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Retirement Planning: Opportunities and Challenges Today

Christine Benz

Benz: Hi, and welcome to our live webcast, "Portfolio Planning in Retirement Opportunities and Challenges Today."

I'm Christine Benz, director of personal finance for Morningstar.

I'm pleased to say that we are joined here today by three experts who are going to help us tackle some of the challenges facing retirees, and also pose some practical solutions.

Here joining us today is Mark Balasa. Mark is principal and co-founder of the firm Balasa Dinverno & Foltz. Mark is a long time friend of Morningstar and has been named seven times as one of the Best Financial Advisors in the U.S. by Robb Report Worth magazine. Mark, thanks for being here.

Mark Balasa: Thank you.

Benz: We also have Christine Fahlund here from T. Rowe Price. Chris is a senior financial planner and vice president for T. Rowe Price Group. Chris specializes in the areas of retirement accumulation strategies, retirement distribution planning and estate planning. Chris, thanks for being here.

Finally, we have Jeff Ptak here from Morningstar Investment Services. Jeff is president and chief investment officer of that group. Morningstar Investment Services creates and manages Morningstar managed portfolios, a suite of products that includes a retirement income series of portfolios. Jeff, thanks for being here.

Jeff Ptak: My pleasure.

Benz: So we have a lot of ground to tackle today. We are going to talk about navigating retirement given the current fixed-income environment and what to do with your bond portfolio.

We'll also talk about setting the right asset allocation in retirement. And I am hoping that we'll also have time to discuss some peripheral retirement income strategies, such as maximizing Social Security, as well as the role of annuities in retiree portfolios.

Toward the end of this session, we will take some questions both from our online audience and from our live audience here at Morningstar headquarters. So we will dive into some of those questions later in the session.

To kick things off, we're going to take a look at a clip with one of our users, a premium user, Bill Buerstatte. He is a new retiree. Let's take a look at the clip.

Video Clip: Hi. I am Bill Buerstatte. I've been a Morningstar client for about three years now. I just recently entered retirement, six months ago, in July of 2010. As a fairly recent retiree, one of my interests, of course, is concerned with fixed income. And it's no secret, we've had pending rising rates going on, prospect of inflation, and some of the uncertainty in muni bonds, and the like. So, I'd like to get the panel's advice on what should be my best strategy for fixed-income investing. So, any advice you might have on protecting against interest rate risks or specific allocation directions would be very helpful.

Benz: Terrific question, obviously. I think this is a question that's top of mind with so many retirees and pre-retirees today. Mark, let's talk about the practitioner's perspective on this question. I'm sure you're getting it a lot. You told me you're getting it a lot from your clients. What are you saying and what are you doing to protect client portfolios in the face of what could be rising interest rate risk?

Balasa: Sure. I mean, to your point, in all of the years I've been in business doing this, without a doubt, it is the most questions I've ever gotten about bonds. And it makes sense, right? If you think about interest rates, they've been falling since the early '80s. So, we've had a 30-year tailwind for bondholders, right? Because as interest rates fall, that's good for bonds and vice versa is true. So, the 0% or 25 basis point Fed fund rate, everyone expects rates to go up.

I was in Newport Beach the week before Christmas at PIMCO's offices, and so we heard a day and a half's worth of conversation about PIMCO's views about rising rates. In their view, and of course, it's only one view, but it's an educated one, they felt that it wouldn't happen until later 2011, maybe even as far as early 2012.

So, part of their advice was to be sensitive and aware of the fact that rates are going to go up, but don't react too quickly and too dramatically. ... One of the natural things to do to insulate and inoculate your portfolio is to shorten durations and raise the credit quality. Their point is, if you do that too quickly and too drastically, remember the yields on the short end of the curve are very low. So you think about your money market right now. Do you want to have your money making no return. So you have to weigh the strategies that you are going to employ in your fixed-income portfolio.

But I'll leave some more for the rest of the panel, but I'll just make one point, the obvious one is that as we go forward in 2011 to think about what's the average duration or the average maturity of your bond portfolio. Again, the farther out you are, the more volatile the reaction is to a rising interest rate environment.

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Benz: Chris, what's T. Rowe saying to its clients right now about bonds and their prospects?

