Cost Basis options advice for Vanguard?

[fund4tomorrow]

My apologies if this has been brought up in an earlier post, but I recently started contributing to a couple of funds at Vanguard.  This particular account and holdings are taxable and intended for additional savings outside of 401k and IRA contributions which are being maximized.  We plan on using these funds 10 or more years from now. 

I have not yet established a cost basis method for my Vanguard account, but I noticed that Vanguard is offering 3: Average Cost, specific identification and first-in, first-out. 

I plan on establishing a portfolio of about 4-5 index funds which would come close to the Life Strategy Growth fund, however I would like to make the final call on asset allocation, personally preferring a little more US exposure. 

With a long term investment strategy for this type of taxable account, would you kindly provide me with your opinions on what cost basis method you would setup (and a short why)? 

Much appreciated!

Matt

[seattlecyclone]

I prefer specific identification. It allows you the most control over how much capital gains income you will have each year when you get around to spending your savings. First-in, first-out is usually less optimal because older shares generally have a lower cost basis than newer shares. That means that when you sell a few shares, you're often selling the ones that have the lowest cost basis, and thus the highest capital gains taxes.

Average cost is simpler than specific identification. It will usually be better than FIFO because you're selling a few old shares and a few new shares. Only specific identification lets you decide to sell only newer shares or only older shares depending on what would be best for your tax situation that year.

[MDM]

^Agreed.

In other words, if you choose specific identification you can always identify the first-in lots, or identify lots that approximate average cost, if desired.  You can't, however, do the reverse.