Author Topic: Where do I invest if I can't put money in tax-advantaged account?  (Read 7111 times)

mmmkyle

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Where do I invest if I can't put money in tax-advantaged account?
« on: September 10, 2014, 08:03:39 AM »
I have a bit of a unique situation but I thought you brilliant mustachians could give me some advice on this.

I'm 24 and i've moved to Sydney for the year. I have an old 401K from a company I use to work at and have maxed out my Vanguard Roth IRA for the year. When you work in Australia you have a superannuation contribution, which is basically a mandatory 9.5% of your income that is put into a retirement fund for you.

Long story short, I have extra money to invest and don't know where to put it. Is my best bet to just use a brokerage account? I am young and am an aggressive investor, with 100% invested in index funds (Total Stock Market, SP500). Do you think it is wise to invest in index funds in a non-tax advantaged account like a brokerage account? I feel like I have no other choice but that's why I am coming to you guys :)

thedayisbrave

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #1 on: September 10, 2014, 08:41:39 AM »
Yes, you can invest in a taxable/brokerage account if there's nothing else left for you to do tax-advantaged wise.  I would recommend Vanguard.  If you're going to invest in their funds anyway, having an account with them means their mutual funds are commission-free (where with other brokerages you have to pay a fee unless its the ETFs you are after).

Don't know if you're familiar with tax efficient asset allocation but since you're thinking about a taxable account that may be something you need to look into as well.  Generally income producing securities go in a tax advantaged account because of tax treatment (so bonds, REITs, etc.) while stocks go in a taxable.  Do you have any international exposure? That would be the best option for a taxable account (foreign tax credit).  Next would be your total stock funds.  If you post your allocation here we can help you with it.  Bogleheads is also a great resource.

BaldingStoic

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #2 on: September 10, 2014, 01:32:08 PM »
Yes.  Invest away in an ETF or low-cost Index fund.  As I understand it, the ETF won't generate an capital gains until you sell it.  Similarly, the capital gains in index funds tend to be much lower then in an actively traded funds so the tax isn't isn't that big.

klystomane

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #3 on: September 10, 2014, 05:07:10 PM »
Yes, you can invest in a taxable/brokerage account if there's nothing else left for you to do tax-advantaged wise.  I would recommend Vanguard.  If you're going to invest in their funds anyway, having an account with them means their mutual funds are commission-free (where with other brokerages you have to pay a fee unless its the ETFs you are after).

Don't know if you're familiar with tax efficient asset allocation but since you're thinking about a taxable account that may be something you need to look into as well.  Generally income producing securities go in a tax advantaged account because of tax treatment (so bonds, REITs, etc.) while stocks go in a taxable.  Do you have any international exposure? That would be the best option for a taxable account (foreign tax credit).  Next would be your total stock funds.  If you post your allocation here we can help you with it.  Bogleheads is also a great resource.

This maybe a dumb question, but why does everybody recommend Vanguard? Is it mostly advantageous to use VG if you invest only in Index Funds?

How about the other low-cost brokers I hear of (Tradeking, Scottrade, E-Trade, etc.)? Is there any reason to choose VG over them or vice versa?

Thanks!

thedayisbrave

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #4 on: September 10, 2014, 07:36:11 PM »

This maybe a dumb question, but why does everybody recommend Vanguard? Is it mostly advantageous to use VG if you invest only in Index Funds?

How about the other low-cost brokers I hear of (Tradeking, Scottrade, E-Trade, etc.)? Is there any reason to choose VG over them or vice versa?

Thanks!
Heh, I probably may not be the best one to answer this question given all my investments are with Vanguard.  People recommend them because it's the best company, IMHO.  It's the lowest cost, great customer service, and the ownership structure is different than other brokerage companies.  With Vanguard, the company itself is owned by the mutual funds, which are owned by you.  So to put it simply, when you buy a Vanguard fund YOU own Vanguard.  So there's no gray area between who's working for who... you know when you get a rep on the line that they genuinely have your interests at heart and they're not just recommending/selling you stuff you don't need to pad their pockets.

