Author Topic: Fund selection for taxable account  (Read 5758 times)

Outbound

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Fund selection for taxable account
« on: May 18, 2015, 08:44:00 AM »
I have a Schwab brokerage account and I've come up with a list of funds to invest in.  This money I am using for a 1-5 year horizon, so I don't want to go too aggressive with stocks.

Here's what I've come up with:

Schwab U.S. Large-Cap Growth ETF (SCHG)
Schwab International Equity ETF (SCHF)
Schwab U.S. Small-Cap ETF (SCHA)

What do you think of this selection?  All of these have very low expense ratios, and I also want to go with Schwab because it's a Schwab brokerage account.

dandarc

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Re: Fund selection for taxable account
« Reply #1 on: May 18, 2015, 08:51:25 AM »
If you have lots of other assets, such that if this is down in 1-5 years it won't affect your decisions fine.  If this being down a lot (think 30,40% or more to get a grasp on your risk tolerance) in that time frame is going to be a big problem for you, you might want to rethink stocks altogether, and definitely skew towards large caps if you do go stocks.

Often times you see people with these questions who are basically saving for a downpayment, and don't have any kind of back-up.  If they're willing to wait it out if necessary, stocks can be OK, but if the goal is to buy a house within 3 years come hell or high-water, savings accounts, short-term CDs, I-bonds are better places for the money. 

Stocks are volatile - you need to be in them for the long haul for the superior returns to make up for the short-term volatility.

Outbound

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Re: Fund selection for taxable account
« Reply #2 on: May 18, 2015, 09:03:26 AM »
What about money market funds?

Aphalite

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Re: Fund selection for taxable account
« Reply #3 on: May 18, 2015, 09:21:32 AM »
You get what you pay for with money market funds - loss of purchase power over time in exchange for 99% safety of principal investment

With stocks, if you want to go conservative, go with a large value fund - less chance of a huge downswing than growth, international and small cap funds (although still possible)

Another option is to buy bonds (actual bonds, not a bond fund which constantly replenishes its holdings), which if you hold to maturity (selling early in a rising interest rate environment will result in loss of principal), will not lose purchasing power (assuming inflation doesn't go crazy) - in this case, you have a smaller chance of loss of purchasing power, but your upside is still not as good as holding equities

Outbound

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Re: Fund selection for taxable account
« Reply #4 on: May 18, 2015, 09:42:38 AM »
So we're back to equities, or rather, large value equity funds.

I already have 6 months of cash in a savings account, and I don't want to add more to an account that earns 1%, give or take a little change.

Is "large value" the same as "large cap", or do they mean different things?

Aphalite

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Re: Fund selection for taxable account
« Reply #5 on: May 18, 2015, 09:50:22 AM »
Large Cap refers to market capitalization, which is another word for largest companies

Within the different market capitalization structures (Large, Mid, Small), firms are identified as either Value or Growth, it depends on the institution - generally it's based on a basic look at price versus earnings, so a company that makes 1 million would be categorized as value if it sells for under 15 million where as it would be growth if it sells for more than 25 million. A "Blend" fund just means you hold both types of companies

Generally, you have a little more margin for error in value funds as a miss in earnings estimate won't move the business multiple that much down, but be aware that in depressions, value companies will go down just as growth companies

I'll take a look at Schwab's for you - SCHV is the ETF and you should be able to get that from your brokerage account

Top 10 Holdings (25.84% of Total Assets)   
Company   Symbol   % Assets
Microsoft Corporation   MSFT   3.89
Exxon Mobil Corporation Common   XOM   3.57
Johnson & Johnson Common Stock   JNJ   2.69
General Electric Company Common   GE   2.66
Wells Fargo & Company Common St   WFC   2.52
JP Morgan Chase & Co. Common St   JPM   2.30
Procter & Gamble Company (The)   PG   2.09
Verizon Communications Inc. Com   VZ   2.05
Chevron Corporation Common Stoc   CVX   2.04
Pfizer, Inc. Common Stock   PFE   2.03


Outbound

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Re: Fund selection for taxable account
« Reply #6 on: May 18, 2015, 10:09:05 AM »
Thanks, I put 25% into SCHV and 25% into SCHG.  I'll sit on the other 50% and think about what to do with it... not in any particular hurry.