Christine Fahlund: It's a difficult time, as Mark alluded. So, we certainly suggest that if you are worried about your bonds, doing as Mark suggested, where you diversify a portion of it or liquidate, go to short-term bonds, for example, just a portion at a time. So, you don't do anything that's precipitous, because we don't know when these interest rates will turn and by how much.

Benz: Jeff, in terms of thinking about the client portfolios that your team runs, are you doing anything to protect against rising rates? How are you positioning them?

Ptak: So we've been managing our portfolios' interest rate sensitivity for some time now. We were a bit early in thinking that rates would rise. They finally did more recently. So, our duration of our portfolios, the level of interest rate sensitivity, has been between 60% and 80% of the Barclays Aggregate Bond Index. That's one of the ways that we can try to mitigate some of the risk that can arise as it has recently when rates do rise up on bond investors.

But I would echo what Mark and Christine have said, that you have to do it judiciously. We haven't gone and switched all the way into cash. Instead, what we are seeking out is other areas where we feel like the risk-reward profile, the risk reward trade-off, is more attractive.

So we might look at things like high-yield bonds, maybe BB rated. It's an area where we can go and lower our portfolios' duration a bit without taking on scads of risk--trading interest rate risk for credit risk where we feel, given that companies are as flush with cash as they are right now, even amongst lower-rated issuers, the more cash generative of them, we feel like that's a trade worth making. So that's one of the ways that we've tried to combat interest rate risk in our portfolios.

Benz: So the user, Bill, touched on munis, and of course we saw that big sell-off in the municipal bond market in the fourth quarter. I'm wondering if any of you could address what you perceive to be the risks for munis or do you think it was a little bit overblown in the fourth quarter, muni market perhaps overreacting?

Balasa: If you think about what happened when the Bush tax cuts were extended, in many ways the muni marketplace was expecting--or they were unsure how, we'll leave it at that--what was going to happen. When the tax rates got extended and they stayed lower, that makes muni bonds less valuable. So that happened in November.

And then in December, a lot of people felt that the Build America Bond program would be extended and it wasn't. So that's another influence, negative influence on the short-term impact on munis.

So, for our purposes, 2011 is still attractive for municipals. What we've seen in the last two or three months here, and even a little bit so far this year, is more of an interim influence than necessarily a long-term systemic problem with munis.

The other thing on the muni side for those of you that have taxable assets, not just deferred assets, is how important it is not to have just munis in your bond portfolio. A lot of folks (us included) feel you should have something outside of that. Some of the more flexible mandates, some international, et cetera, which we can talk about if we get that far, but long term, I wouldn't give up on munis even though last couple of months have been tough.

Benz: But you're still mining the same interest rates--risks that would apply with any bond portfolio, right? I mean that still going to be a factor?

Balasa: Absolutely, bond is a bond.

Benz: Right.

Fahlund: Haven't you still got the credit quality issue?

Benz: Yes.

Fahlund: So you still do need to do your work.

Benz: Or diversify, make sure that you're adequately diversified.

Fahlund: That's right.

Benz: A question we've been getting a lot from users is, the role of dividend-paying stocks and should they, could they, think about using dividend-payers to supplant a portion of the fixed-income portion of their portfolio. What's your take on that question? Jeff, maybe you can take that one?

Ptak: The retirement income portfolios that we manage, we do tend to work in dividend-paying stocks. However, it is very much a function of time horizon, risk tolerance. I don't think that it's a perfect substitute, certainly, for fixed income. We all know what the risk-award profile of a fixed-income security is, and then contrast that, say, circa 2008 early 2009, with a high-yielding stock. They are very, very different.

That being said, we feel like there is an opportunity to work them in for those who can withstand the volatility that comes with it. Dividend-paying, high-quality stocks, those are the types of names, blue chip, very cash-generative names. Those are the types of securities that some of our equity dividend focused managers have worked in.

We feel like it's a nice complement, something again that helps to mitigate some of the interest rate risk that we would otherwise court in those portfolios as well as some of the credit risk we would otherwise court.

Benz: Jeff, any other income-producing securities in your portfolio, so not dividend-paying stocks or bonds? Are there any other types of securities that you used to deliver income?

Ptak: We do. So we have a whole host of securities. So we'll use things like covered call. We'll look at convertible bonds. There is various types of, I hate to use the term absolute return, but it might be credit-arbitrage strategies of various sorts. So these are all ways we can generate some income for our account holders, again without taking on scads of interest rate and credit risk.

