How aggressive are you in Taxable?

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BogleBuddy12
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How aggressive are you in Taxable?

Post by BogleBuddy12 »

It's funny. All of the investing books I've read only seem to talk about one goal for investing. Retirement.

But what about my taxable account, where I put a good chunk of money in stock and bond funds each month? That shouldn't be invested to the same level of aggressiveness as my retirement account, the time horizon is much shorter...but no author really seems to talk about this!

Does anyone here have thoughts on this subject? My retirement account is almost all equities (I'm 28 years old.) but my taxable account is only 30% equities right now, because I don't want to risk too much of that money.

Thanks all
TIAX
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Re: How aggressive are you in Taxable?

Post by TIAX »

Many people use taxable accounts to invest for their retirement (and to a lesser extent, vice-versa). Thus, if you're investing for your retirement (or another long term goal), there is no reason that a taxable account should be less aggressive than a tax-advantaged account.

You sound like you are using a taxable for shorter term investing so, of course, you should be less aggressive. For example, if your time horizon is 5 years, you may want to be 60/40.
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Re: How aggressive are you in Taxable?

Post by Sidney »

I manage it all as one portfolio. All my equity is in taxable. The money doesn't know.
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Re: How aggressive are you in Taxable?

Post by whatusername? »

Sidney wrote:I manage it all as one portfolio. All my equity is in taxable. The money doesn't know.
Make that "all my taxable is in equity" and I'd add a +1. :D But I really don't have anything specific I'm saving for.

Since they are non-retirement funds, OP, the key isn't their tax status, it's your horizon. When you want your capital returned should dictate your risk. Under 5 years, I'd have my funds in I bonds or CDs. 10 years I would maybe take a little more risk but not a lot more unless it was a flexible goal (i.e., I could make up any losses from additional principal to meet my goal).
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Re: How aggressive are you in Taxable?

Post by chrisdds98 »

aren't bonds supposed to be in tax deferred accounts because of tax efficiency? if you needed the $ soon wouldn't muni bonds be the best option for the taxable account?
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Re: How aggressive are you in Taxable?

Post by cfs »

Good conversation.

On my side of the house the taxable is loaded with munis [insert the personal decision disclaimer here].

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Re: How aggressive are you in Taxable?

Post by livesoft »

ajacobs6 wrote:It's funny. All of the investing books I've read only seem to talk about one goal for investing. Retirement.

But what about my taxable account, where I put a good chunk of money in stock and bond funds each month? That shouldn't be invested to the same level of aggressiveness as my retirement account, the time horizon is much shorter...but no author really seems to talk about this!
My taxable account is invested for retirement and a few other things, just as my tax-advantaged accounts are. But I can deduct losses in taxable account which is very hard to do in a tax-advantaged account, therefore my taxable account is more aggressive than my tax-advantaged accounts. I have no cash nor bonds in my taxable account … it is 100% equities. I have plenty of bond funds in my tax-advantaged accounts.
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pascalwager
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Re: How aggressive are you in Taxable?

Post by pascalwager »

In investment company taxable I have VG TSM, VG TISM, and five DFA stock funds. My taxable is just as much for retirement as are my IRAs.
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Steadfast
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Re: How aggressive are you in Taxable?

Post by Steadfast »

80/20 in retirement accounts but 70/30 in taxable. I view my taxable account as a general long-term savings fund first, and only secondarily for retirement. I could buy a second house using those funds, for example, whereas the retirement portfolio is unavailable for 20+ years. I agree with you that the overwhelming focus here and in the books is the retirement portfolio, which should definitely be viewed in aggregate. But for anything else, the portfolio should match the timeline.
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BogleBuddy12
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Re: How aggressive are you in Taxable?

Post by BogleBuddy12 »

Steadfast wrote:80/20 in retirement accounts but 70/30 in taxable. I view my taxable account as a general long-term savings fund first, and only secondarily for retirement. I could buy a second house using those funds, for example, whereas the retirement portfolio is unavailable for 20+ years. I agree with you that the overwhelming focus here and in the books is the retirement portfolio, which should definitely be viewed in aggregate. But for anything else, the portfolio should match the timeline.
Yeah we're on the same page. I view it as a long-term savings account, but obviously having the advantage to dip into it during my working lifetime.

Think I'd be wise to make it 60/40? I'm in my late 20's, but it would be pretty devastating to have it all in equities during a market crash. In my retirement account however, doesn't matter. Almost all equities.
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Re: How aggressive are you in Taxable?

