Initial stakes in taxable account established.

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Initial stakes in taxable account established.

Postby IlliniDave » Fri Jun 28, 2013 9:54 am

I just placed my last buy orders at Vanguard to establish an initial stake in each of the 6 funds I plan to hold in my taxable "investment" account (I have other holdings in my taxable account that are part of my emergency fund savings).

These are the 6 funds I've established (all Vanguard):

Core:
Total Stock Market Index
Total International Stock Index
Intermediate-term Tax-exempt Bond

Small Tilts:
Mid-Cap Index
Small-Cap Index
Emerging Market Stock Index

For the next several months I'll be building up the assets in the core funds until they're about 75-80% of the total, then building everything together in proportions according to my IPS. When my total balance reaches $200K I may consider adding another tilt or two (e.g., Int'l small cap index)

My questions are to those with knowledge/experience of taxable accounts:

    1. Do the six fund styles I have seem reasonable as holdings in a taxable account? (they seem to align with what I've read on the subject)
    2. Is there anything I'm missing that could be distinctly advantageous for a taxable account?
Thanks!
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Re: Initial stakes in taxable account established.

Postby House Blend » Fri Jun 28, 2013 11:17 am

1. The cool kids that tilt prefer small and value, not so much small by itself.

2. More important question not touched on here: what is your overall asset allocation? Choose that first, and then decide what the best way to achieve that is, based on tax considerations, space available in tax-advantaged locations, and fund choices in your 401k.
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Re: Initial stakes in taxable account established.

Postby IlliniDave » Fri Jun 28, 2013 12:02 pm

House Blend wrote:1. The cool kids that tilt prefer small and value, not so much small by itself.

2. More important question not touched on here: what is your overall asset allocation? Choose that first, and then decide what the best way to achieve that is, based on tax considerations, space available in tax-advantaged locations, and fund choices in your 401k.


Thanks House!

I was intending to add a value tilt in my Roth IRA (no opportunity in 401) because value seems to come with higher dividend yields (and with the new index it looks like dividend yield is even one of the weighting factors for inclusion in the value category, albeit a smaller one). I'd like to add it in both places but a quick back of the envelope with data based on the old indexes made the "blend" index appear slightly better in a taxable account. I'm not sure what to expect out of the new indexes going forward.

Maybe the tax consequences aren't serious enough to worry about?

I've already set my asset allocation. My (new) taxable investment account is not in alignment yet only because I'm working through all the minimum fund balances and whatnot. Through ongoing contributions I should be on target before the end of the year. I don't have the numbers in front of me but generally I'm heading towards 70/30 stocks/bonds, and within stocks 70/30 domestic/int'l and within both of those the respective tilts will cumulatively occupy 10-15% of the category.

It's pretty similar to my overall/retirement account allocation. This taxable account may be put to a separate pre- retirement use down the road, so I opted to more-or-less implement my overall allocation strategy separately in both tax domains.
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Re: Initial stakes in taxable account established.

Postby petrico » Fri Jun 28, 2013 12:06 pm

IlliniDave,

Without knowing your overall AA and where your assets are located (how many other accounts, what type of accounts, investment options, etc.), my one comment is that you appear to have chosen a very high number of funds to put in a taxable account. Is there any overlap with the assets held in tax-advantaged accounts?

I try to minimize fund overlap between accounts. That's especially true for the taxable funds. Almost 36% of my overall retirement AA is located in taxable accounts, and that portion consists solely of a total stock market index fund and an emerging markets index fund. Those two selections were made based upon what is available in a defined contribution plan.

My recommendation is to consider paring down the number of taxable funds, if possible. I don't say that for the sake of simplicity alone, as I also have far more funds than a good Boglehead should. But I don't want too many taxable funds.

First, total market funds tend to be more tax efficient than other narrower market slices. Second, because you will not likely want to sell any taxable funds with taxable gains, you should favor funds that you know you will need in your portfolio "forever." Core total market funds meet that test superbly. Third, while I don't advocate simplicity for simplicity's sake alone, it's far simpler at tax time to deal with one or two taxable funds than a half dozen. While it's true that numerous small positions may offer more tax-loss harvesting opportunities, those opportunities will diminish over time, and TLH with numerous funds is a lot more work.

Does your combination AA and account type/location allow you to use just a single fund in the taxable account? A more specific question: *What percentage of your overall portfolio do you envision being in a taxable account?* If it's a relatively small slice, I'd recommend just choosing one total market index fund, either international or domestic, for your taxable account.

--Pete
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Re: Initial stakes in taxable account established.

Postby House Blend » Fri Jun 28, 2013 12:25 pm

IlliniDave,

I agree that SB is noticeably more tax-efficient than SV. My recollection is that even with only 70% QDI, SB can sometimes be more tax-efficient than TSM. YMMV.

In general, I prefer fewer moving parts in taxable. Yes, you may see fewer TLH opportunities that way, but it makes staying in balance easier and cheaper if most of it can be done by making moves in tax-advantaged accounts.

FWIW, my asset allocation includes TSM, Intl, SV, SB, real estate, nominal bonds, TIPS, and stable value. But I have only TSM and Intl in taxable. The only overlap I have between taxable and tax-advantaged is TSM.
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Re: Initial stakes in taxable account established.

Postby IlliniDave » Fri Jun 28, 2013 2:01 pm

Hey Pete,

Wow a lot to think about there.