Benz: Chris or Mark, how about that question of other income-producing securities, MLPs, anything like that?

Fahlund: Not my area.

Balasa: No MLPs for us. There is other issues with that outside the income.

Just coming back to munis for a second, too, just to touch on that, because we're getting lot of questions about municipals from our clients. Couple of things: one is, I would encourage you to focus on essential service bonds, bonds that have a stable backing, if you will, in terms of revenue, so that the obligations are met by the different municipalities.

There have been somewhat popular stories lately about how municipalities are going to be going under, and of course, you know some of that will happen, but understand in general, don't let some of those stories frighten you. If you stick your knitting: high-quality, short-term, essential services, diversified, it's going to be okay.

The other thing I would tell you is on the municipal side is to have maybe as much as 25% of your portfolio in something outside of municipals to help diversify away some of those risks.

But to come to your question about other things, kind of like Jeff said. There are other things that can generate income. We're more concerned typically about the total return for a portfolio than how much comes in the form of income. So, remember, there's interests, dividends and capital gains, and each of those has different tax status and different risk profiles. So, for us, it's easier to manage for that than trying to just manage for certain yield on the portfolio.

Benz: We're going to touch on that total return versus income...

Balasa: Sorry.

Benz: No, no, that's good. But first we'll watch another clip from one of our users.

Video Clip: I am Bob Bailey. I'm 65 years old; I'll soon be 66 years old. I've been a Morningstar user for the last few years. I find Morningstar very helpful to me. I recently retired, and I am now dealing and have been in the last few years with issues about how to allocate my money to make it last for the balance of my and my wife's life.

At 65 years old, I've got to be thinking about how much of my life savings should be going into bonds? What allocation do you think would be reasonable? And of the amount that goes into bonds, what proportion do you think would be reasonable to put into municipal bonds versus corporate bonds versus Treasuries and other bond opportunities?

Benz: So a lot of important questions there. Let's start with the big one, though: finding that right asset allocation for retirement. This is probably the main question I get from do-it-yourself investors. A lot of advisors kind of shroud their asset allocation advice in secrecy.

Individual investors are really stumped about where to start. Chris, let's talk about that from your standpoint. Where should investors go if they're trying to figure out what is a good baseline asset allocation?

Fahlund: Well, we go with two guidelines, one more specific than the other. The more specific one is that our target-date funds, our retirement date funds, are targeted to have a 55% equity-45% bond allocation at age 65.

Benz: So, you're more equity heavy than a lot of other target date fund firms.

Fahlund: We definitely are. We ratchet down throughout your retirement until age 90 or 95, wherein you're all the way down to 20% in equities and 80% in bonds.

However, we feel that heavy in equities still pays off in the long run. If you look at very long returns--as opposed to the lost decade--that's a good strategy.

Generally speaking, we feel as if those who are hovering around the retirement age on either side of it should be anywhere from 40% equities to 60%. So, that general 20% range on the equities and obviously the converse on the bonds.

Benz: So, how about the volatility factor that comes along with that extra weighting in equities. How do you coach investors against just putting up with that?

Fahlund: Well, we have a number of strategies for that, but number one is just to be extremely well diversified. So, that's international as well as domestic, it's emerging markets, it's the whole enchilada. So, that's the first way.

The second way is when we were in the middle of 2008 and there was a lot of panic, what we were telling investors to do was to gradually liquidate very temporarily if they absolutely had to get out of the market and they couldn't take it anymore, then maybe start with 5% or 10% of their portfolio. Wait a few weeks, see how they were feeling. See if they can turn the tide on that emotion, because long-term buying and holding would be the best medicine.

Benz: Jeff, any tips for individuals trying to figure out asset allocation?

Ptak: Sure. So, I think that it certainly pays to think as expansively as possible when it comes to building retirement income. If you were to look across our suite of strategies that we offer, you would find that probably our most diversified portfolios are our retirement income portfolios.

So, I think that entering retirement, building a portfolio that you think can last you through retirement, is no time to be complacent. And so, that's why in our longest range portfolio, that's why you would find that only about 45% of it is in fixed-income securities; the balance of it is in some mix of equities, real assets like real estate, commodities, and then alternative strategies of various kinds.

