Bogleheads

[elgob.bogle]

I searched for simple answers to these questions, but was overwhelmed with all of the detailed discussions and somehow I missed them. Perhaps those of you who know will respond. Perhaps there are no simple answers.

Assuming that we invest in these three asset classes with Vanguard Mutual and/or Exchange Traded Funds, which of the three - US Small Value, International Large Value, or International Small Blend - would be the best fund to hold in one's taxable account? If International Small Blend is the best, would it be better to invest in the ETF version? William Bernstein (The Investor's Manifesto, page 152) indicates that owning Vanguard All-World ex-US Small-Cap ETF (VSS) is one of the few instances where owning an ETF does make sense.

Out portflio has been in transition for two years. We began our AA modifications in November 2007 with a $1M portfolio at 95:5 stocks:bonds. We briefly dropped below $500k (scary stuff) wtih an AA of about 80:20 in March 2009. Since then, our portfolio has recovered to about $820k. We have added and will continue to add $56k/year into our tax-advantaged accounts. Perhaps I am overly optimistic, but I am hoping that we reach $1.3M by my retirement. If we don't, we can live with it.

We also have been shifting equity $$ to bonds as the market recovers, and we are searching for our "equipose point" (see Bernstein, The Investor's Manifesto, page 80). We are considering changing our current AA (25 TSM, 15 TISM, 25 TBM, 15 TIPS) to a 36:64 Trev H style AA (9 US LB, 9 US SV, 9 Int LV, 9 Int SB, 6 TIPS, 58 TBM) with higher risk in equities and more bond funds (sort of like Larry Swedroe might recommend). Until we discover that point, any investment policy is likely doomed to failure. We are thinking we can settle in with an AA containing approximately my "age in bonds" as recommended by Jack Bogle.

We could make this 36:64 AA fit our situation by putting two of the three funds in our ROTH IRA's and the third fund in our taxable account. We'd have to deal with a $20k taxable gain from our All World x-US Large Blend (VFWIX) account, but we have TLH credits to cover the gain.

I'm 61 1/2 and I am 4 1/2 years from retirement. Spouse is 55 and plans to work until age 62 (we'll see!). At retirement I am estimating my cola'd defined benefit payments will be about the same as my projected Social Security payments. I am not worried now (maybe I should be?) about reducing % TIPS. At retirement, I can roll my 457b plan to a Vanguard IRA and adjust my bond mix. I am a little worried that we are too late in our accumulation phase to move to a Trev H style portfolio. I've read numerous posts that the higher equity risk associated with this type of portfolio/AA may not pay off for 10 or more years, if at all.

Looking for advice? TIA

elgob

[livesoft]

I'd choose int'l small for taxable over the others first. I'd use an ETF.

You will be doing tax-loss harvesting in this asset class, so you might as well make that as easy as possible.

[musbane]

I fear I might be missing something here, so BE NICE.
Isn't it so that all thing being equal, a foreign fund in taxable will be eligible for the Foreign Tax Credit?

[YDNAL]

[elgob.bogle]

Landy:

Our tax-advantaged space (IRAS & 4xx plans) totals about $700k.

elgob

[bertie wooster]

I think Vanguard's small value fund would be fine for a taxable account because it has an ETF share class. It will have a higher dividend then the small blend index fund so it will be a little more tax inefficient, but I think it is unlikely to distribute capital gains (assuming the federal government doesn't change tax laws pertaining to ETF's).

Holding the ETF shares vs. the investor shares is irrelevant as far as tax efficiency goes. Both will have the same tax treatment.

You might consider tax managed small cap (unfortunately, no ETF share class with this).

Good Luck.

[YDNAL]

[JasonR]

[dbr]

[YDNAL]

[elgob.bogle]

Oops! Current AA is 35:15:35:15 (50:50) and not 25:15:25:15 (50:50). Thanks for the support on the AA switch. We can live with 35:65 until retimement at age 66. We are studying possible combinations of funds to produce Trev H type portfolio. Unfortunately, a big chunk of tax advantaged is with FIDO and can only use the Total Bond Market (FBIDX) and US Large Blend (FUSEX) from there. Another big chunk is 457b with some Vanguard funds but not everyting I woud like. Also can use US Large Blend and Total Bond Market and/or VTINX (Target Retirement Income) from there - and REIT fund if desired.