The main reason I've started off the way I have is that the taxable "portfolio" could wind up being a secondary/tertiary income source should I opt to semi-retire. In a sense I view it as a (potential) mini retirement portfolio/bridge fund in-and-of itself, and hence decided to replicate my general allocation in it. Depending on what decisions I make in the future and how things work out, it (or a substantial portion of it) could very well end up being part of my full retirement savings.

There is considerable overlap of fund types with my 401k, although the only specific fund in common is VG Total Stock Mkt. My company recently retooled the plan to offer primarily super low cost index funds, with just a couple managed funds at reduced fees (Pimco Total Return, Oppenheimer Developing Mkt, and a TRP small-cap growth). It's almost a Boglehead's dream 401k except it doesn't have any "value"-style equity funds, so I'll have to depend on my Roth IRA at VG for that.

When I get to the decision point for whether to do the semi-retire/career change move, the taxable holdings could be 30-40% of my total investments, maybe a little more. I'm totally maxed out in my tax deferred space and I'm throwing everything else I can manage into the taxable. Living on just over 20% of my gross income feels crazy sometimes, but I want some options for myself down the road.

So anyway, that's how it got the way it is. I'll think about what you said. I can still harvest a small tax loss moving a couple a couple of the funds if I hurry :)
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Re: Initial stakes in taxable account established.

Postby IlliniDave » Fri Jun 28, 2013 2:11 pm

House Blend wrote:IlliniDave,

I agree that SB is noticeably more tax-efficient than SV. My recollection is that even with only 70% QDI, SB can sometimes be more tax-efficient than TSM. YMMV.

In general, I prefer fewer moving parts in taxable. Yes, you may see fewer TLH opportunities that way, but it makes staying in balance easier and cheaper if most of it can be done by making moves in tax-advantaged accounts.

FWIW, my asset allocation includes TSM, Intl, SV, SB, real estate, nominal bonds, TIPS, and stable value. But I have only TSM and Intl in taxable. The only overlap I have between taxable and tax-advantaged is TSM.


House Blend,

Definitely a theme so far that I may have drawn up something a bit too complicated wanting the taxable to potentially function as a stand-alone. I didn't make the decisions I did based on tax loss harvesting, and could do a reasonable job of maintaining a balance through contributions (I'm not a fastidious balancer). Still, I should probably rethink it and see if I can't do more with less. Retreating back to a generic 3-fund might be more prudent. Thanks again.
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Re: Initial stakes in taxable account established.

Postby petrico » Fri Jun 28, 2013 2:46 pm

IlliniDave,

Thanks for the explanation. Based on what I think you're objectives are, you don't need to duplicate your AA in the taxable account. Rebalancing is easily accomplished in your tax-advantaged accounts if you want to draw from a taxable account at some point. Heck, you can even put your emergency fund in a tax-advantaged account if you have taxable funds because of the ability to rebalance tax-free in a tax-advantaged account. Check out the wiki link (even if it's obviously dated wrt money market yields), and try to envision all of your accounts together, as pieces of a larger puzzle. So in your case, if you only have a total stock market index fund in taxable, for example, you can liquidate what you need, and if that unbalances your AA you simply exchange some tax-advantaged holding(s) for some replacement total stock market in your tax-advantaged account(s). That said, at 30% - 40% of your total portfolio, yeah, you'll probably need more than one fund in taxable -- but only because you probably don't have a single position in your AA that large.

--Pete
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Re: Initial stakes in taxable account established.

Postby IlliniDave » Sat Jun 29, 2013 8:52 am

petrico wrote:IlliniDave,

Thanks for the explanation. Based on what I think you're objectives are, you don't need to duplicate your AA in the taxable account. Rebalancing is easily accomplished in your tax-advantaged accounts if you want to draw from a taxable account at some point. Heck, you can even put your emergency fund in a tax-advantaged account if you have taxable funds because of the ability to rebalance tax-free in a tax-advantaged account. Check out the wiki link (even if it's obviously dated wrt money market yields), and try to envision all of your accounts together, as pieces of a larger puzzle. So in your case, if you only have a total stock market index fund in taxable, for example, you can liquidate what you need, and if that unbalances your AA you simply exchange some tax-advantaged holding(s) for some replacement total stock market in your tax-advantaged account(s). That said, at 30% - 40% of your total portfolio, yeah, you'll probably need more than one fund in taxable -- but only because you probably don't have a single position in your AA that large.

--Pete


Hi Pete,

At a certain point my instincts/intuition rebel against the notion of what I call the integrated whole life portfolio. I certainly can digest the math and philosophy involved, so it's something in the realm of the irrational I suppose. Maybe a lack of confidence in being able to navigate the stickier situations with that sort of an overarching integration (which in some ways functions as a constraint).

My main discomfort in the context of our conversation would be the potential lack of ballast/stability on the taxable side of the wall since I'll possibly be taking distributions from it before I'm 59.5. The wall surrounding the tax-deferred stuff can be breached at a moderate cost, but it's something I'd prefer to avoid until the direst of circumstances.

When you get down to it I guess I'm just somewhat of a bucket-er at heart :D

I'll definitely take a close look at the links over the weekend, in the past I've shifted my intuitive biases so I'm not a hopeless case, but it does take me an amount of time. I do appreciate the alternate ideas. No matter what I decide in the end I'll have the benefit of more comprehensive due diligence.
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