Other brokerages are just fine too.  I think it depends on what funds you are going to go with.  If you're going to go with Vanguard funds (which are recommended because they are the lowest cost), then it just makes sense to have your account at Vanguard because you can buy the funds through them commission free - while if you used a different broker, they may have a varying fee structure and you may have to pay a commission to own the Vanguard fund.  In the end it's not a huge deal and it's up to you.  But you'll find a lot of Vanguardians here as well :)

johnny847

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #5 on: September 10, 2014, 08:28:21 PM »
Yes.  Invest away in an ETF or low-cost Index fund.  As I understand it, the ETF won't generate an capital gains until you sell it.  Similarly, the capital gains in index funds tend to be much lower then in an actively traded funds so the tax isn't isn't that big.

While in general, a mutual fund can have capital gains distributions, with Vanguard funds, there aren't any (or at least after the first couple years of fund inception) because they essentially funnel the capital gains distributions into the ETFs.

http://www.bogleheads.org/wiki/ETFs_vs_mutual_funds
"Tax efficiency: the mutual fund shares benefit from the disposition of capital gains through ETF shares, making Vanguard funds with ETF share classes as efficient as an ETF."

EDIT: Because the tax efficiency is a non issue for Vanguard funds, I decided to use the mutual funds instead because automatic investment is much simpler (it may be possible to do automatic investments with ETFs at some brokerages, but it's not recommended because they will place market orders, and funny things can happen in that scenario, such as "flash crashes"). Also, you can't buy fractional shares of ETFs, but you can buy Vanguard mutual funds down the the penny if you want. If you buy ETFs, you will almost certainly end up with turd cash.
« Last Edit: September 10, 2014, 08:30:52 PM by johnny847 »

superannuationfreak

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #6 on: September 10, 2014, 09:26:49 PM »
Suggest using US-based ETFs for any such investment.  Australian-domiciled ETFs will be treated as Passive Foreign Investment Companies by the IRS and receive punitive tax treatment. US-based mutual funds will often not allow you to invest if you are not currently a US-resident.

Incidentally, that may well be true of your superannuation fund too.  If you only expect to ever have a small amount in there (which you can withdraw after departure if you are not a permanent resident or citizen of Australia) the solution may be to use a low-cost cash option.  There's some information and links to other sources here: http://forum.mrmoneymustache.com/investor-alley/australia-vs-america-where-to-invest/

mmmkyle

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #7 on: September 13, 2014, 02:17:31 AM »
Thanks guys! So currently 100% of my VG IRA is invested in Total Stock Market Index. I'm happy with that because I am not afraid of the risk and don't think I plan on introducing any hedges like bonds or REITs for a while (open to your opinions on this!) so basically I should just also open a brokerage (?) account with Vanguard to keep my money invested?

My super will have maybe $7k when I head back home and I will take it out when I depart and invest it back home. I see the Total Stock Market index as a good proxy for international exposure seeing as Fortune 500 companies operate all over the world. I am very interested in what kind of asset allocation I'd be shooting for? ...and if people have strong thoughts about getting into REIT/bonds why would that be?

not_a_trex

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #8 on: September 13, 2014, 05:51:56 PM »
...and if people have strong thoughts about getting into REIT/bonds why would that be?

It all depends on whether you think you can stomach the next market crash and see your portfolio drop in value by 50%. The thing that convinced me to do it is the diversification you get by allocating towards different parts of the world market. Historically real estate has not correlated too much with the stock market. Although stocks and and the housing market seemed to have gone up and down together over the past few years, they now look to be returning to historical correlational differences.

Although the past few years have been great in the stock market, I don't know how I would do if I saw all of my investments (in a 100% stocks portfolio) plummet in the next cyclical downturn. It is reassuring to see at least something not correlated going up while I wait for the market to rebound.