So, I certainly think it, again pays to think very expansively about how you put your portfolio together. To echo what Chris just said, really focus on diversification, focus on that time horizon, which if it happens to be long, I think does argue for some allocation to equities, a meaningful stake.

Benz: So Mark, do you line up with Jeff and Chris on this in terms of positioning retiree portfolios with fairly hefty equity allocations?

Balasa: "Fairly hefty" is a relative term. I mean, I do agree in general. I think as a starting point 50-50 at age 65 is probably as good a place as any to start, and then you either ratchet up or ratchet down depending on individual factors, so I'll give you a couple of examples.

It's not uncommon for some of our clients to come in and have more than they need for the balance of their life. So we try to encourage them and say look, let's take what you need for your life, set it aside, maybe there is 30% stock and 70% bonds. We will have that as a separate conversation.

So the part that's going to go to the kids or the grandkids or to charity, maybe more traditional allocation: 60%-65% stock might be a better way to approach it. So there is a reason we could see where you would go north.

Conversely, let's say you come in and we start at 50-50 and you say, gosh, I don't have enough already. I am already short. That's the case for lots of folks, but now you have to weigh the concerns that you are touching on, which is that volatility and your ability to stay like Chris said.

I can't tell you how many people bailed in March of '09, because they just couldn't take it any more--the absolute worst thing that could happen, right? So you have to give yourself enough buffer there that you can stay in the game, so if that means having less in stock, maybe your ultimate return is less, but if you stay in the game, if you hold on to those stocks, you're still better off. So those are the sort of things that you have to weigh to pull you either up or under the 50-50 allocation.

Benz: And one question we had from one of our users was how a pension--those lucky enough to have a pension and getting ready to retire--how does that fit in within an asset allocation framework?

Balasa: For us, real quick, it goes for Social Security too. You think about that fixed-income stream, it's a really valuable asset. So all kinds of research shows that if you have, let's say, a million dollars, and you take 5% a year, so it's $50,000 a year, 5% right? The money is going to largely last for forever, right? So if you think about a $1,000 a month pension, whatever it is, divide it by 5%, that's the equivalent of how much you have in bonds in your portfolio. So do the math for yourself and you can see why if you have a permanent income stream, whether it's Social Security or pension, even better yet, you can have more in equities and still be "balanced."

Benz: So I'd like to drill into the second part of Bob's question about intra-asset allocation with that bond component of the portfolio. So how do you find that right mix of Treasuries, corporates, mortgage backs, et cetera. How does a retiree arrive at what that fixed-income portfolio should look like. Jeff?

Ptak: So to a certain extent, we try to stand on the shoulders of giants. We use outside managers who we think are very discerning. It might be foreign bond manager like Michael Hasenstab. It could be someone like Jeffrey Gundlach at DoubleLine. And they help us to a certain extent to determine what our fixed-income ratings are going to be, but we have a say in it, and so the way we've expressed our conviction lately is, for instance, to underweight Treasuries very meaningfully. We have been focused really more on things like credit, maybe it's non-agency mortgage-backed securities.

These are areas where we feel like we can get a little bit more income at a level that's commensurate with the risk that we're taking on. Right now, we just don't feel like we're getting paid adequately to invest in government securities.

And so, that's been one of the ways that we've tried to suss it out, but a big focus for us is just making sure that we have managers that we feel like do a very discerning, thorough job of credit work, and also in managing interest rate risk through a cycle.

Benz: Mark, how about you? Or Chris, did you have an answer?

Fahlund: Well, to your point, too, I think, we have to think about where those assets are going to be located. So, for example, your munis obviously are going to be in your taxable accounts. However, if you think about how much money you probably have invested in tax-deferred accounts as opposed to Roth accounts, for example, that might be tax-free. Bonds are a great place, the corporate bonds--that side of your portfolio--is a great place to locate in your tax-deferred accounts.

One of the things that does for you is to reduce the rate of growth of RMDs. Some of you in the room I am sure are being required to take those every year. You need a well diversified portfolio, but what's the point in growing those required minimum distributions for the government to take out in tax. So, location of the diversification of your bonds is also important.

Benz: It's a great point. Mark, in terms of positioning fixed-income portfolios, what's your advice on how retirees should tackle that?

Balasa: Sure. As I said earlier, on the munis side, probably 75% munis and 25% something outside of that, a very flexible type and broadly diversified bond funds to complement the munis.

