Investing Help

[mmicha]

DELETED

[ObliviousInvestor]

Welcome to the forum.

I'm a big fan of "all-in-one" funds (e.g., Target Retirement or LifeStrategy), but there are a few reasons why, in a taxable account, they tend to be less tax-efficient than a DIY allocation using individual index funds.

1) They use taxable bonds, when tax-exempt muni bonds would make more sense in some cases.
2) They do not qualify for the foreign tax credit (which an individual holding of, say, Vanguard Total International Stock Index would qualify for).
3) They get in the way of an "asset location" plan (wherein you tax-shelter your least tax-efficient assets prior to tax-sheltering your more tax-efficient assets).
4) They result in a reduced ability to tax-loss harvest.

[DaveS]

I agree with the previous poster. Two very tax efficient funds or etf's are total international and total stock market or as etf's VTI and VXUS. You would improve your tax efficiency by holding them in taxable, and if you wanted your stock bond ratio to remain the same have more bonds in tax free. Just so you know, in order of tax efficiency worst to best; taxable bonds, REIT, Small Value, Large Value, Large Blend, International/Emerging due to the foreign tax credit. If you picked a target fund for a year like 2030, you could get more bonds in the tax free and still use the fund of funds format. Sooner or later I think you will get away from the fund of funds format and end up with the two total funds in taxable and bonds and some of the other tax inefficient funds/etf's in tax free. Start that whenever you have more confidence. Dave

[jimkinny]

I think there is a lot in favor of the all in one funds and I hope to use a Life Strategy fund myself in the not too distance future.

Here is a bit of info on tax efficient fund placement from the Boglehead Wiki. BTY, the link for the Wiki is on the top right of this page and there is just a lot of information located there.

http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

So, since the all in one funds have bonds, it is a bit more difficult to have a portfolio with them and still be tax efficient.
Therefore, there are many fans of a 3 fund portfolio. Read this long discussion of it:

http://www.bogleheads.org/forum/viewtopic.php?f=10&t=88005

My guess is that you are paying a premium for the banks advice. If it is worth it to you, continue to do so, but read 2 books: these are the two Boglehead Guide books (Investing and Retirement). Those two books are on the recommended reading list (on the Wiki). This is not rocket science and the books explain everything you will need to know clearly, simply and convincingly. Several hours reading and most people can manage this stuff on their own.

jim

[skibbi9]

any reason why you're not taking advantage of your 401k more for tax advantaged space (vs. your large taxable positions? down payment or just haven't thought about it or limited as a HCE [doubtful though]

[regularguy]

mmicha,

Very simply, you could put your rainy day fund into an online savings account. At current rates at Ally or AmEx you could get a whopping ~$380 a year. It's much less important than what others are telling you, but it's easy to implement. As for amount, the conventional wisdom is to keep 3-6 months livings expenses in readily available cash.

~RG

[mmicha]

[Merged with the above thread - admin LadyGeek]
Hello,

I have been getting interested in doing investing on my own. I've just read the Bogleheads Book on investing, but still have questions and am a rookie.

I opened a Vanguard account (taxable) and currently have 10k sitting in a money market account. After reading the book, it mentions using index funds over mutual funds and actively managed funds, etc. It makes sense and all. However, it is the allocation and tax ramifications that are a big boggling

A few minutes ago I was reviewing the three index fund portfolio concept. (http://www.bogleheads.org/wiki/Three-fund_portfolio)

Seems pretty straight forward, however I posted a message about a week ago and folks were iffy on the bonds in a taxable account due to uncle sam! So I'm a bit lost on how to allocate.

Vanguard has: Vanguard LifeStrategy Moderate Growth Fund (VSMGX), which seems to be this same 3 index allocation. 60/40, domestic, international, and bonds.

I guess questions are:

1. how do I protect myself if bonds are bad in a taxable account...
2. is a fund like VSMGX a better fit, or is buying the 3 index funds individually better?

I've got other money being "managed" at a bank that I'm surely paying lots extra for... So I wanted to take this 10k and learn/understand. Than possibly move that money into this setup for myself. I'm already moving my Roth IRA at this time to Vanguard.

Thanks in advance for the help!

~Matt

[ziszew]

Hello,

I have been getting interested in doing investing on my own. I've just read the Bogleheads Book on investing, but still have questions and am a rookie.

I opened a Vanguard account (taxable) and currently have 10k sitting in a money market account. After reading the book, it mentions using index funds over mutual funds and actively managed funds, etc. It makes sense and all. However, it is the allocation and tax ramifications that are a big boggling

A few minutes ago I was reviewing the three index fund portfolio concept. (http://www.bogleheads.org/wiki/Three-fund_portfolio)

Seems pretty straight forward, however I posted a message about a week ago and folks were iffy on the bonds in a taxable account due to uncle sam! So I'm a bit lost on how to allocate.

Welcome to the forum. Don't overthink your situation and might I suggest starting at minimum with a read of this post to deal with some of your questions, followed by this wiki entry. It might seem basic, but given your questions giving those a read this as well as the post on tax efficiency will help.

Vanguard has: Vanguard LifeStrategy Moderate Growth Fund (VSMGX), which seems to be this same 3 index allocation. 60/40, domestic, international, and bonds.

I guess questions are:

1. how do I protect myself if bonds are bad in a taxable account...
2. is a fund like VSMGX a better fit, or is buying the 3 index funds individually better?

I've got other money being "managed" at a bank that I'm surely paying lots extra for... So I wanted to take this 10k and learn/understand. Than possibly move that money into this setup for myself. I'm already moving my Roth IRA at this time to Vanguard.

Thanks in advance for the help!

~Matt

Might I suggest at the minimum that you focus on the fundamentals (although having your dollars in Vanguard products is a very good start):

-Get your Emergency Fund sorted

-Maximize your tax deferred space (401k, IRA, HSA, etc) before you start filling up your taxable accounts.

-Avoid paying anyone to "manage" you investments especially a bank as they are in the business of selling you what's profitable over what's in your best interest (although this is very different from paying for direct finacial advice on a fee-only basis); get your money away from your bank as soon as possible. To avoid potential tax issues you can transfer the actual investments (i.e. funds, stocks, bonds) without selling the underlying securities to your Vanguard accounts and go from there. Give Vanguard a call and they can help you with the details.

-No need to overthink your bond situation. If taxes are a concern substitute the equivalent VG tax-exempt bond fund and you're done (assuming you've run out of room in your tax-advantaged space for bonds). The VG funds are high-quality and low-fee making them the best bet for someone in your situation (if you had 500k+ to invest in taxable bonds it might be a different story)

-Simplicity is your friend; given your tax concerns I'd recommend a three fund portfolio subsituting tax-exempt for total bond market if your tax-advantaged space is full of bonds and the target retirement funds don't make sense.

NOTE: all of this is said with very little by way of details; if you post more specifics (actual investments, tax brackets (fed and state), etc.) more specific advice can be given.

Good Luck,
Dan

[LadyGeek]

Welcome! I merged your first thread with this one, as it has additional helpful information. It's best to keep everything together, so we can take everything into consideration. Keep asking questions, and take your time.