New to taxable accounts

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Topic Author
megaluke
Posts: 37
Joined: Sat Aug 04, 2012 11:35 am

New to taxable accounts

Post by megaluke »

Hello,
I was thinking of opening a taxable account with vangaurd but I could probably use a little guidance in doing so.

I am self employed
married
live in Ohio
$75K emergency fund
I max out my SEP every year*
$400K loan on my house (no debt besides that)

I have $100,000 to invest (this does not include my emergency fund). I was initially going to get a vanguard tax advantaged balance fund and pair it with tax advantaged small cap fund and allocate it so it was a 60/40 portoflio. I thought this would be the easiest to manage (I don't want any more that 3 or 4 funds to manage) or do I purchase the ohio tax exempt long term bonds and pair that with a S&P fund. Anyway, as you can see I am not quite sure. Simply put what should I do with $100K

*I should note that I do have an financial advisor and I am well diversified with DFA funds. I know, I know, I should be doing all this on my own but at this stage in my life I just don't have the time to manage it but like bill bernstein says "if you are going to use an advisor, make sure they have access to DFA" I want to open the vanguard accounts on my own but this is also why I only want to manage 3-4 funds.

Thank you
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Taylor Larimore
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Use tax-efficient funds in taxable accounts.

Post by Taylor Larimore »

Megaluke:

It is important in taxable accounts to use tax-efficient funds that can be held "forever" (selling triggers taxes). Balanced funds holding taxable bonds are nearly always a poor choice.

Vanguard's Total Stock Market and/or Total International Stock Market are two funds that are often recommended.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Topic Author
megaluke
Posts: 37
Joined: Sat Aug 04, 2012 11:35 am

Re: New to taxable accounts

Post by megaluke »

Thank you I will definitely consider those. I forgot to mention that I am 38 and I certainly hope I can invest in these funds for decades to come but you never know. What about the Tax managed small cap? and should I consider the ohio Tax exempt bond fund. I think the trickiest part will be deciding what to do about bonds Any suggestions?
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Chan_va
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Re: New to taxable accounts

Post by Chan_va »

Look at your taxable + tax deferred (IRA's, 401k's) + tax free (Roth) as one big bucket. Decide on an asset allocation, and place bonds for the most part in your tax deferred accounts.
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Taylor Larimore
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The Three Fund Portfolio

Post by Taylor Larimore »

What about the Tax managed small cap? and should I consider the Ohio Tax exempt bond fund. I think the trickiest part will be deciding what to do about bonds Any suggestions?
Megaluke:

Have you investigated The Three Fund Portfolio.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Topic Author
megaluke
Posts: 37
Joined: Sat Aug 04, 2012 11:35 am

Re: New to taxable accounts

Post by megaluke »

Chan,
I thought about that but like I said, I already am well diversified in DFA. I have long term, intermediate, short and Tips. I understand by opening new accounts with vanguard that there will probably be some overlap
Topic Author
megaluke
Posts: 37
Joined: Sat Aug 04, 2012 11:35 am

Re: New to taxable accounts

Post by megaluke »

Taylor,
Yes I have but I thought I shouldnt put a total bond index in a taxable account. or should I ?
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Chan_va
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Re: New to taxable accounts

Post by Chan_va »

megaluke wrote:Chan,
I thought about that but like I said, I already am well diversified in DFA. I have long term, intermediate, short and Tips. I understand by opening new accounts with vanguard that there will probably be some overlap
What is your current asset allocation within your DFA funds?
Topic Author
megaluke
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Joined: Sat Aug 04, 2012 11:35 am

Re: New to taxable accounts

Post by megaluke »

80/20
livesoft
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Re: New to taxable accounts

Post by livesoft »

I don't have my taxable account match my portfolio asset allocation at all. Instead, I have my taxable account 100% equities and let my tax-advantaged accounts hold my fixed income fund. So why don't you just have 2 funds in your taxable account: Total Int'l Stock Market Index and Total US Stock Market Index.

You can have your advisor increase the percentage of bonds in the portfolio they manage for you in order to offset your purchase of equities only in your taxable account.
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Chan_va
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Re: New to taxable accounts

Post by Chan_va »

I would still highly recommend treating all your accounts as one bucket.

But if you insist on a 60:40 AA in taxable with 100k, here is one simple option

Total Stock Market - 40k
Total International Stock Market - 20k
Intermediate term tax exempt - 40k

The ohio tax exempt fund has a higher duration than I would like
Topic Author
megaluke
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Joined: Sat Aug 04, 2012 11:35 am

Re: New to taxable accounts

Post by megaluke »

Livesoft,
I like the simplicity of that, I was considering the tax managed small cap fund. Do you think its a bit overpriced right now and maybe I should add it down the road?
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Taylor Larimore
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Fund placement

Post by Taylor Larimore »

Megaluke:

I wrote: "Have you investigated The Three Fund Portfolio."

You replied: "Yes I have but I thought I shouldn't put a total bond index in a taxable account. or should I ?"

My Three Fund Portfolio thread recommends putting Total Bond Market Index Fund in a tax-advantaged account:
Fund Placement for maximum tax-efficiency: Place Total Bond Market in tax-advantaged account(s). Place Total Stock Market and Total International in tax-advantaged account(s) or taxable account.
If you have no room in tax-advantaged accounts, use a similar tax-exempt bond fund like Vanguard's Tax-Exempt Intermediate-Term Bond Fund in your taxable account.