Aphalite

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Re: Fund selection for taxable account
« Reply #7 on: May 18, 2015, 10:14:57 AM »
Thanks, I put 25% into SCHV and 25% into SCHG.  I'll sit on the other 50% and think about what to do with it... not in any particular hurry.

For simplicity's sake, if you're going to do both value and growth, a total market fund wouldn't differ extremely from that (you will have some exposure to small cap/mid cap, which should help your money grow more than anything, although it does still expose you to more downside on a theoretical basis). Schwab's total market index is SWTSX 

Outbound

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Re: Fund selection for taxable account
« Reply #8 on: May 18, 2015, 10:36:26 AM »
For simplicity's sake, if you're going to do both value and growth, a total market fund wouldn't differ extremely from that (you will have some exposure to small cap/mid cap, which should help your money grow more than anything, although it does still expose you to more downside on a theoretical basis). Schwab's total market index is SWTSX

For some reason, my Schwab brokerage account won't let me buy any of those shares because it is a mutual fund.

dandarc

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Re: Fund selection for taxable account
« Reply #9 on: May 18, 2015, 11:08:15 AM »
SCHB is the equivalent ETF.

Outbound

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Re: Fund selection for taxable account
« Reply #10 on: May 18, 2015, 11:26:02 AM »
SCHB is the equivalent ETF.

Thanks so much!

Scandium

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Re: Fund selection for taxable account
« Reply #11 on: May 18, 2015, 11:33:03 AM »
If you NEED the money in 1-5 years I would not put any in stocks at all, large cap or not. Maybe 10-20%. CDs or gov bonds should be the only risk you want to take with this. But that's just me. If this is money that it would be "nice to have" in 5 years, but not critical, the story would be different.

forummm

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Re: Fund selection for taxable account
« Reply #12 on: May 18, 2015, 03:34:41 PM »
Another option is to buy bonds (actual bonds, not a bond fund which constantly replenishes its holdings), which if you hold to maturity (selling early in a rising interest rate environment will result in loss of principal)

Does this actually matter? If you buy and hold for 5 years isn't it the same to buy a fund with a 5 year average duration as to buy a 5 year bond? If rates go up, the bonds the fund sells fetch less on the market, than the same face value bonds with the higher rate, but the new bonds the fund buys pay a higher dividend.

forummm

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Re: Fund selection for taxable account
« Reply #13 on: May 18, 2015, 03:38:18 PM »
Agree with Scandium. Also, I wouldn't buy a growth fund in general. A total market fund makes sense. But only if you're OK with losing 30% of your money for a period of time in the next few years (happens frequently with stocks).

Aphalite

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Re: Fund selection for taxable account
« Reply #14 on: May 18, 2015, 05:30:38 PM »
Does this actually matter? If you buy and hold for 5 years isn't it the same to buy a fund with a 5 year average duration as to buy a 5 year bond? If rates go up, the bonds the fund sells fetch less on the market, than the same face value bonds with the higher rate, but the new bonds the fund buys pay a higher dividend.

Yes, if he is trying to avoid loss of principal, a bond fund will be more adversely affected by bad timing of interest rate increases as you can't control bond duration in a bond fund. If rates rose in the last year of his 5 year holding period, in a bond fund he will have to sell out at a lower price without having time to enjoy the replacement bonds throwing off higher yield whereas with a normal bond, he'll recover his principal without loss

forummm

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Re: Fund selection for taxable account
« Reply #15 on: May 18, 2015, 07:35:36 PM »
Does this actually matter? If you buy and hold for 5 years isn't it the same to buy a fund with a 5 year average duration as to buy a 5 year bond? If rates go up, the bonds the fund sells fetch less on the market, than the same face value bonds with the higher rate, but the new bonds the fund buys pay a higher dividend.

