Author Topic: Simplifying Investments, Best for Taxable Account?  (Read 12598 times)

cbr shadow

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Simplifying Investments, Best for Taxable Account?
« on: December 26, 2013, 10:40:16 AM »
I'm trying to simplify the investments my wife and I have.  I'm still learning about investing (currently reading "The Bogleheads Guide to Investing") but still have a couple questions.  Right now we max our 401k's and Roth IRA's, but we want to start a taxable account this year and slowly add any surplus money to it.
On to my question..
 
I hear things about tax efficiency and keeping certain investments in our tax sheltered accounts (401k, Roth IRA) and others that are better fitted for taxable accounts.  I'd like to get this right the first time, so is it a bad idea to have "Vanguard Life Strategy Growth Fund" (VASGX) in our taxable account?

Right now our 401k's are both in "Vanguard Target Retirement 2050 Fund", and both of our Roth IRA's are VTSAX.  I was thinking that we're heavy on stocks right now so was thinking I'd switch our Roth IRA's to VASGX, and all taxable investments also in VASGX for simplicity.  Would this be a mistake as far as tax efficiency goes?

A little about us:
Both 30 yr old
Combined Income = $176,500
Net Worth = ~$200,000
Debt: Just mortgage, $194k @ 3.75% 15-yr loan.  Home value = $215k

Current Combined Retirement Assets - $113,500
Taxable None currently, plans to open this year @ Vanguard

His 401k @ Vanguard $28,750
His Roth IRA @ Vanguard - $13,514

Her 401k @ Vanguard   $45,569
Her Roth IRA @ Vanguard  - $13,529
Her Traditional IRA @ Vanguard (From previous job, no longer contributing) - $6,310


Thanks for any info you can provide!
-CBR

cbr shadow

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Re: Simplifying Investments, Best for Taxable Account?
« Reply #1 on: December 26, 2013, 01:59:02 PM »
Anyone have some investing experience that can help out here, please?

Frankies Girl

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Re: Simplifying Investments, Best for Taxable Account?
« Reply #2 on: December 26, 2013, 05:07:19 PM »
I think the boards are slow due to the holidays, so I'll give this a small bump with the little information I (think) might be helpful. :)

As ya'll are still pretty young, being heavy on the stocks is actually a good idea in my opinion. If you're nervous about that, however, I don't think there's anything wrong in going more conservative - you have to set your asset allocation where it is comfortable for your risk level.

The only thing I have in my taxable account is a total stock market index mutual fund (Fidelity's Spartan series - comparable to the Vanguard version). You want to have the most tax efficient and lowest turnover stuff in your taxable accounts. Bonds and REITs and the like have higher turnover, so those should go in the tax advantaged accounts.

http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

The Roths in VTSAX and the 401Ks in the Vanguard 2050 are fine (as the target fund is going to rebalance on its own, and the VASGX looks to be 80/20 stocks and bonds but with a lower turnover), but if you do decide to add in the VASGX, I'd do it in your future contributions to those and not sell off to buy VASGX. I'd say switch over those going forward to the VASGX and then open your taxable account to add in the VTSAX going forward. But if you are really unhappy with the allocation RIGHT NOW, then selling off some of what is in the Roths and 401Ks to buy into the VASGX is the right thing to do for your comfort level.

The biggie is figuring out what YOUR asset allocation should be. I have mine set at 80/10/10 stocks/bonds/REITs which I believe is pretty aggressive, but that's my comfort level - you'll need to look at all of your accounts overall, and figure out what your mix should be and then put the tax efficient stuff in the taxable and the rest in the 401K/Roth buckets.

I have my REIT and Total Bond funds in an Traditional IRA, but also hold a bit of the total stock index fund in there as well to offset their lower performance (since the bond/REIT thang isn't doing all that super right now, I still like the comfort of seeing the stock index fund offset the poor performance in that one account, and it works overall with my basic asset allocation).

