My wife and I (well I'm the one doing it) are in the process of rolling over our Roths from a typical, high fee, mutual fund company, to Vanguard; in order to take advantage of the index fund amazingness. For our roths, I was planning to put us into a target-date fund (with auto contributions, obviously) for simplicity sake. From reading this forum, I know some of you don't like the target-date funds for lack of control, or that they get too conservative too fast. (To counter that, I was planning on choosing the "wrong" target date, that of a younger person, for at least one of us. Therefore it stays aggressive longer.) However I just wanted to not have to worry about re-allocating every year for our Roths. I may be able to swayed, but I feel that taking into account what I have to say below (the fact that I will be doing other investing as well), and the convenience they offer just makes the best sense for me.
Decision one is whether or not you want to treat taxable and tax-advantaged accounts as separate portfolios. If you treat them as separate, the target date funds are great, unless your 401(k)s have terrible choices (and you need to make use of the least bad funds). It isn't unheard of for folks with a FI goal to make their tax-advantaged accounts the "post-60" money and use taxable just to bridge the gap.
That having been said, you can get more tax efficiency if you treat all of your investments (perhaps not including any Real Estate) as one large portfolio, and allocate your desired assets among accounts for
best tax efficiency. For what it's worth, this is what I'm doing, but I have no problem with people doing the other one.
Either way, the first step is to decide if you have one big portfolio or multiple smaller ones. The second step is to decide what asset allocation you want in each.
After Roths (and our 401k's, obviously), as we're being more and more frugal, we are ending up with a nice problem to have. Too much money sitting in a low-interest rate savings account. So we want to invest what's over our emergency fund. That's where I really need the advice: Where to start, and where to go?
Glad to see you aren't disregarding your tax-advantaged accounts.
I see in an early post from MMM (http://www.mrmoneymustache.com/2011/04/10/post-4-what-am-i-supposed-to-do-with-all-this-money/), to put the rest in a dividend yielding index fund, such as VFINX (I'd aim for the admiral version, VFIAX). Makes sense, although it does seem odd to me to put everything in one index fund. So my thought is, why not take it a step further? Invest in the High-Dividend Yield fund (VHDYX), or dividend growth (VDIGX)? I guess they have higher fees, but if they have higher dividends couldn't that off-set it? Or invest in a few of them, in order to get over my apprehension of everything in just one fund (maybe that apprehension is unwarranted?). So the hope/goal is to keep investing into dividend yielding funds, DRIP, and then eventually live off of dividend payouts, as my form of FI.
First, I don't think MMM stands by the dividend advice anymore; very few serious investors do. It's tempting to think of it as free money, but it isn't. "Dividend paying stocks" is a popular stock picking theory, but it's just that - there's no evidence that it beats, in total return, the market itself. The higher fees
certainly don't get offset by the dividends - the fund's total return (including dividends) would have to beat a similar total market fund by that amount, consistently, to make up for the higher expense ratio.
A brief bit of history: people used to buy "growth" stocks as they were accumulating money and, in preparing for retirement, would sell and buy "high dividend" stocks. Back in those days, though, you had to buy stocks in large batches, and these purchases had high fees; selling also had fees, but receiving the dividend did not. In the 21st century, we have funds with no transaction costs that can accumulate total return, and we can realize our gains (which includes paying taxes on the same) at our convenience, rather than quarterly (funds) or whenever the company feels like it (individual stocks).
Next, if you're holding domestic stocks in a taxable account, go for VTSAX. If you can't afford Admiral shares right away, don't worry: start with Investor shares, and when you reach the Admiral minimum, Vanguard will automatically promote you. This is
not a taxable event.
While we're at it: decide on an asset allocation and use the best available funds to fill those assets. Trying to go with multiple mutual funds to cover the same asset in the same account is known as "naive diversification" - you achieve real diversity in your investments by the
underlying assets, not the funds. This is doubly true if you go with actively-managed mutual funds.
So currently my thought was to start with VFINX, make admiral in that, and then start "diversifying" with other funds, such as VHDYX or VDIGX, or the total stock market VTSAX (though I am investing in that via the roth). I was maybe going to include an REIT index (VGSLX) for the cashflow too, but I think due to tax implications maybe add that last, or once my tax bracket drops in FI. Although the one nice thing about taxes is, they only occur when you're making money.
REITs are very tax inefficient; if you want REITs (beyond what is in total market already), they belong in tax-advantaged accounts.
Thoughts? For someone who is young and eventually wants to live off of dividend checks: Spread out over a few different dividend funds, or stick to the s&p solely? Correct in delaying REIT?
Again, sorry for writing a book. Thanks, in advance!
I don't recommend living off dividend checks; I recommend living off the total return of your investments. You have more control over it, there's more history to know about it, and you get taxed upon realization instead of when it happens (even at the preferred dividend rate).
Another fund you're missing: VTIAX, Vanguard's total international stock market index. It gives you some additional
real diversity in your stock allocation and, when held in taxable, gives you some tax credits that you don't get when holding it in a tax-advantaged account.