GGNoob

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #9 on: September 14, 2014, 04:13:35 AM »
I believe when opening a "brokerage" account at Vanguard, that only allows you to invest in stocks and ETFs. If you want to invest in mutual funds, just open a new taxable Vanguard account to do just that. All of your accounts (taxable and IRA) will show up when you log in. My wife and I have a joint taxable mutual fund account and each have a Roth IRA (invested in mutual funds) with Vanguard.


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GGNoob

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #10 on: September 14, 2014, 04:19:31 AM »
Oh and if you take Vanguards survey to suggest funds and allocation for you (sorry on iPhone or I'd get the link) and you choose the most risky options, it suggests 100% stock...70% VTSAX (total US stock index) and 30% VTIAX (total international stock index). That's how I'm basing my portfolio, except I added VEXAX in the US portion to add more allocation to small and mid-cap stocks.


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Ybserp

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #11 on: September 16, 2014, 01:14:33 PM »
This maybe a dumb question, but why does everybody recommend Vanguard? Is it mostly advantageous to use VG if you invest only in Index Funds?

How about the other low-cost brokers I hear of (Tradeking, Scottrade, E-Trade, etc.)? Is there any reason to choose VG over them or vice versa?

Thanks!

I like Vanguard for the low expense ratio index funds. If I were going to purchase stocks directly, I might go with Scottrade or E-trade. Fidelity also has low expense ratio index funds, though theirs are not quite as low as Vanguard's. Fidelity seems to have better customer service. I attribute that to Fidelity having spent more on their phone service reps.

I do enjoy the podcasts about investing topics that Vanguard provides periodically. It is a convenient way of getting continuing education about financial topics.

mmmkyle

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #12 on: September 24, 2014, 07:57:30 AM »
@Logan T

I think I'd like to do what you've done and purchase mutual funds in the "taxable" account- Can i do that from inside my current Vanguard account since they will eventually all appear in the same place?

Also, I've been thinking about allocating a small portion- perhaps 10% of my portfolio to stocks- I know the index has been proven to beat the stock pickers but i think it may allow for the unicorns with a small added risk. Is there any studies about a small allocation of selected stocks increasing gains and what kind of increased risk that would look like? I know there are similar ones about diversification and how the expected return is slightly lower with bonds included but the risk is x% lower

Also, if i was to have this vanguard account- do i need two different accounts to purchase mutual funds and stocks/ETFs? Sorry if this common sense but I actually have no idea if they would be different

Ybserp

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #13 on: September 24, 2014, 09:10:32 AM »
@Logan T

I think I'd like to do what you've done and purchase mutual funds in the "taxable" account- Can i do that from inside my current Vanguard account since they will eventually all appear in the same place?

Also, I've been thinking about allocating a small portion- perhaps 10% of my portfolio to stocks- I know the index has been proven to beat the stock pickers but i think it may allow for the unicorns with a small added risk. Is there any studies about a small allocation of selected stocks increasing gains and what kind of increased risk that would look like? I know there are similar ones about diversification and how the expected return is slightly lower with bonds included but the risk is x% lower

Also, if i was to have this vanguard account- do i need two different accounts to purchase mutual funds and stocks/ETFs? Sorry if this common sense but I actually have no idea if they would be different

A bit of terminology for you:
Taxable account := Any account that is not a 401k, 403b, 529, IRA, or other special tax-advantaged account.

You probably already have a bunch of taxable accounts. Your checking account (if you have one) is a taxable account. Your savings account is a taxable account. If you open an account with a financial institution, Vanguard/Fidelity/Local Credit Union, you will be opening a regular taxable account unless you go out of your way to make it something else like a Roth IRA.

The range of your questions implies you need to know more than a few tidbits of information available from a web board. I strongly recommend you pick up a book or two on investing. Try starting here: http://www.bogleheads.org/wiki/Getting_started

To respond to your questions already asked:
(1) If you open an account with Vanguard and also have an IRA with Vanguard, the display will allow you to see the holdings on the same screen. But the money won't be in the same account.
(2) Investing in individual stocks results in large added risk for on average small added returns, not the other way around.
(3) There exist studies about pretty much everything.

mmmkyle

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #14 on: September 24, 2014, 10:21:45 AM »
I could be reading your tone wrong but I'm pretty well versed on the terminology you mention.