Yes, if he is trying to avoid loss of principal, a bond fund will be more adversely affected by bad timing of interest rate increases as you can't control bond duration in a bond fund. If rates rose in the last year of his 5 year holding period, in a bond fund he will have to sell out at a lower price without having time to enjoy the replacement bonds throwing off higher yield whereas with a normal bond, he'll recover his principal without loss

Yeah, that makes sense. I was thinking about it from the interest rate happening close to year 0, where the principal value would slowly rise as the time period grows towards the average duration of the portfolio.

Outbound

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Re: Fund selection for taxable account
« Reply #16 on: May 19, 2015, 07:35:56 AM »
Here's what I went with:

50% in Schwab Broad Market ETF
25% in Schwab Large Cap Growth ETF
25% in Schwab Large Cap Value ETF

Is this good for a time horizon of up to 5 years? 

I'm ok if the market dips a little, I will just buy more shares if that happens and hold the investments a little longer.  If I really needed cash during a down market, I'll just pull some out of my savings account.

forummm

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Re: Fund selection for taxable account
« Reply #17 on: May 19, 2015, 08:43:02 AM »
Here's what I went with:

50% in Schwab Broad Market ETF
25% in Schwab Large Cap Growth ETF
25% in Schwab Large Cap Value ETF

Is this good for a time horizon of up to 5 years? 

I'm ok if the market dips a little, I will just buy more shares if that happens and hold the investments a little longer.  If I really needed cash during a down market, I'll just pull some out of my savings account.

It's unusual to hold both a growth and value fund. Why not just go 100% broad market?

Aphalite

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Re: Fund selection for taxable account
« Reply #18 on: May 19, 2015, 09:18:37 AM »
Yeah, that makes sense. I was thinking about it from the interest rate happening close to year 0, where the principal value would slowly rise as the time period grows towards the average duration of the portfolio.

I definitely agree with you that interest rates SHOULD rise soon, but I work in the Mortgage industry and we've been waiting for that for the past two years... lol. Bad timing for us is good timing for the general public I suppose

Edit: Also, agree with forummm, no need to hold both growth and value, just do 100% broad market - be aware that drawdowns are possible - move a percentage to fixed income if you are worried about that risk

Scandium

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Re: Fund selection for taxable account
« Reply #19 on: May 19, 2015, 10:42:19 AM »
Here's what I went with:

50% in Schwab Broad Market ETF
25% in Schwab Large Cap Growth ETF
25% in Schwab Large Cap Value ETF

Is this good for a time horizon of up to 5 years? 
No.

Quote
I'm ok if the market dips a little, I will just buy more shares if that happens and hold the investments a little longer.  If I really needed cash during a down market, I'll just pull some out of my savings account.

So your time horizon isn't really 5 years then? First determine when you need the money and what your goals are. Only then can anyone help with your allocation.

Outbound

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Re: Fund selection for taxable account
« Reply #20 on: May 19, 2015, 12:48:57 PM »
So your time horizon isn't really 5 years then? First determine when you need the money and what your goals are. Only then can anyone help with your allocation.

I don't really know, that's the thing. I cannot predict the future with enough accuracy to answer your questions.

I'm pretty flexible with the time horizon.  I'm trying to become location independent and travel while I work.  I'm a coder, so I just need to spend about $2000 on a laptop and software development platforms and then off I go.  It'll be a side hustle for a while, until I make enough money to leave my job and live somewhere else. 

However, my car might break down tomorrow, and I might need to pull the funds out. Or I may get another windfall in a year or two, and would have never touched that money.  I don't know.  But I'm definitely not planning to buy any real estate.

I guess I'll sell the growth and value funds and put it all in the broad market?