Taxable Low-Risk Placement

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Taxable Low-Risk Placement

Postby SkolVikes7 » Sat Jul 27, 2013 7:02 am

Trying to help a friend out with a question regarding money he has in some high risk equity funds/individual stocks he has with fidelity. He is already maxing out his tax sheltered retirement savings and has a solid emergency fund (index funds). He wants to use the $80k that he has invested with fidelity and transition it from these high risk assets to use for a downpayment for a house in 3-5 years. My first instinct is to tell him to sell these to purchase a short term bond index fund (such as Fidelity Spartan Short-Term Treasury Bond Index Fund Investor Class). Although I know it is not ideal to hold these types of funds in a taxable account.

Another note is he is currently in a tax free zone (and spend the past three months in a tax free zone), I don't know if that would change anything. In all reality, the decision to go with CD's, MM or Short term bond funds in this time frame will most likely not make much of a difference, I am just looking for any advice or oh bye the ways before I tell him my opinion. Thanks!
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Re: Taxable Low-Risk Placement

Postby tyler_cracker » Sat Jul 27, 2013 1:17 pm

i guess i can offer advice to a vikings fan since my preferred team is in the afc :p.

SkolVikes7 wrote:has a solid emergency fund (index funds).


absent context, index funds are not appropriate for an emergency fund.

He wants to use the $80k that he has invested with fidelity and transition it from these high risk assets to use for a downpayment for a house in 3-5 years.


this is a really bad idea, as it seems you are aware.

My first instinct is to tell him to sell these to purchase a short term bond index fund (such as Fidelity Spartan Short-Term Treasury Bond Index Fund Investor Class). Although I know it is not ideal to hold these types of funds in a taxable account.

Another note is he is currently in a tax free zone (and spend the past three months in a tax free zone), I don't know if that would change anything. In all reality, the decision to go with CD's, MM or Short term bond funds in this time frame will most likely not make much of a difference, I am just looking for any advice or oh bye the ways before I tell him my opinion. Thanks!


i don't know what you mean by "tax free zone". does this impact your concerns about potentially holding tax-inefficient assets in taxable space?

i think the options you're considering are all reasonable. you should also look at I Bonds. you could consider municipal bond funds, which bear more risk (weaker diversification) but have better tax efficiency.

if it were me, i wouldn't mess around with these nonzero-risk vehicles (bonds) when there are zero-risk vehicles (CDs, I Bonds) with similar yields right now. for the long run, i'm perfectly satisfied with bond funds. 3-5 years is not the long run.

gl!
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Re: Taxable Low-Risk Placement

Postby livesoft » Sat Jul 27, 2013 1:25 pm

I think going to a short-term bond fund at Fidelity is just fine for this. Basically, taxes won't really matter much since these funds pay virtually nothing and might have a chance for tax-loss harvesting. Furthermore, in reality it won't really matter at all if the $80,000 makes $500 or loses $500.

My personal choice nowadays is to use VCSH (an ETF) for my short-term bond fund with dividends re-invested. I believe Fidelity will re-invest the monthly dividends for free. I think it will cost a commission to buy the initial shares of VCSH at Fidelity. It's a corporate bond index fund so has more risk (and potentially more reward) than a Spartan Treasury fund.

Anyways, zero-risk is not really zero-risk because of inflation, so I don't use CDs and FDIC-insured investments that pay little. Some folks on the forum advocate going to online savings accounts that pay about 1%. I don't like to do that myself because of market timing moves I make that I don't want to pollute this thread with.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Taxable Low-Risk Placement

Postby Stonebr » Sat Jul 27, 2013 1:33 pm

3-5 years would imply CDs or an online savings account. Short term fund would be another option. The market risk is non-zero, but as long as your friend understand this, ST funds are still an option. But I don't see that there's so much more income from them than from bank products to justify the risk.

The issue with emergency funds in stocks is that a financial emergency (like loss of job) might come at the same time as a general market crash -- like 2008-9 when so many formerly affluent people were stuck with no job, stocks selling down 50%, and a house that was unsellable. Not a good time to be tapping index funds for groceries or braces for the kid. However, with $80k in a CD/ST/Online Savings you get double-duty: emergency fund and down payment at the same time. At least until they buy the house.
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Re: Taxable Low-Risk Placement

Postby jsl11 » Sat Jul 27, 2013 1:34 pm

With the possibility that interest rates may rise over the next few years, I would suggest CDs for money needed in 3 to 5 years. Be sure that the CDs are FDIC or NCUA (for credit unions) insured. CDs probably will not have any real return, but at least they will not lose money.
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Re: Taxable Low-Risk Placement

Postby dbr » Sat Jul 27, 2013 1:37 pm

livesoft wrote:
Anyways, zero-risk is not really zero-risk because of inflation . . .


Which brings up the point that the amount of money needed for the down payment may be increasing in a way that is not certain. Certainty in the amount of money that will be available isn't the whole story. However, the action to take for this might be to add a contingency to the estimate. Taking risk with the investment is not a solution. Of course inflation risk measured by CPI can be eliminated by a period matched investment in TIPS bonds, if one is certain about the timeline.
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Re: Taxable Low-Risk Placement

Postby SkolVikes7 » Sat Jul 27, 2013 1:39 pm

All great advice, thank you. I must have sneezed while I was typing. He does not have his emergency funds in the form of index funds. It should have read: He has a solid emergency fund and his retirement savings invested in index funds. Sorry for the confusion and thanks again for the replies.
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