Tax-Efficient Tactical Sector Diversification

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academianut
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Joined: Mon Jun 16, 2014 9:49 pm

Tax-Efficient Tactical Sector Diversification

Post by academianut »

Hi everyone,

I'm a long-time Vanguard investor. I've been very pleased with the performance of my portfolio, but I know I can do better. I recently checked out another investment company and went through their spiel. I thought they had some interesting advice, but I don't want to leave Vanguard (and pick up the company's heftier management fees). I liked their approach, but I don't care for the "personal touch" or whatever touchy-feely spin they used to try to justify their fees.

I think I know what I want, but I just can't seem to get sufficient visibility on the construction of Vanguard's mutual funds and ETFs to achieve tax efficient tactical sector diversification across my taxable and retirement accounts. I currently have $74k in a taxable JTWROS and a total of $83k in retirement accounts. I would like to have equal-weighted exposure to the 10 S&P sectors (10%/each) across these accounts, optimized for tax efficiency. Here's what I would like for my asset classes:

Stocks 75.00% Total
US 52.00%
Developed International 16.00%
Emerging markets 7.00%

Other 12.50% Total
US Real Estate 2.00%
Gold 2.50%
International Real Estate 2.00%
Energy 2.00%
Food 2.00%
Metals 2.00%

Bonds 12.50% Total
US corp. 4.00%
US govt. 3.00%
US inflation prot 2.75%
International 2.75%

And in terms of market capitalization, I would like to be 60% in Large cap, 20% in mid and 20% in small cap.

I've been reading forums and playing with the portfolio tester for a while. I've called Vanguard a few times, but can't seem to get any concrete advice from them. I figured I'd see if anyone here might be able to advise. I'm open to suggestions. My main objective is tax efficient tactical sector diversification across my taxable and retirement accounts.

I can't wait to hear what you would do with $74k in a taxable JTWROS and $83k in retirement accounts.
stlutz
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Re: Tax-Efficient Tactical Sector Diversification

Post by stlutz »

Complexity does not lead to higher returns. In fact, it often leads to lower returns as complexity leads to tinkering, and portfolio tinkering tends to result in buying high and selling low.

Pick 4 assets classes--start with total US, total international, an intermediate bond fund, and then pick a segment that's under-represented in TSM that you want to make a bet on. For some it's small/value stocks, for others it's REITs, but it can be Materials stocks for all I care.

Buy, hold, rebalance, and then spend your time on things more interesting--like posting on BH! :happy
curielmc
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Re: Tax-Efficient Tactical Sector Diversification

Post by curielmc »

I agree with academianut - complexity does not lead to higher returns. Whatever you decide to do, you should measure your performance against a simple, disaggregated portfolio. I use VT for stocks and SCHZ for bonds, since they are the most efficient ways to get exposure to the broad stock and bond markets, respectively.
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Topic Author
academianut
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Re: Tax-Efficient Tactical Sector Diversification

Post by academianut »

Thanks!

I wasn't trying to over complicate things; I just had an idea of the sort of exposures I'd like. I wasn't really planning on tinkering with it at all. I just wanted to set it and forget it; that's why I wanted to make sure I had ample exposure in this, perhaps overly-detailed, way.
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InvestorNewb
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Re: Tax-Efficient Tactical Sector Diversification

Post by InvestorNewb »

Why bother with gold and metals? It is very unboglehead-ish.

Having <2% allocation to something won't really move the needle.

Rebalancing will be more complicated with that setup.

I like the thread title though. IT sounds cool. :D
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
livesoft
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Re: Tax-Efficient Tactical Sector Diversification

Post by livesoft »

If one can come up with 10 asset classes, then surely they can find 10 ETFs that fulfill those asset classes. With less than 50% of the portfolio in taxable and a desire for 75% of portfolio in tax-efficient equities, I really don't see what the problem is in figuring this out.

Why not have a go at it and present actual ticker symbols in this thread? ???
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pkcrafter
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Re: Tax-Efficient Tactical Sector Diversification

Post by pkcrafter »

I'm a long-time Vanguard investor. I've been very pleased with the performance of my portfolio, but I know I can do better.
More than 80% of investors underperform the total stock market return after 20 years, and if equal weighting sectors did beat the overall market, everyone would be doing it. You can probably find individual ETFs and build your own equal-weighted portfolio. If you do, it won't be very tax efficient, and it will be difficult to rebalance and maintain the equal weight.

The ETF EQL is supposed to equal weight sectors, but M* doesn't confirm that.

http://portfolios.morningstar.com/fund/ ... ountry=USA

Here's how investors weight the sectors.

http://portfolios.morningstar.com/fund/ ... ountry=USA


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Last edited by pkcrafter on Tue Jun 17, 2014 6:30 pm, edited 1 time in total.
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freddie
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Re: Tax-Efficient Tactical Sector Diversification

Post by freddie »

You can buy 1 ETF that will equal weight all the sectors (something like EQL) or just hold multiple sector funds. Heck you could even go equal weight sectors with equal wieght within the sector. Problem getting a 60/20/20 size split using those funds is going to be pretty much impossible. You pick one or the other and go with it. If you pick 10 sector funds, you can put the historically high div ones in tax advantaged space.
livesoft wrote:If one can come up with 10 asset classes, then surely they can find 10 ETFs that fulfill those asset classes. With less than 50% of the portfolio in taxable and a desire for 75% of portfolio in tax-efficient equities, I really don't see what the problem is in figuring this out.