In the tax-deferred accounts, it's already been stated, more diversification is probably better than less. You can approach that a couple of different ways. You can build that diversification on your own with targeted products, something that buys corporate, something that buys Treasury, something that buys high yield, something that buys emerging markets, et cetera. Emerging market debt rate right now is very popular an asset class.

Or you may say, "Gosh, I really don't get it. I don't understand. I don't want to spend my time on that." You can go out, and you can get people who do that for you, as Jeff mentioned. Those are both fine approaches; it just depends on how much time and energy you want to spend on it, and how much comfort you have in that area.

The idea, though, is more diversification right now is better than less, whether that's fixed income or equities, but especially on the fixed-income side, given all the concerns with rising rates.

Benz: So, Mark, you hit on what we've talked about, world bond and foreign bond funds in a couple of different ways. What do say, though, about the currency-related risk in some of those funds? Is that just kind of a wildcard that retirees who want that exposure have to put up with? Or how do you manage that?

Balasa: Sure. Currency risk is different on the equity side versus the bond side. On the bond side most, certainly not all, but most managers don't want that currency risk. Because you think of a bond returns, there is this much variance, stock returns are of this much variance, right? So if you have this much variance in currency, it's a big piece of that. You can overwhelm your [bond] return. So the point is, a lot of bond managers will hedge away the currency risk. They don't want it. There is too many variables. Whereas most of the stock side do want it. They want, especially lately, the tailwind. So, that's one consideration.

The other is currency does different things to difference parts of the world. The euro right now and think about their status versus emerging market currencies. So, depending on what part of the world you are concerned about, currency is going to be tailwind or a headwind. So, you have to think about that when you are building the fixed-income portfolio.

Benz: So, do you go with the hedged products for client portfolios or un-hedged?

Balasa: We do for normal global bonds. We don't do it for emerging markets, for example, though we use the local currencies there.

Benz: Chris, I know that T. Rowe has a couple of unhedged products, your Emerging Markets Bond, and your World Bond. Do those show up in the target-date funds?

Fahlund: They do indeed. Yes.

Benz: So I assume, though, they are not huge portions of the retiree portfolios.

Fahlund: No, like 5%.

Benz: Okay. Jeff, how about you? What's your take on that currency hedging question?

Ptak: So, we try to stay within our circle of confidence. This is how we draw it and sort of managing our currency exposures is not sort of a core competence for us.

So we differ to our managers to a certain extent, who have expertise in that. I think that what we want to see from them is the ability to manage, again, through a cycle. Also, I think it's comforting to us in doing our diligence to see a manager who, in certain cases, allows unhedged currency exposure, in other cases, hedges it away, and we can have that within a single strategy. It demonstrates to us if they are discerning about those sorts of things. In that way, we can really count on their acumen and things like an interest rate call or a credit risk call in a particular locale really let that express itself in the portfolio rather than let it be overwhelmed by unhedged, sort of unadulterated currency exposure throughout the portfolio.

Benz: So one another question I want to touch on here is inflation-proofing retiree portfolios. Is it TIPS? Is it commodities? Is it stocks? How do you think about inflation protecting, because we all know that such a big portion of what retirees are trying to achieve with their portfolios, Mark?

Balasa: Right now it's not an issue, but it soon will be, right? That's what everyone is expecting. So, the things you listed are the obvious ones. I mean TIPS are a great way to hedge against inflation. Right now TIPS are expensive, so I wouldn't rush out and buy them today.

Benz: So how do you measure whether TIPS are expensive or cheap?

Balasa: You can look at their real yields versus the expected inflation rates is one way of doing it. There are others, of course. But if you look at that right now, I mean TIPS weren't supposed to do well last year, for example, but they did. So, they got expensive. But, if you're buying them long term, I wouldn't let that be a showstopper, but I wouldn't overweight them. But that's an obvious way to do it. Now, there's domestic TIPS, in the U.S.; there's international TIPS as well. So, that's another consideration.

Some of the other things that you mentioned: commodities, gold are potential ways to hedge inflation, but they're very volatile, right? If you think about it, we haven't had much inflation in the last year, but what's happened with gold commodities? They've taken off. So, you can see the correlations aren't exactly one-for-one year here. You're getting more than just inflation hedge when you're buying some of these other instruments.

