What to do with my STAR fund? Newbie queston...

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Trailbreaker1
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What to do with my STAR fund? Newbie queston...

Post by Trailbreaker1 »

Hello everyone,

This is my first post on these boards and I'm pretty new to investing. I have been reading about these index funds and their low costs for a couple months now and a few weeks ago I opened up The Total stock Market index (VTSMX) investor shares. The only other outside my 401K investment I have besides that is the STAR fund. I've been invested in the STAR fund for 7 years now. It was my first investment ever, It's been a really good starter fund for me as it helped me put the 20% down payment on my home. I like the 60/40 stock n bond ratio. But it is actively managed and even though the (ER is 0.34) is still "low" its not as low as an index fund that's similar, the Lifestrategy moderate growth fund (VSMGX, ER is 0.16). I dunno if a ER difference of 0.18 is a significant savings over the long term or not. The performance between the 2 are about the same.

I have @ $10K in the STAR fund and have been thinking about doing one of these 3 things with it...

1). Put all that money into a different index fund, such as one of the Lifestrategy funds so I can save on costs and be all indexed.
2). Transfer @ $7k over to VTSMX and get admiral shares right away (save even more costs) and use the other $3K to open and start a Lifestrategy fund.
3). Make no changes and keep the STAR fund and continue to regularly invest in it along w VTSMX.


I was going to do the fund-to-fund exchange that Vanguard offers to do this.

My question is this...In your opinion, Is this a good idea for me to make that switch? Am I thinking on the right track with my thought process or am I wasting my time even thinking about this? This question is prolly going to sound really stupid to some of you but it's been on my mind a lot and would love to have any and all feedback. Opinions etc...

My goal with these outside investments with vanguard is to contribute monthly to them and hold on to them for @ 20-25 years or as long as I can through thick and think. I just wanna do it the right way....or the "best" way possible.

Thanks everyone for your input! :D
My portfolio | Vanguard TSM index (40%), Vanguard TISM index (20%), Vanguard small cap value index (20%), Vanguard EM index (10%), Vanguard REIT index (10%).
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bottomfisher
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Re: What to do with my STAR fund? Newbie queston...

Post by bottomfisher »

Vg Star is a solid fund. It has a low ER despite its active management. And the active management is fairly conservative. The fund is much like a balanced index fund with slightly higher costs. You mentioned Star is held outside of your 401k. You didn't mention whether your Star fund is in another type of tax deferred account like a Roth IRA. If it is your taxable account, I would consider holding it there to avoid paying capital gain taxes on selling the fund. If it is in a tax deferred account you have more flexibility. And its up to you how important the differences in expense ratios are worth. Again I don't think the active management is as much an issue IMHO with this particular actively managed fund.

Addendum: OTOH Star fund isn't very tax efficient in case you are holding it in your taxable account; there are better tax efficient options for a taxable account than Star or LifeStrategy due to the type of bonds they hold.
Last edited by bottomfisher on Mon Apr 01, 2013 11:44 am, edited 1 time in total.
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Trailbreaker1
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Re: What to do with my STAR fund? Newbie queston...

Post by Trailbreaker1 »

Thanks bottomfisher for the reply! I do not have the STAR fund in another tax deffered account. Unfortunalty my 401k funds don't have any vanguard options. Just this SSga company that has index funds available.

Both my Vanguard funds (STAR and VTSMX) are in a taxable account. I guess my thinking at the time was if for some odd/ emergent reason I did need some access to that money I could withdrawl from it. I understand if it's in an IRA and you take money out you get hit with a 10% penelty if your under 59 1/2 years of age. But the ultimate goal is to leave it there and let compound interest do it's thing. I have a 4 months emergancy savings if I need a lil emergancy cash tho.

The STAR fund is pretty darn solid....I've just now been noticing little things like Expense ratios etc and was playing with the idea of going all index with ultra low ER's.

Thanks again :)
My portfolio | Vanguard TSM index (40%), Vanguard TISM index (20%), Vanguard small cap value index (20%), Vanguard EM index (10%), Vanguard REIT index (10%).
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Taylor Larimore
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Re: What to do with my STAR fund? Newbie queston...