I'm also aware that investing in individual stocks is a much greater risk- Maybe my wording did not make this awareness clear. I was only wondering what percentage (on average- from longitudinal studies) of added risk comes with allocating a small part (~10%) of your portfolio compared to the potential (on average) higher returns. For example, if individual stocks  (within SP500) for this small part of my portfolio on average increased returns from 9% to 10% per year but added 50% more risk to my portfolio, than I would deem that a risk not worth taking. If there was a study that you were aware of that delved into that scenario that would be cool as I couldn't find much.

In a Random Walk Down Wall Street they mention a ton of info around this but not the specific scenario I am wondering about. Also, kneeling at the altar of index funds is all good and well and I subscribe to it myself but I feel like SOME individual stocks may infuse some small excitement into investing with POSSIBLY not too large of a risk to my overall portfolio. 

Thoughts?

solon

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #15 on: September 24, 2014, 12:58:20 PM »
This is an actual screen shot I just took!

Ybserp

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #16 on: September 24, 2014, 04:29:01 PM »
mmmkyle -  I recommended reading more because the combination of questions and the way they were asked led me to guess that you were considering some bad financial choices. On some investing forums you would get their equivalent of a face punch for considering trying to beat the market. This isn't the kind of forum where people are blunt about market risk and taking on risks that do not have an increased valuation for the individual investor, so I was trying to gently guide you towards learning more. (Obviously failing in being gentle now. But I wish you the best and hope you end up with loads of money instead of losing it to the kind of financial advisor or actively managed fund guru who would love to prey on you.)

If you want to buy individual stocks, it is reasonable to consider it like buying gold coins. There is some intrinsic value there, but it is anyone's bet whether or not it will beat inflation long term. Think about how much money you'd be willing to just blow on something like a vacation. Give yourself a flat amount to buy individual stocks with. Keep track of how you do buying and selling, including tax costs. After a few years see if you beat the market. If you did, think about changing careers and doing it professionally. If you didn't, put whatever you have left into index funds.

Dodge

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #17 on: September 24, 2014, 06:58:24 PM »
Thanks guys! So currently 100% of my VG IRA is invested in Total Stock Market Index. I'm happy with that because I am not afraid of the risk and don't think I plan on introducing any hedges like bonds or REITs for a while (open to your opinions on this!) so basically I should just also open a brokerage (?) account with Vanguard to keep my money invested?

My super will have maybe $7k when I head back home and I will take it out when I depart and invest it back home. I see the Total Stock Market index as a good proxy for international exposure seeing as Fortune 500 companies operate all over the world. I am very interested in what kind of asset allocation I'd be shooting for? ...and if people have strong thoughts about getting into REIT/bonds why would that be?

Obligatory Japan 1989-2013 (25 years) chart:



How would stocks having a negative return for 25 years affect your plans?  Suddenly you're 50 and have significantly less money than expected.

Also, bonds are at their best during a distribution phase, when you're withdrawing from the portfolio.  While you may think this won't happen for many years, after all you're young, there are many scenarios where you might end up needing your portfolio before then.  Generally, 100% of anything is not recommended.  Here's an insightful post from the Bogleheads forum on this topic:

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Listen, there are two HUGE reasons other than psychology (itself not to be underestimated) to have some bonds:

1) you might need the money during a crash. As in, you get fired or get ill, both for the long term. The forced sale will be devastating and may well be the difference between the poor house and some degree of comfort. Do you really want to trade that in exchange for "more money if stocks do well", a situation in which you're already in good shape?

2) there are no guarantees that stocks rebound after any amount of time. Compare a stock certificate with a Treasury bond, no guarantees in sight for the former. If someone tells you that it's a certainty because of history blah blah, ask them for a written, notarized guarantee backed by THEIR personal fortune. Only then can you rightfully sleep well.