So hopefully some more knowledgeable posters will chime in to help you out more.
« Last Edit: December 26, 2013, 11:02:14 PM by Frankies Girl »

Jeremy

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Re: Simplifying Investments, Best for Taxable Account?
« Reply #3 on: December 27, 2013, 07:43:42 PM »
At 30's years old, I would go 100% stock.  It will give you the biggest long term return.  The reason people add other asset categories to their portfolio is because of volatility, but you have a long runway ahead of you.  In fact the best thing that could happen for you is a major stock market collapse, so you could buy more shares at a lower price

We are retired in our 30's and are going 100% stock for the same reason, to have a higher long term return.  We don't care much about volatility

For investing overall, Jim Collins' stock series is one of the best things out there and the price is right
www.jlcollinsnh.com/stock-series/


If you don't want to follow the all stock recommendation, you do not want any bond or REIT income in your taxable account.  It will be taxed at your marginal rate, which is probably in the 25%+ range for your income level.  Dividends and long term capital gains on the other hand will be taxed at a maximum rate of 15% while working and very likely at 0% after retirement (We plan to never pay taxes again, see www.gocurrycracker.com/never-pay-taxes-again/)

In short, put VTSAX in your taxable account, any bonds or REITs in your 401k/IRA (but consider minimizing bonds)

chasesfish

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Re: Simplifying Investments, Best for Taxable Account?
« Reply #4 on: December 28, 2013, 05:25:50 AM »
Sorry about the slow response, i should have chimed in earlier.

Is this income number before or after your 401k contributions?  It makes a difference in your tax rate.  The most important part of taxable investing is low securities turnover.  You can accomplish this in an index fund, Vanguards Wellington fund, or a tax efficient mutual fund.  I don't know if vanguard has that, but a few of the other low cost brokerage houses do,

I am in a similar situation and I personally choose to pick 5-6 individual stocks for my taxable account.  I personally enjoy it and am in control of avoiding short term gains that add on to my AGI.

Lots of choices and you have time, this won't be a big issue for you in the first year or two of the account,  only after it starts growing.

the fixer

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Re: Simplifying Investments, Best for Taxable Account?
« Reply #5 on: December 28, 2013, 09:12:00 AM »
Having a small amount of something other than stocks in your portfolio is good because it lets you rebalance. Effectively, you're sacrificing a tiny amount of return in exchange for substantially reduced risk (variability) of your portfolio. For instance, we recently passed out of what some people call the "lost decade" in stocks, where average annual returns were not very good due to volatility. Bond returns also weren't great, but if you were rebalancing even a 90/10 portfolio of stocks and bonds I think you'd be looking a lot better than 100% stocks.

Investing in an aggressive LifeStrategy fund will give you this diversification without having to worry about rebalancing yourself, but at the cost of some tax efficiency. This is not as big a deal as you might think, though. http://advisorperspectives.com/newsletters13/pdfs/Optimizing_Asset_Location.pdf

You can also start by buying a LifeStrategy fund, then when you have more taxable assets switch over to buying separate stock and bond funds in the future which are optimally located in various accounts. You would probably want to just let the LifeStrategy shares sit there instead of selling and paying taxes, and that's okay.

Also, you can achieve more diversification by using REITs. Total market index funds and REITs perform pretty differently but both have high risk/return, so if you don't think bonds are right for you at the moment a REIT index fund is worth considering (but these are much better off in tax advantaged accounts IMO).

Jeremy

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Re: Simplifying Investments, Best for Taxable Account?
« Reply #6 on: December 28, 2013, 08:30:39 PM »
Having a small amount of something other than stocks in your portfolio is good because it lets you rebalance. Effectively, you're sacrificing a tiny amount of return in exchange for substantially reduced risk (variability) of your portfolio. For instance, we recently passed out of what some people call the "lost decade" in stocks, where average annual returns were not very good due to volatility. Bond returns also weren't great, but if you were rebalancing even a 90/10 portfolio of stocks and bonds I think you'd be looking a lot better than 100% stocks.

Rebalancing has its place, although in the OP's situation they have something even better:  a job.  If stocks fall, use current income to buy more

I did a quick simulation for comparison using http://cfiresim.com using all default values ($1kk staring value, standard fees, 4% withdrawal, etc...)

In one case it is 75% stock / 25% bonds with annual reallocation and the other 100% stock.  The results are:
75/25: 
Average portfolio ending value:  $1.8kk
Median portfolio value: $1.4kk

100% stock:
Average portfolio ending value:  $2.6kk
Median portfolio ending value:  $2.1kk

The statistics say all stock is the better case, by a landslide.  It does have greater volatility, and that is where bonds help some people sleep better at night, but it comes at a cost.  And not a tiny one