Post by Taylor Larimore »

Trailbraker:

Welcome to the Bogleheads Forum!

STAR fund was our first Vanguard Investment. I like it. However, balanced funds like STAR are seldom suitable for taxable accounts. Their taxable bonds or stocks will be in the wrong type account. Over the past 15 years STAR fund holders (in high tax brackets) have lost more than 1% of their annual return to taxes.

Are you aware that Roth IRA contributions are available at any time for any reason without tax or penalty?

Use this link to our wiki for information about fund placement:

Principles of Tax-Efficient Fund Placement

To get specific advice, it will be helpful if you provide more information. Use this link:

Asking Portfolio Questions

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Grt2bOutdoors
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Re: What to do with my STAR fund? Newbie queston...

Post by Grt2bOutdoors »

I hold the STAR fund in a tax-deferred account. It's a good fund, however if held in a taxable account you may needlessly be paying taxes on distributions. The main problem with the actively managed index funds (Lifestrategy) and other funds are you will have to declare distributions on your tax return - this occurs when they re-balance the fund to stay in line with their stated allocation.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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bottomfisher
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Re: What to do with my STAR fund? Newbie queston...

Post by bottomfisher »

I added an addendum to my prior post after thinking about it a little further. I think Star or LifeStrategy are less than ideal for taxable account. I am in a similiar situation as you with my taxable account. I've actually made my own essentially balanced fund with Vg TSM and Vg LT Municiple bond fund. This approach is more tax efficient due to taxable bond component in Star and LifeStrategy. Another consideration is the Vg Tax Manged Balanced fund. I actually own this one as well but its earmarked for a special purpose. The stock/bond ratio is 50/50; so not quite what your were looking for. But the improved tax efficiency may help offset the less than ideal allocation for you. Hope that helps
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jjunk
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Re: What to do with my STAR fund? Newbie queston...

Post by jjunk »

I'm always interested in conversations like these as I am 50/50 Wellington/Wellesley in a taxable account. I'm still trying to understand the arguments for efficient fund placement vs. overall performance.

When I look at something like the Tax-Managed vs. STAR over the last 10yrs, STAR outperforms even after costs/taxes are removed. This was the same when I looked at my allocations vs. making my own efficiencies using tax-advantages. Is the argument here more about keeping the govt from getting your money? Because I haven't seen anything that shows a well managed balanced fund isn't a better option, regardless of the placement in taxable or tax-deferred. Below is the 10yr comparison for a couple of these funds. I know I shouldn't preach the backwards looking philosophy but its still a data point (which happens to hold up remarkably well in Morningstar.com comparisons over longer periods of time).

https://personal.vanguard.com/us/funds/ ... tingFrom=2
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ofcmetz
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Re: What to do with my STAR fund? Newbie queston...

Post by ofcmetz »

I agree with those who say that they wouldn't hold STAR in taxable. The Target Retirement and Lifestrategy funds are superior IMO for reasons stated.

I would start with Admiral shares of the Total Stock Market Index or Total International Index. Adjust the 401K accordingly to maintain you desired asset allocation while seeing both the 401K and the taxable account as two parts of one total portfolio.
Never underestimate the power of the force of low cost index funds.
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bottomfisher
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Re: What to do with my STAR fund? Newbie queston...

Post by bottomfisher »

When I look at something like the Tax-Managed vs. STAR over the last 10yrs, STAR outperforms even after costs/taxes are removed. This was the same when I looked at my allocations vs. making my own efficiencies using tax-advantages.
If your funds are doing better even after taxes and you're content paying the additional taxes - it's difficult to argue that you should be doing otherwise with your money. As always the standard caveat applies - past performance doesn't ....
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Trailbreaker1
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Re: What to do with my STAR fund? Newbie queston...

Post by Trailbreaker1 »

Thanks for all the great replies! I really appreciate all your input!

....I guess I should have had the STAR fund in a roth IRA (oh well). Since I have it in a taxable account I don't see a point in having lots of $$ in it. I think I'm going do a fund-to-fund echange and tranfer enough money from my STAR fund over to my Vanguard Total Stock Market index fund and get those crazy low admiral ER's.