Post by bertilak »

Yiu, personally, associate your taxable account with shorter-term savings goals but that doesn't mean everyone does.
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Re: How aggressive are you in Taxable?

Post by Steadfast »

ajacobs6 wrote:
Think I'd be wise to make it 60/40? I'm in my late 20's, but it would be pretty devastating to have it all in equities during a market crash. In my retirement account however, doesn't matter. Almost all equities.
60/40 seems reasonable, but have a look at these before making a final decision:

https://personal.vanguard.com/us/insigh ... llocations

Also, look at using muni bonds in taxable. Good luck.
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BogleBuddy12
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Re: How aggressive are you in Taxable?

Post by BogleBuddy12 »

Steadfast wrote:
ajacobs6 wrote:
Think I'd be wise to make it 60/40? I'm in my late 20's, but it would be pretty devastating to have it all in equities during a market crash. In my retirement account however, doesn't matter. Almost all equities.
60/40 seems reasonable, but have a look at these before making a final decision:

https://personal.vanguard.com/us/insigh ... llocations

Also, look at using muni bonds in taxable. Good luck.
Thanks for this. Definitely muni bonds, no worries there. I think I'm going to go 70/30, because I'm in it for long term growth. Just not as long term as retirement, which is over 30 years away. Thanks!
frisbee
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Re: How aggressive are you in Taxable?

Post by frisbee »

Timely topic for me. I'm a rookie investor.

DW & I currently have 100% Total Stock (VTSAX) in our taxable. Our overall portfolio allocation (including retirement) is at the target ratio, but we'd like to have less volatility in our taxable account (reason -- some psychology, but also the possibility we'd tap the money for a house in 7-10 years).

2 questions:

We are in 25% marginal tax bracket in Pennsylvania, joint filing.

1) We've never invested in Muni's. Would the Vanguard PA L/T Muni (VPAIX) make sense in a taxable account? How does that math work? How would I compare it against an alternative (like LifeStrategy Conservative - VSCGX) in terms of total return?

2) If not muni's, then would you recommend Total Bond (VBTLX)?

If you think this should be a new thread, I'll post separately.

Thanks-Frisbee
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Re: How aggressive are you in Taxable?

Post by whatusername? »

chrisdds98 wrote:aren't bonds supposed to be in tax deferred accounts because of tax efficiency? if you needed the $ soon wouldn't muni bonds be the best option for the taxable account?
True-ish. If I were doing it that way, I'd overweight bonds in my retirement accounts and hold an equity position in my taxable account to bring my portfolio AA into line. You can't hold I bonds in external accounts, however, and given the current interest rates I really wouldn't bother with munis over treasuries for short term savings. Same with a CD ladder - someone asked recently about parking some sizeable sum of money for a few years and setting up a CD ladder - at the current rates, it was a difference of about $70/year over a high-yield checking account from Ally.

The point remains the same, though. Your horizon should dictate the risk you take if you're going to separate out your savings into multiple portfolios.
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Re: How aggressive are you in Taxable?

Post by Steadfast »

frisbee wrote: 1) We've never invested in Muni's. Would the Vanguard PA L/T Muni (VPAIX) make sense in a taxable account? How does that math work? How would I compare it against an alternative (like LifeStrategy Conservative - VSCGX) in terms of total return?

2) If not muni's, then would you recommend Total Bond (VBTLX)?
The muni fund you mentioned carries two risks over and above the standard, national intermediate term muni funds (such as VWITX): (1) higher interest-rate risk, given the long term duration, and (2) state-specific risk, meaning all your muni bonds are tied up with the fortunes of PA instead of spread across all 50 states. The state-specific risk could be compensated by slightly higher returns, because the distributions will probably be both federal and state tax free (check PA's tax laws). Whether this possible, incrementally higher return is worth the state-specific risk is up to you. The long-term bond interest rate risk will - no surprises here - give you slightly higher interest payments (distributions), but you will see more volatility in the funds price/NAV as interest rates shift around. Most on this board would recommend the national, intermediate-term muni bond funds because they view bonds as being for safety and sleeping well.

You can use this tax-equivalent yield calculator to compare the tax-adjusted yields of muni funds to their taxable counterparts:

https://personal.vanguard.com/us/FundsTaxEquivForYield

Take the output of that calculator, and compare it to the SEC yield of your chosen taxable bond fund like Total Bond. Whichever is higher is the "logical" bond fund to choose, all else being equal (which it never is, since asset location is a factor in this thread). The higher your tax bracket, the more munis will be favored.

