Generally, you don't want to hold bonds in a taxable account as bonds are not a tax efficient asset class; neither are REITs.
Finally getting back to this now that I have some free time.
I think you're probably right that I'd be better off with the Vanguard Total International fund and Total Bond fund. Given how long I've been putting this off and how eager I am to get started, the simplicity is quite appealing.
I'm quitting my job in less than three months. At that point I'll roll my 401(k) over into a traditional IRA and have better investment options for that money. So I'll probably leave the tax-sheltered portion of my portfolio alone until then and focus on just the taxable part for now.QuoteGenerally, you don't want to hold bonds in a taxable account as bonds are not a tax efficient asset class; neither are REITs.
REITs I understand, but I thought one of the main reasons for holding bonds was to have some relatively stable money to fall back on in case of a prolonged bear market. What good is it if it's locked up in a sheltered account? (Aside from allowing me to purchase cheap stocks for the sheltered part of my portfolio, of course.)
Asset | Fund | Amount | Account type | % of asset class | % of total portfolio |
Bonds | VBTLX (https://personal.vanguard.com/us/funds/snapshot?FundId=0584&FundIntExt=INT) | $12,500 | Sheltered | 100% | 20% |
Foreign stocks | VTMGX (https://personal.vanguard.com/us/funds/snapshot?FundId=0127&FundIntExt=INT) | $10,000 | Taxable | 20% | 16% |
Large market | VFIAX (https://personal.vanguard.com/us/funds/snapshot?FundId=0540&FundIntExt=INT) | $10,000 | Taxable | 20% | 16% |
Small market | VTMSX (https://personal.vanguard.com/us/funds/snapshot?FundId=0116&FundIntExt=INT) | $10,000 | Taxable | 20% | 16% |
Large value | VVIAX (https://personal.vanguard.com/us/funds/snapshot?FundId=0506&FundIntExt=INT) | $12,500 | Sheltered | 25% | 20% |
Small value | VISVX (https://personal.vanguard.com/us/funds/snapshot?FundId=0860&FundIntExt=INT) | $2,500 | Sheltered | 5% | 4% |
REITs | VGSIX (https://personal.vanguard.com/us/funds/snapshot?FundId=0123&FundIntExt=INT) | $5,000 | Sheltered | 10% | 8% |
I think you should try to own a portion of as many of your funds as you can in your sheltered accounts. This makes rebalancing easier. OTOH it makes your allocation using lots of funds next to impossible until you get way more money. That should at least make you stop and think about whether optimizing it to this extent is really worth it.
Muni funds probably make sense if you are completely unafraid of the real possibility of your state defaulting and are in a state with high state taxes and you're in the Fed 33% or so marginal bracket
Have you read the boglehead guide to tax-efficient portfolios? Doesnt look like it.
Bonds always go in tax-advantaged space. When you run out [a good problem to have], also consider Ibonds/EE bonds [in fact, consider them anyways].
Next, foreign indexes go into taxable [for the foreign tax credit], and then following a KISS principle round out the rest of your portfolio where possible.
- I hate looking at the growth charts for these funds as it's clear that I'll be buying into the market at a time when it's quite expensive. Should I wait? (I'm guessing the answer is "Hell no! Jump in, stick to your chosen allocation, and don't try to time the market.")
Thanks for the links, orangeclocker. The second one was really helpful. As for the three-fund portfolio, I'm aware of the arguments for and against additional "slicing and dicing" of the market beyond a very basic portfolio, and I've decided that it's worth the additional effort.
I've worked out the specifics of what assets I'm going to own. Any input would be much appreciated.
I'm going to be investing $62.5k, of which $32.5k is sheltered and $30k is unsheltered.
Asset Fund Amount Account type % of asset class % of total portfolio Bonds VBTLX (https://personal.vanguard.com/us/funds/snapshot?FundId=0584&FundIntExt=INT) $12,500 Sheltered 100% 20% Foreign stocks VTMGX (https://personal.vanguard.com/us/funds/snapshot?FundId=0127&FundIntExt=INT) $10,000 Taxable 20% 16% Large market VFIAX (https://personal.vanguard.com/us/funds/snapshot?FundId=0540&FundIntExt=INT) $10,000 Taxable 20% 16% Small market VTMSX (https://personal.vanguard.com/us/funds/snapshot?FundId=0116&FundIntExt=INT) $10,000 Taxable 20% 16% Large value VVIAX (https://personal.vanguard.com/us/funds/snapshot?FundId=0506&FundIntExt=INT) $12,500 Sheltered 25% 20% Small value VISVX (https://personal.vanguard.com/us/funds/snapshot?FundId=0860&FundIntExt=INT) $2,500 Sheltered 5% 4% REITs VGSIX (https://personal.vanguard.com/us/funds/snapshot?FundId=0123&FundIntExt=INT) $5,000 Sheltered 10% 8%
A few things to note:
- The assets in my taxable account are what I'm going to buy now. When I leave my job in two months, I will roll my 401(k) over into an IRA, sell my shares in the target-date fund, and buy the "sheltered" assets listed above.
- Since the asset allocation I initially came up with did not fit well with my taxable/sheltered ratio, I settled on a compromise: owning 20% small market and 5% small value rather than my original 10% and 15%. This is quite a bit less value-heavy than I would have liked, but I'm out of space in my sheltered account and it wouldn't make sense to own a small value index fund in a taxable account.
- I hate looking at the growth charts for these funds as it's clear that I'll be buying into the market at a time when it's quite expensive. Should I wait? (I'm guessing the answer is "Hell no! Jump in, stick to your chosen allocation, and don't try to time the market.")
I would suggest a simple 3-fund portfolio [total US, total foreign, total US bond] with maybe 1-tilt for now [REIT], as you pass 6 figures maybe add a small value tilt, and then maybe mid-6 figures some of the others you are considering.
Muni funds probably make sense if you are completely unafraid of the real possibility of your state defaulting and are in a state with high state taxes and you're in the Fed 33% or so marginal bracket
Sounds like a giant headache
Have you read the boglehead guide to tax-efficient portfolios? Doesnt look like it.
Bonds always go in tax-advantaged space. When you run out [a good problem to have], also consider Ibonds/EE bonds [in fact, consider them anyways].
Next, foreign indexes go into taxable [for the foreign tax credit], and then following a KISS principle round out the rest of your portfolio where possible. You want some funds in taxable to support tax-loss harvesting where possible. EG swap out one foreign index fund for another if it drops 10% or so. Do it again if it keeps falling and bank that tax loss. Avoid the wash sale.
I would just like to interject 3 things:
1) Godamn!!! 23 and you have and are thinking about a "portfolio". Fuck all when I was 23 I had passing interest in ERE...but my beer drinking and general assing-off won out.
2) Thank you for posting these links. It is VERY helpful for people such as myself (who are just beginning to dip the toes in) to be able to go straight to the funds one is discussing. I find when reading through various investing related posts I find myself unsure of exactly which particular fund a person is truly discussing. So thanks.
3) Good on ya!! If I had pulled my head out of my ass as early as you...I would already BE where I want to get to.
Hope I didn't thread-jack too badly.