So don't do 100%. Add 20 or 30 percent bonds, which won't hurt your returns too badly and will be there for you when times generous. Unlike others above, I won't qualify this to depend on your worldview or vitamin levels. Just don't.

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http://www.bogleheads.org/forum/viewtopic.php?f=1&t=142825&newpost=2123372#p2120756
« Last Edit: September 24, 2014, 08:03:28 PM by Dodge »

mmmkyle

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #18 on: September 26, 2014, 09:34:03 AM »
@ Ybserp
This may be getting a little philosophical so bear with me but while I'm a huge advocate of low cost index funds- as shown by my current investments- I always try to ask myself, "is the accepted way of doing something necessarily the best way?". I am a big fan of Bogle and I know the overwhelming data that points to an index fund beating active investors but to categorically say that trying to beat the market is wrong is something I don't easily accept. We are on this forum because most likely we are fans of MMM and his mustachian ways. Like MMM, again, I am a big supporter of the index fund but why doesn't he get flack for renting property (which generally has lower returns than the stock market) or for his Lending Club Experiment (which is as good as picking stocks, is it not?)?

I am sort of trying to play devil's advocate and maybe picking stocks is not the right way to "beat the market"-which has such a stigma attached to it in these parts that any indirect reference to it will get shot down- but I'm just trying to think outside of the box of the accepted "throw all your money into VG index with 20/30% bonds". Some prominent entrepreneurs, including Mark Cuban, advocate putting all your money into building, investing in and growing a business rather than putting your money in the stock market at all!

Just trying to play the contrarian and get your thoughts..

Dodge

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #19 on: September 26, 2014, 11:10:36 AM »
@ Ybserp
This may be getting a little philosophical so bear with me but while I'm a huge advocate of low cost index funds- as shown by my current investments- I always try to ask myself, "is the accepted way of doing something necessarily the best way?". I am a big fan of Bogle and I know the overwhelming data that points to an index fund beating active investors but to categorically say that trying to beat the market is wrong is something I don't easily accept. We are on this forum because most likely we are fans of MMM and his mustachian ways. Like MMM, again, I am a big supporter of the index fund but why doesn't he get flack for renting property (which generally has lower returns than the stock market) or for his Lending Club Experiment (which is as good as picking stocks, is it not?)?

I am sort of trying to play devil's advocate and maybe picking stocks is not the right way to "beat the market"-which has such a stigma attached to it in these parts that any indirect reference to it will get shot down- but I'm just trying to think outside of the box of the accepted "throw all your money into VG index with 20/30% bonds". Some prominent entrepreneurs, including Mark Cuban, advocate putting all your money into building, investing in and growing a business rather than putting your money in the stock market at all!

Just trying to play the contrarian and get your thoughts..

Sure, I'll bite.  This conversation is probably best left to a new thread, so I'll keep it short.

The "standard advice" is only "vanguard indexes" around here, and on the bogleheads forum.  We represent a tiny fraction of the number of people investing.  Be careful you don't try and stick out from the bogleheads herd, just to join a significantly bigger one ;)

Ybserp

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Re: Where do I invest if I can't put money in tax-advantaged account?
« Reply #20 on: September 26, 2014, 04:56:24 PM »
Just trying to play the contrarian and get your thoughts..

Well then here are my thoughts:

If you are good at running businesses and want to spend your time trying to make start-ups work, then using your money as personal investment capital is a good option for you.

If you are like doing remodeling projects and want to spend your time running a rental business, then using your money to buy rental properties is a good option for you too.

If you have the temperament to stay in the stock market even when the prices drop and want to spend some time ensuring you keep your portfolio diversified in low cost funds, then using your money to invest in the stock market is another good option for you.

There probably exist some people who have no business buying index funds, or trying to rent out properties, or running their own businesses. I feel sorry for such people because it is a lot harder to FIRE if US Treasury Bonds are your only real option.