My personal approach in taxable has been, once I achieved Admiral Shares in the California intermediate-term muni funds (100% state and federal tax free), I halted contributions to that fund, and started funding a national intermediate term muni fund. I want to take maximum advantage of low fees and tax free distributions, but in the long run don't want everything tied to California where I live and work.
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Re: How aggressive are you in Taxable?

Post by ralph124cf »

frisbee wrote:Timely topic for me. I'm a rookie investor.

DW & I currently have 100% Total Stock (VTSAX) in our taxable. Our overall portfolio allocation (including retirement) is at the target ratio, but we'd like to have less volatility in our taxable account (reason -- some psychology, but also the possibility we'd tap the money for a house in 7-10 years).

2 questions:

We are in 25% marginal tax bracket in Pennsylvania, joint filing.

1) We've never invested in Muni's. Would the Vanguard PA L/T Muni (VPAIX) make sense in a taxable account? How does that math work? How would I compare it against an alternative (like LifeStrategy Conservative - VSCGX) in terms of total return?

2) If not muni's, then would you recommend Total Bond (VBTLX)?

If you think this should be a new thread, I'll post separately.

Thanks-Frisbee
For somebody in the 25% tax bracket, muni bonds do not make sense. You pay for the tax free status by getting a lower interest rate, and you need to be in a higher tax bracket for this interest rate differential to be in your favor. For people in the 39.6% bracket they do make sense.

Ralph
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Re: How aggressive are you in Taxable?

Post by frisbee »

ralph124cf wrote:
frisbee wrote:Timely topic for me. I'm a rookie investor.

DW & I currently have 100% Total Stock (VTSAX) in our taxable. Our overall portfolio allocation (including retirement) is at the target ratio, but we'd like to have less volatility in our taxable account (reason -- some psychology, but also the possibility we'd tap the money for a house in 7-10 years).

2 questions:

We are in 25% marginal tax bracket in Pennsylvania, joint filing.

1) We've never invested in Muni's. Would the Vanguard PA L/T Muni (VPAIX) make sense in a taxable account? How does that math work? How would I compare it against an alternative (like LifeStrategy Conservative - VSCGX) in terms of total return?

2) If not muni's, then would you recommend Total Bond (VBTLX)?

If you think this should be a new thread, I'll post separately.

Thanks-Frisbee
For somebody in the 25% tax bracket, muni bonds do not make sense. You pay for the tax free status by getting a lower interest rate, and you need to be in a higher tax bracket for this interest rate differential to be in your favor. For people in the 39.6% bracket they do make sense.

Ralph
I'm a little confused (not questioning your advice, just don't understand bonds):

VPAIX - Vanguard PA LT Tax Exempt Investor has an SEC Yield of 2.65% w/ duration of 6.2yrs
VBIIX - Vanguard Inter-Term Bond Index Investor has an SEC Yield of 2.67% w/ duration of 6.5yrs

Given that VPAIX would be Federal & State Tax free (28.03%), doesn't that imply that I need an SEC yield of [1/(1-.2830)]*2.65%=3.69%?

Ignoring state specific risk, VPAIX appears to be a better choice? Or should I be looking at some other % metric (like 5-year or 10-year)?

Thanks-Frisbee
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Re: How aggressive are you in Taxable?

Post by feh »

Sidney wrote:I manage it all as one portfolio. All my equity is in taxable. The money doesn't know.
+1

My taxable accounts are for retirement, just as my tax-advantaged accounts are. For tax efficiency, my taxable accounts are 100% equities.
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Re: How aggressive are you in Taxable?

Post by elgob.bogle »

We have 5 years worth of joint annual ROTH IRA contributions ($13,500 x 5) invested Vanguard's Short Term Municipal Bond fund in our taxable account which will hopefully cover contributions for the next 5 years until spouse retires. The dividends are directed to Vanguard's Tax Exempt money market fund because we don't want to deal with Federal income taxes on capital gains/losses(we are also rolling over IRA's to ROTH IRA's). This is a short term strategy, at the end of which, we will have no funds in our taxable account, but two commas worth of funds in our ROTH accounts. I'm providing this information as an example of a short term strategy for taxable accounts.

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Re: How aggressive are you in Taxable?

Post by Iorek »

We are about 2/3 equities in retirement and 2/3 bonds in taxable. However, our taxable is a fraction of retirement, and most of the bonds are i-bonds. We got in the habit of stashing extra cash in i-bonds and managed to build up a decent emergency fund that way.
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Re: How aggressive are you in Taxable?