Why not have a go at it and present actual ticker symbols in this thread? ???
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midareff
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Re: Tax-Efficient Tactical Sector Diversification

Post by midareff »

academianut wrote:Hi everyone,

I'm a long-time Vanguard investor. I've been very pleased with the performance of my portfolio, but I know I can do better. I recently checked out another investment company and went through their spiel. I thought they had some interesting advice, but I don't want to leave Vanguard (and pick up the company's heftier management fees). I liked their approach, but I don't care for the "personal touch" or whatever touchy-feely spin they used to try to justify their fees.

I think I know what I want, but I just can't seem to get sufficient visibility on the construction of Vanguard's mutual funds and ETFs to achieve tax efficient tactical sector diversification across my taxable and retirement accounts. I currently have $74k in a taxable JTWROS and a total of $83k in retirement accounts. I would like to have equal-weighted exposure to the 10 S&P sectors (10%/each) across these accounts, optimized for tax efficiency. Here's what I would like for my asset classes:

Stocks 75.00% Total
US 52.00%
Developed International 16.00%
Emerging markets 7.00%

Other 12.50% Total
US Real Estate 2.00%
Gold 2.50%
International Real Estate 2.00%
Energy 2.00%
Food 2.00%
Metals 2.00%

Bonds 12.50% Total
US corp. 4.00%
US govt. 3.00%
US inflation prot 2.75%
International 2.75%

And in terms of market capitalization, I would like to be 60% in Large cap, 20% in mid and 20% in small cap.

I've been reading forums and playing with the portfolio tester for a while. I've called Vanguard a few times, but can't seem to get any concrete advice from them. I figured I'd see if anyone here might be able to advise. I'm open to suggestions. My main objective is tax efficient tactical sector diversification across my taxable and retirement accounts.

I can't wait to hear what you would do with $74k in a taxable JTWROS and $83k in retirement accounts.

With small portfolio slices (9 slices @ 3% or less with 5 of them at 2%) you are making little piles of investments that will have a negligible effect on your total performance, and create lots of little transactions. Do you rebalance when 2% becomes 2.2%? 2.4%? etc.?

Probably anything less than 5% can't budge the needle so why don't you put fewer sauces in larger containers?

"I've been very pleased with the performance of my portfolio, but I know I can do better. " Ever hear this one? The natural enemy of a good plan is the thought of a better one.
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ruralavalon
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Re: Tax-Efficient Tactical Sector Diversification

Post by ruralavalon »

Welcome to the forum :) .

You are very wise to decline the other company's "heftier management fees".

2 or 3% in anything can't materially change portfolio performance, and 13 different holdings just makes things more complicated and hard to manage.
academianut wrote:I think I know what I want, but I just can't seem to get sufficient visibility on the construction of Vanguard's mutual funds and ETFs . . . . . . Here's what I would like for my asset classes:
I don't really understand your comment about visibility and construction of funds. Vanguard has funds that specifically cover each area you mention except: food; gold; and metals.

academianut wrote:I wasn't trying to over complicate things; I just had an idea of the sort of exposures I'd like. I wasn't really planning on tinkering with it at all. I just wanted to set it and forget it; that's why I wanted to make sure I had ample exposure in this, perhaps overly-detailed, way.
I personally would not use any sector fund other than the REIT index fund and the Precious Metals an& Mining fund. Neither is a "set it and forget it" idea, they are very volatile, especially the PM&M fund.

By the way, I like your username.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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cfs
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Re: Tax-Efficient Tactical Sector Diversification

Post by cfs »

The Other part.

In my opinion, the "other" part is not needed, I would take that 12.5% and move it to the equity and bond side of the portfolio, keeping things simple for tracking and re-balancing. Just my two centimos. And now back to watching the World Cup.

Thanks for reading.
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Topic Author
academianut
Posts: 3
Joined: Mon Jun 16, 2014 9:49 pm

Re: Tax-Efficient Tactical Sector Diversification

Post by academianut »

Thanks for everyone's feedback.

I'm hearing an overwhelming consensus to pare down holdings and to not sweat the smaller percentages. I was basically trying to figure out how to achieve the advisor's portfolio with Vanguard offerings. I didn't want to skew your recommendations by introducing ticker symbols because I was hoping for a clean-slate recommendation, but I guess now it would make sense to share my current holdings and adjust them from here.

Retirement
$72k of the $83k in retirement is invested in Vanguard's target retirement funds, with the remaining $11k in Vanguard Wellesley Income Fund Investor Shares (VWINX).

Non-retirement
$22k of the $76k is invested in Vanguard Growth Index Fund Admiral Shares (VIGAX).
$18k of the $76k is invested in Vanguard Selected Value Fund (VASVX).
$15k of the $76k is invested in Vanguard Small-Cap Index Fund Admiral Shares (VSMAX).
$21k of the $76k is invested in Vanguard Total International Stock Index Fund Admiral Shares (VTIAX).

I like all of these holdings, but I find myself fairly overweight in health care and technology. Also, even though the funds in the non-retirement account are index funds, I seem to accumulate fairly hefty dividend distributions from these holdings (particularly VASVX and VTIAX).

Based on your feedback, it looks like I might consider adding a REIT and Precious metals ETF to my retirement accounts. I'm just not sure what I should keep in my taxable account.
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