The way I have it now is $10K in STAR and $3K in VTSMX. It should be the other way around.....I want it $10K VTSMX (admiral) and $3K in STAR. and I'll go from there.

Still not sure if I'll keep a lil money in my taxable STAR fund or just sell the whole thing off and get one of those nice lil Lifestrategy funds or Target date funds in a IRA account. One step at a time I guess. I'm just happy I'm in the investing game now and saving and contributing and doing something. Most of my friends are just watching on the sidelines doing nothing.

Thanks again everyone!
My portfolio | Vanguard TSM index (40%), Vanguard TISM index (20%), Vanguard small cap value index (20%), Vanguard EM index (10%), Vanguard REIT index (10%).
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telemark
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Re: What to do with my STAR fund? Newbie queston...

Post by telemark »

To get some idea of how much it would cost you in taxes, you can sign on to the Vanguard site. choose My Accounts -> Taxes & Income, then choose the Cost Basis link on the left hand side of the screen, and look for the Capital gain/loss column. The best time to switch would be when you have losses, but I can't predict when that may happen.
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bottomfisher
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Re: What to do with my STAR fund? Newbie queston...

Post by bottomfisher »

The way I have it now is $10K in STAR and $3K in VTSMX. It should be the other way around.....I want it $10K VTSMX (admiral) and $3K in STAR. and I'll go from there.

Still not sure if I'll keep a lil money in my taxable STAR fund or just sell the whole thing off and get one of those nice lil Lifestrategy funds or Target date funds in a IRA account.
There may be some accounting implications if you only sell part of the fund from your taxable and you made various purchases over time and had re-invested multiple dividends over time. Look into your cost basis and how should account for this if you decide to sell the fund. It may be easier just exchange the entire fund based on average cost depending on your situation.
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BL
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Re: What to do with my STAR fund? Newbie queston...

Post by BL »

I would sell Star in taxable and buy in a Roth IRA (or tIRA). You can put 5000 into a Roth for 2012 until April 15th and 5500 into Roth for 2013 until April 15th of 2014. Actually you can buy anything you want but at least there won't be an expense in changing it in the future and you don't have to worry about it being in taxable.
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Re: What to do with my STAR fund? Newbie queston...

Post by Dandy »

The Star fund is a very good starter fund. At a young age and early in the accumulation phase you are right to turn your attention to lower cost index funds. Over the short term 18 basis points in expense isn't a concern but over the long run why not be lower cost and gain the effeciency of having bonds mostly in tax advantaged accounts and equities mostly in taxable accounts.

However, to me your focus should be on getting your allocation to match your risk tolerance and making sure you are saving a sufficient portion of your income. Then to get your location of investments to be reasonably tax effecient by using mostly low cost index funds. Don't mess up your target portfolio allocation just to gain a few expense dollars. i.e. don't change to a lot more Total US Stock Market fund if that means having more equities than planned.
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Trailbreaker1
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Re: What to do with my STAR fund? Newbie queston...

Post by Trailbreaker1 »

Very nice input from everyone...Thank you all! :)

My AA is right now (at 37 years old) is primarly in stocks. I have bonds in my 401K. so If I did sell my STAR fund and exchanged it all to Total US Stock Market Index, my AA looks something like 85/15 stock to bond ratio. My risk tolerence is very high. During the 2008-2009 crash I saw my STAR fund plummet....I slept well n didn't care...I kept investing and added a little more to it knowing it would eventually come back up, and sure enough it did. Having an extra 4 month emergancy fund in the bank sure helped ease my worries a lot!
I figure after 10 years of going primarly stock index investing I'll slowly add Total bond Market index into my portfolio mix (in a tax defered account). I hate reading about bonds....so boring to me, but I know there an important part of investing and AA.

I'm gonna take my time with this decesion on what to do with the STAR fund. I thought if I had it in a Roth IRA and I had to withdraw from it then I get slammed with a 10% penalty + taxes and god knows what elese. After reading what you guy's say and looking more into it I guess that's not the case. Good to know.

Thanks again everyone!
My portfolio | Vanguard TSM index (40%), Vanguard TISM index (20%), Vanguard small cap value index (20%), Vanguard EM index (10%), Vanguard REIT index (10%).
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