The size of our IRAs just happens to be about 18% of our portfolio, and our taxable contains a little less $$ than our IRA's. It conveniently works out that I can squeeze in a TrevH style equity 9:9:9:9 if I choose two Vanguard funds for the ROTH IRAs, 1 Vanguard fund in taxable, and US Large Blend from the 4xx accounts. If I use VTINX, I can keep some TIPS. The International in VTINX is a minor nusiance. In the final portfolio, if we feel that we don't need any tips over the next 4 1/2 years, we will just use US Large Blend. This is a tough decision also because I have become accustomed to many posters recommending TIPS.

Thanks


elgob

[livesoft]

Why is it unfortunate that you have access to FBIDX?

[elgob.bogle]

I apparently didn't convey my thoughts adequately - sorry for the confusion. Fidelity's Total Bond Market Fund (FBIDX) is fine, and we have over $200k in it right now. I believe that the fund manager made a bet on mortgage-backed securities a while back which has led to the fund's underperformance in comparison to Vanguard's TBM fund. The unfortunate part that I should have better explained is that my spouse's Fidelity 4xxx plan only has 3 other funds that we would consider using: Spartan International Large Blend (FSIIX), Spartan US Mid Cap Blend (FSEMX), and Spartan US Large Cap Blend (FUSEX). Of these, only FUSEX will fit with a Trev H style slice & dice portfolio. We plan on devoting some of her 4xxx space to FUSEX, with the rest in FBIDX.

elgob

[tarnation]

We have VFSVX in taxable (and VSS in tax defered), I'm assuming all divs this year will all be regular dividends, since the fund started earlier this year.

You might also look at using VEA, which is the ETF for Tax-Managed International Fund.
_________________

[elgob.bogle]

Thanks Tarnation - we are looking at everything

best regards

elgob

[G12]

Elgob, I hold 400 shares of VSS bought in April/May in taxable and also hold the VG small cap index in taxable and hold all value holdings in tax advantaged, probably have a +15% value tilt to the total market so I am not going overboard. The small cap index has outperformed small value this year, who knows what the future holds, and it has been relatively tax efficient the 8-years I have held it.

VSS is very volatile and should have high expected returns so consider holding it in a Roth if possible as no one knows future tax rates, I had no room to do so. Something to be aware of is the bid/ask spread on VSS. I was looking last week and the spread was 19 cents per share one day, I think Thursday. Due to the run up and inefficient pricing one might be better off in the mutual fund version accumulating a position over time then converting to the ETF at a later time if desired. I have nothing against Trev's portfolio, but believe the equity volatility would be outside my comfort level. Here is the fact sheet for VSS as of QE Sept if you have not seen it:

https://institutional.vanguard....FS3184.pdf


I would point out that formulas for historical equity/bond mixes postulated for maximum equity exposure resulting in "x%" annual losses do not incorporate small/micro or international small cap/ small value holdings, nor bond holdings which could have much greater value declines than a traditional total market equity holding paired with treasury/investment grade corporate mix. I am with you on equity exposure reduction, I am 46 and have become much more cognizant of how little impact our current earned income would have on rebuilding portfolio losses of $300-400k. I was lucky to have ample cash to buy additional equity in November 2008 and Feb-May of 2009 and made back my losses and have been selling down for 90-days to a more permanent equity holding of ~ 38% equity and into 7-figures, I am never going back to 60-80% equity holdings. Sitting on cash with little yield is another challenge but so be it. Good luck.

[tarnation]

[elgob.bogle]

G12 - Thanks for the detailed information. Perhaps I shouldn't rush into a Trev H type portfolio at all, or perhaps I should consider the relative recovery of the 4 asset classes since Mar 9 in picking my % of each. If I had jumped in during Mar 2009, I probably would have been able to start off with a fairly even 9-9-9-9 portfolio and be reasonably assured that I was beginning with a level playing field. Now that some asset classes have outperformed, it is time to rebalance but I have nothing to rebalance with. The only thing I can think of is to adjust by buying less of an asset class in proportion to its outperformance, or, conversely, more of an asset class in proportion to its underperformance since March. The math to develop the entry point purchases wouln't be that difficult. What do you think of this idea?

G12 - Thanks again for you input.

elgob

[grabiner]

[grabiner]