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Re: How aggressive are you in Taxable?

Post by abuss368 »

ajacobs6 wrote:It's funny. All of the investing books I've read only seem to talk about one goal for investing. Retirement.

But what about my taxable account, where I put a good chunk of money in stock and bond funds each month? That shouldn't be invested to the same level of aggressiveness as my retirement account, the time horizon is much shorter...but no author really seems to talk about this!

Does anyone here have thoughts on this subject? My retirement account is almost all equities (I'm 28 years old.) but my taxable account is only 30% equities right now, because I don't want to risk too much of that money.

Thanks all
Hi ajacobs6,

We look at our overall investment portfolio and have the same asset allocation. No difference if the account is taxable or tax advantaged.

Keep investing simple.
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Re: How aggressive are you in Taxable?

Post by abuss368 »

If your taxable account will be used for a goal with a smaller timeframe than retirement, you may want to consider cash, CD's, or a short term bond fund.

It is difficult to assess with the information that was provided.

Best.
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Re: How aggressive are you in Taxable?

Post by Jerry55 »

Not very, moderate, maybe 3-3.5 on a scale of 1-5 (5 being most aggressive).

Of course, I retired @ 57, just turned 60. Dodge & Cox International stocks and Wellesley (60% stock/40% bond)
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Re: How aggressive are you in Taxable?

Post by JonnyDVM »

It is all one portfolio. Tax friendly investments are better in taxable but I don't let taxes dictate everything.
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Re: How aggressive are you in Taxable?

Post by poker27 »

I'm about 80/20 in both 401k and taxable. I don't know if I have the stomach to see my taxable drop by 50%, so a few bucks in bonds lets me sleep better at night
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Re: How aggressive are you in Taxable?

Post by Sents »

I tend to put funds that are more tax-burdened (REITs, some bonds, etc) in my tax-deferred accounts when possible. Otherwise my taxable and tax-advantaged accounts share many similar funds because I treat the entire portfolio as one entity. Money I absolutely will need within 5 years that I cannot risk pulling out of my portfolio is earmarked in a separate fund (this is basically nothing, as I'm at 70/30 allocation and I'm comfortable withdrawing from my portfolio if needed).
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Re: How aggressive are you in Taxable?

Post by ny_rn »

I use Vanguard Total Stock Market for 100% of my taxable account. Every month I contribute cash to this account that I do not need.
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Re: How aggressive are you in Taxable?

Post by ogd »

ajacobs6 wrote:But what about my taxable account, where I put a good chunk of money in stock and bond funds each month? That shouldn't be invested to the same level of aggressiveness as my retirement account, the time horizon is much shorter...but no author really seems to talk about this!
Yes, and for good reason.

Something you might not have thought about is that you can "sell" bonds from the retirement account if you want (i.e. if the "overly-aggressive" taxable account bit you within the time horizon). Like so:

1) Sell stocks in taxable.
2) Sell the same amount of bonds in tax-advantaged.
3) Buy the same amount of stocks in tax-advantaged.

The end result is as if you'd held bonds in taxable, but without having paid the interest income penalty until then. A couple of gotchas: you might want to tax-adjust a tax-deferred account to maintain a consistent AA and to make "same amount" meaningful in the face of the future payment of taxes; the other is that this doesn't work if the taxable account is so hard hit that it actually runs out during a recession, much sooner than your bond AA would. But even then, there are workarounds like taking money out of the 401k at a tax penalty (possibly erased by the huge capital losses booked), stopping contributions to catch up, loan, etc.

So the key point is that you control the sales in both accounts. As long as you do, you can treat them holistically.

Meanwhile, it's nice to take risk in taxable because the government insures part of it through the capital loss deduction. Such insurance would not be cheap if bought in the markets, you know.
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Re: How aggressive are you in Taxable?

Post by letsgobobby »

We have one portfolio for our long term goals. It is 42% taxable, 19% Roth, and 39% pretax. The Roths and taxable are about 90% stocks. The pretax are about 90% fixed income. It all adds up to 60% stocks and 40% bonds, which is the target. I don't think of a taxable portfolio and a retirement portfolio, it is all one portfolio, for all long term goals (primarily retirement).
digit8
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Re: How aggressive are you in Taxable?