You should incorporate your DFA funds as one overall portfolio.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Topic Author
megaluke
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Re: New to taxable accounts

Post by megaluke »

Taylor,
Here is what my DFA portfolio consists of. Do you think I should do something other than a 3 fund portfolio after seeing this or should I do something different all together. Thanks for you patience and help

DFA U.S. Core Equity 2 (DFQTX)
DFA U.S. Small-Cap Value (DFSVX)
DFA International Small-Cap Value (DISVX)
DFA International Value (DFIVX)
DFA U.S. Large-Cap Value (DFLVX)
DFA Emerging Markets Core (DFCEX)
DFA Five-Year Global Fixed Income (DFGBX)
DFA Intermediate-Term Extended Quality (DFTEX)
DFA International Core Equity (DFIEX)
DFA Inflation-Protected Securities (DIPSX)
DFA Two-Year Global Fixed Income (DFGFX)
DFA Commodity Strategy Portfolio (DCMSX)
DFA U.S. Micro-Cap (DFSCX)
DFA Real Estate Securities (DFREX)
DFA International Real Estate Securities (DFITX)
livesoft
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Re: New to taxable accounts

Post by livesoft »

megaluke wrote:Livesoft,
I like the simplicity of that, I was considering the tax managed small cap fund. Do you think its a bit overpriced right now and maybe I should add it down the road?
I'm agnostic on tax-managed small cap fund. In general, index funds are not overpriced, so your question is not one I would be asking. Instead, I would ask, "Does my asset allocation require me to buy more US small caps now?" or "Am I underweighted in US small caps?" If the answer is Yes, then buy more small caps.
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Taylor Larimore
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New information changes things.

Post by Taylor Larimore »

Megaluke:

You have presented us with a whole new ballgame. We don't know the percent of each fund in your TOTAL portfolio. We don't know if your DFA funds are in taxable or in tax-advantaged accounts. We don't know your age, desired asset allocation, tax-bracket, etc. Frankly, I am unimpressed with any adviser who recommends 15 funds as a part of a portfolio.

Without more complete information I am reluctant to make suggestions. If fact, you should ignore my previous suggestions.

If you provide the information and format in this link, we can give you informed suggestions:

ASKING PORTFOLIO QUESTIONS

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Topic Author
megaluke
Posts: 37
Joined: Sat Aug 04, 2012 11:35 am

Re: New to taxable accounts

Post by megaluke »

Taylor, I see your point. I guess I was just skipping alot of that info and trying to see what funds I should purchase with the extra money I had in a taxable account . I still feel when all is said and done I will just stick with a simple 3 fund portfolio. However, here is the additional information for you to look over and will certainly consider any thoughts you may have for my future investments with Vanguard. Thanks again and let me know if you need some more info

I am self employed and my wife doesnt work
Emergency Fund: I have 12 months of expenses set aside
$400,000 mortgage loan at 3.5% 30 year. This is my only debt
Married
Tax Rate: 33%
State: Ohio
Age: 38
Desired asset allocation for taxable accounts is 60/40
International allocation between 25-35%

Below is breakdown of my current SEP with my advisor. it is 80/20 with DFA current size is low six figures


US MARKET EQUITY 21.66%
US LG VALUE 7.57%
US SM NEUTRAL 2.91%
US SM VALUE 11.94%
INT'L MKT EQUITY 5.17%
INT'L LG VALUE 7.59%
INT'L SM VALUE 7.76%
EMERGING MARKETS 7.38%
US REAL ESTATE 2.62%
INT'L REAL ESTATE 1.15%
COMMODITIES 3.40%
SHORT TERM (<3yrs) 3.93%
INTERMEDIATE TERM 16.19%
TIPS 4.07
CASH/MONEY MARKET 0.72%
100.00%
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Taylor Larimore
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A complicated situation.

Post by Taylor Larimore »

Megaluke:

You have a complicated situation with needed information missing.

Sorry, but I simply don't have the time to give your situation the analysis it deserves. Consider the advice of your own adviser.

I hope others will step in to help you.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Zabar
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Re: New to taxable accounts

Post by Zabar »

megaluke wrote:I should note that I do have an financial advisor and I am well diversified with DFA funds. I know, I know, I should be doing all this on my own but at this stage in my life I just don't have the time to manage it but like bill bernstein says "if you are going to use an advisor, make sure they have access to DFA" I want to open the vanguard accounts on my own but this is also why I only want to manage 3-4 funds.
There's absolutely nothing wrong with using an ethical, high-quality advisor for your investments and/or for other areas of personal finance. I personally hold a bunch of DFA funds that I purchased through an advisor. However, you want to make sure that the various components of your investments are coordinated. If you trust your advisor, then you should be asking him/her, and specifying whether you want these non-retirement investments to be part of your assets under management, if that's how you're paying for services.
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LowER
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Re: New to taxable accounts

Post by LowER »

megaluke:

You have gotten some great advice here, some of which may seem subtle, like from Taylor and livesoft and others, but is based on lots of research. It is not imparted with bright lights or colorful adjectives or hyperbole or predictions or promises, which is consistent with their/my investing philosophy: solid, evidence-based boring investing. My wholehearted endorsement of their recommendations for total stock index and total international index in taxable is akin to the mayor Podunk (population 8) endorsing the US presidents' policy on whatever, but after months and months of reading and researching like it mattered a lot, I do happen to walk that walk with many coveted dollars made more dear by a fairly recent need to re-start retirement accumulation at an advanced age.

Another amateur observation: your current portfolio seems more complex than it may need to be. Have you run it through the Morningstar X-ray calculator? My hunch is that you may find some unnecessary overlap.

Please carefully re-read the advice given above knowing that that advice is NOT a sales pitch by any stretch of anyone's imagination.

By the way, you seem to be doing great for your age, so keep it up, with the fine-tuning advice mentioned above.
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