

If you are getting SS with that $86k income you are doing well, at least I would be doing well. Enjoy your retirement and don't worry too much about share price.  The funds will (should) recover once rates head down. Reinvest that income if you can.

[fritzo489]

Interesting question & thanks for the replies making for a good read.

[liftlock]

mikes425,

Many investors have a tendency to hold onto losing positions longer than they should.  They avoid selling in hopes that a losing position will eventually recover.  It can be psychologically difficult to sell a losing position because it requires an investor to admit that they were wrong in buying the position or could have made better choices.  I am guilty of this myself.  Good investors recognize that losses are going to happen in the normal course and to not let them interfere with moving on to better opportunities that may exist.

The recently deceased William O'Neil, founder of Investors Business Daily, has some worthwhile wisdom on the subject.

www.azquotes.com/author/63079-William_O_Neil

 traderlion.com/quotes/william-oneil-quotes/

I have no opinion on the positions you hold. An acid test question is what are the best investment opportunities to be holding now. If you can find better investment opportunities then it probably makes sense to sell and replace the ones you have. 

[chang]

+1 on the value of tax loss selling. Booking a loss allows you to trim overbought winners that will generate CGs and improve / balance your portfolio — if and when you want to. Always nice to have a loss on the books.

No opinion on the specific securities, I am definitely not an “income” investor.

[racqueteer]

About the only thing you can realistically do is to make note of WHY you're making a buy, and only hold so long as that reasoning is justified.   Once the outcome becomes surprising to you, it should be obvious that you have no reason to continue to hold - Or, indeed, to have purchased in the FIRST place! 

[richardsok]

Mike --

Let me follow up --

If I were a longer term buy-and-hold investor, here's how I'd set up my two-year chart... with the actual price line completely bleached out, and showing only the moving averages above and the MACD indicator below. I strip away everything that isn't of actionable importance on a two-year chart. Speaking for myself alone, I might not even wait for MA crossovers to make my trades -- I'd opt for the SLOPES of the moving averages to get in or out of a position, and/or, the two-line cross-0vers of the MACD below.


Note the bulk of losses occurred back in 2021.  2022 was an in-and-out see saw a couple of times for minimal gains plus a few ex-divs.   2023 has been pretty bearish also.    Had you followed the PFFD chart faithfully, most of the time you would have been invested in something else, saving yourself the losses.

Look closely and you'll see the MACD is neutral and even very slightly bullish now.

My goal (which I've never completely mastered) is to invest entirely on objective information and not on judgments or opinions.

I talk about stockcharts a lot b/c it is free and immediately accessible -- but I greatly prefer thinkorswim platform.

[fishingrod]

mikes425,

The hard thing to process is if one is going to sell losers, what makes your next choices any different than your first.

Why did you buy in the first place? What has changed? Is there anything better now to invest in? What makes you think so?

If you have sold losers in the past have you continued watching them to see if they recovered after you got rid of them? Wish you held onto them?

There is a lot to say about an investment philosophy. Always searching for the best? If so, one might want to be willing to accept what really good funds have to offer over longer periods of time. If one sticks with really good funds for a long time, one can reap better results than jumping from one out performer to another. A good investor should be willing to accept a good return instead of always searching for a better return.

I think you need to set your benchmarks for your total portfolio and then quit nitpicking individual funds unless they significantly under perform their benchmark over periods of time.

Investing is all about compromise. Being willing to accept what is given, not always wanting more. If one jumps from one to another fund at the wrong time one can get very bad results.

[fishingrod]

mikes425,

Do you have benchmarks for your total portfolio and each fund?

[fishingrod]

mikes425,

I might add that although some of your holdings might have losses right now, That does not mean that they are necessarily losers at all.

We all have ebb and flow to our growth. Funds are no different. Compare against suitable benchmarks over long periods and you may find your answer.

[mikes425]

mikes425,Chahta,richardsok,steelpony10,fritzo489,liftlock,chang,racqueteer,fishingrod,

Appreciating the great perspectives.  

Upon closer examination and reflection, a number of these may not be accurately portrayed as far as their total return because the unrealized loss percentages aren't inclusive of dividends, and as for some bought over 3 years ago, if income is factored in they come closer to a break even range. In the case of PFFD for example I could see a switch into a different Preferred fund like NPFD, (a CEF trading at a 14% discount).  That trade alone could help offset an approximately $26k realized gain in my Taxable acct YTD... but as for other tax loss selling I've always tended to look at that in the second half of a given year.  

[steadyeddy]

mikes425, I would not sell something just because it has paper loss. As long as you are happy with the allocation (stock vs bond) I would leave things alone.

The strange thing is today's dogs are tomorrow's horses. Just consider in second half 2022 Nasdaq 100 took its beating (baddest of the bad). And look at first half of 2023. The best performer.

My 2 cents: If you like the holdings for what they provide you in your portfolio... Don't Do Something Just Stand There.

[Chahta]

We all would like to sell any losers (temporary) we own. But do we have the expertise to buy something we know 100% will recover any loss?

[mnfish]

You can sell for the loss if needed and buy back 30+ days later if you want. Because some are bond funds, I don't think the new price is going to be much different and the yield will be the same or a little higher.