Post by digit8 »

80/20. 80% is two small windfalls in Total Stock Market as my hope for pulling the pin early someday, and 20% in Ibonds to keep us afloat if someone else chooses to end my employment :happy
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Re: How aggressive are you in Taxable?

Post by garlandwhizzer »

TSM is a no brainer for equity exposure in a taxable account. It offers maximal diversification, great and predictable tax efficiency, and the lowest cost. There is no better long term holding in my opinion and your risk is no greater than beta. As for fixed income that's a bit more complex. The safest thing is MM funds which pay nothing but, if well chosen, are the safest thing out there, immune to duration risk which may become an issue in the future. Every step up from MM in terms of duration increases yield but also increases risk. Likewise munis are more tax efficient but you're taking on a more repayment and liquidity risk with them than with short term Treasuries for example.

The fixed income market prices risk very efficiently between fixed income classes in my opinion, more efficiently than does the equity market because it's a simpler playing field. I suggest you select a low yielding safe instrument (MM or short term Treasuries) if there's any chance at all that you may need this money from your taxable account. If you have a stable and secure job that reliably produces more after tax income than your living expenses, you might only need a very modest amount of fixed income in your personal account. If that is not the case you may need more. In any case I suggest you don't stretch for yield in a taxable account with high yield bonds, long term bonds, REITS, Utilities, high yield stocks, etc., all of which may be too volatile to be counted on if and when you need the money. If you decide you want those asset classes, put them in a tax sheltered account.

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Re: How aggressive are you in Taxable?

Post by Alchemist »

I am 100% in VTSAX in taxable. All the reasons for that are mentioned above by garland. Tax efficient, rock bottom cost, and is kind of the 'purest' form of the index fund being that it represents essentially the entire U.S. stock market.
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Re: How aggressive are you in Taxable?

Post by grabiner »

I treat everything as one portfolio, and thus my taxable account has been 100% stock index funds ever since I understood the tax reasons for doing this. (Actually, I consider my taxable account to be more than 100% stock, because I don't count my home in my portfolio, but I count my mortgage as a negative bond. I hold more bonds in my retirement account than I owe on the mortgage.)
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Re: How aggressive are you in Taxable?

Post by Clever_Username »

I don't really think of my taxable account as separate, but I guess it looks fairly aggressive on paper. Or maybe it doesn't, I'm not sure. $17k in I-Bonds now (will be $20k come end of the year, unless there's something absurd in the new issues). $22k in domestic stock. $30k in total international. I also have $11k cash (about three months' spending). Now that I think of it, that's less aggressive than my overall (30% bonds, give or take).

I own a condo, and if I want to save up towards my "next house," I'd probably pay down the mortgage, since my plan at the moment is to not own two places at once, so I'd end up selling this place for the down payment (or, rather, the equity would have to cover all costs plus the down payment, and I'd roll any additional equity into the new place). Maybe I'm missing something subtle if this is a bad idea.

Car is paid for and I expect it to last another several years, so I don't have a separate "next car" fund. I doubt I'll have trouble financing it when the time comes if I choose to go that route anyway.

Essentially, I buy I-Bonds on a schedule, and every three months, any surplus cash that has accumulated beyond what I want to keep in an emergency-fund as cash plus expected near-term purchases goes into total international (unless doing so would seriously over-weight it, but that hasn't come close to coming up yet).
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Re: How aggressive are you in Taxable?

Post by dkturner »

Very, for an investor my age (72).

Since I'm now retired, and we are taking RMDs from our tax-deferred accounts, we have our tax-deferred accounts allocated about 35% equity and 65% fixed income. We have enough fixed income to cover the portion of our living expenses not funded with SS and pension income for about 25 years, so we can afford to take considerable risk with the composition of our taxable accounts. We currently have our taxable accounts allocated about 80% equity and 20% fixed income. Our equity holdings (in both taxable and tax-deferred accounts) are earmarked for future generations of our family. We will probably never withdraw anything other than the dividends they generate.
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Re: How aggressive are you in Taxable?

Post by IlliniDave »

There's a lot of semantics to this.

The portion of my taxable financial accounts that I consider "investments" are invested aggressively (100% stocks).

But I have some taxable assets in the form of cash and intermediate-term bonds that I maintain for an emergency fund, current month's expenses, and accumulation for near-term purchases/anticipated larger annual expenses like property tax and insurance premiums.

If I smush them all together and invoke the Law of Fungibility, there is moderate risk: about 30% cash, 50% stocks, and 20% bonds.

The taxable assets are only around 15% of my total financial assets.
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