Stocks, ultimately, if there's not large, unexpected inflation, can do a great job, because companies can raise their prices and the stock price goes up. Fixed bonds, of course, are your worst enemy in a high inflation rate environment.

Benz: Want to take another user video here. This is user, Doug Hurdelbrink, and he's going to talk about something you alluded to, Mark, whether to focus on income or total return.

Video Clip: Hello, my name is Doug Hurdelbrink. I've been a user for about six or seven years. I'm turning 60 this year, so I'm expecting to retire in the next five to six years. One of the subjects that I think about as I watch what's happening to my investments year-over-year is that I've spent, in my case, a couple of decades trying to accumulate savings and have a nest egg to draw on when I retire.

I think I'm already experiencing the issue of dealing with changing from an asset accumulation mindset to an asset withdrawal mindset. I think there is a physiological adjustment that has to happen. They're use to watching everything going up or you're wanting everything to be going up, and then suddenly you're going to have to start materially drawing down that money and watching it shrink. So, something I'm concerned about, and I'm wondering how other people deal with that physiological or mindset change.

Benz: So, great question here. Obviously, Doug has the right idea, I think, in the perspective of this panel, that he is focusing on total return, not income. But there are some physiological hurdles that you need to jump over to get comfortable within invading your principal.

Chris, I know that you folks at T. Rowe have talked a lot about this. In fact, you don't talk about retirement income for that reason. But how do you coach people on getting over this physiological hurdle of tapping their principal to fund their living expenses?

Fahlund: Well, I'm glad that he asked these questions, because we've been looking at this particular period of your life as one where we're thinking more and more that it ought to be an extended period. Not necessarily two or three years before you stop working entirely, but instead, think about as much as a 10-year period perhaps, where you're practicing retirement. You're still working, but you're starting to play.

So, where is the money coming from for him? It's coming from his salary, while he lets his portfolio continue to grow. He doesn't tap into that. At the same time, he stops perhaps contributing anymore, at least not more than the match, and starts to really enjoy those vibrant years from 60 to 70. Over that period of time, trying out new relationships with your spouse, with your children, where you are living, trying to go to one car instead of two, all of those issues are important as well as total return versus principal and income

Benz: I thought that was a very practical strategy that you came up with, your work longer study. So, on the one hand you're saying, working longer really is one of the best things you can do in terms of your portfolio's longevity, but maybe think about withholding those 401(k) IRA contributions using that money to have a little fun while you continue to work.

Fahlund: Yes, and it is going a take a while. Those emotional adjustments don't happen all at once. My husband and I decided we'd try one car when we move to Baltimore. I could walk to work, and there was no need for two. That lasted about two weeks. I like a car of my own on Saturday morning to go run errands.

Benz: So Mark, I'm sure you deal with this with clients all the time, where you've coached them on using total return not income approach. But how do you get people over that psychological barrier. I think a lot of us came of age, where parents and grandparents were able to earn a livable income stream with the income that their portfolios kicked off. Now it's really tricky.

Balasa: Now, it is tricky. And just to mention real quickly on the point that Chris made. You'd be surprised how many times people come into our office, and they'll say, "you know what, I am really, really tight in terms of my after-tax money, but I've got to make that IRA contributions. I've got to make that 401(k) contribution." And they are two or three years from retirement.

And just like you said, "Well, no, no, it's okay. It's okay. Use that money to live on." It's good to have some outside after-tax money built up to go with that IRA, because if you think about managing your tax bill after you retire, if you can pick where your money comes from, a taxable account or a tax deferred account, you can have some control, it's even better if you have a Roth account, you have some control with how to manage your tax liability going forward. If everything is in the IRA, it's all current income, right? There are no levers to pull and push.

Now, back to the question. I forgot it.

Benz: Well, coaching folks on getting over their psychological hurdle of invading their principal?

Balasa: It's tough. If I think about the people that were in or bumped up against the Depression--that age group. Their views about dipping into principal, it's like granite. It doesn't happen. You're smiling. That's right. It doesn't happen. They say, "You know what? No. I'm not touching principal. I don't care what I have to do. I'll eat oatmeal and water. I'm not touching principal. Other generations have a more liberal view--not always to their benefit--about how to approach that. But the idea is that you should be looking for total return, not just the income piece, because what's the problem... why is it a bad thing to harvest capital gains, as a good example?

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