Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
persona4826
Posts: 71
Joined: Sun Dec 18, 2016 11:53 pm

Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by persona4826 »

Hello all,

Here is my current standing.

Emergency funds: yes; greater than six months

Debt: none

Tax Filing Status: single

Tax Rate: 22% Federal, 3.23% State

State of Residence: Indiana (potentially MO or IL in the future)

Age: 37

Desired Asset allocation: 90-95% stocks / 5-10% bonds
Desired International allocation: unsure

Current retirement assets

I have just under $250,000 at this time.

Taxable
none

TSP
63% C – mimicking Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) (0.02%)
6% S - mimicking Vanguard Extended Market Index Fund Institutional Shares (VIEIX) (0.05%)
4% G - mimicking Vanguard Prime Money Market (VMMXX) (0.16%)
Company match? yes

Roth IRA at Vanguard
18% FTSE All-World ex-US Small-Cap Index Fund ETF Shares (VSS) (0.11%)

HSA at TDAmeritrade
9% SPDR Portfolio S&P 600 Small Cap ETF (SPSM) (0.05%)

_______________________________________________________________

Contributions

New annual Contributions
$19,500 TSP
$6,000 Roth IRA
$3,600 HSA
$00 taxable (follows in my question)

Questions:
I’ve been filling up all of my tax-advantaged accounts for several years, and saving the rest. Most of my savings (which is also my emergency fund) are presently in online HY accounts and total approx. $180,600. I’ve been reminded, again, recently that inflation makes this a “dumb” approach.

I considered ladders and peer-to-peer lending, yet neither appeal to me as much a brokerage. I am looking at bond index funds - preferably ETFs - to take over some of my current, non-retirement savings.

1. I prefer simplicity, and am considering the following:

Vanguard Total Bond Market Index Fund (BND) (0.04%)
Vanguard Total International Bond (BNDX) (0.08%)
Vanguard Total World Bond (BNDW) (0.06%)

What criteria should I be looking at in selecting one, and adding it to my current portfolio, or should I be looking at a replacing/rebalancing instead?

2. If do shake things up, I would like to remain stock-aggressive and relatively simple. I wouldn’t mind getting rid of my TSP G fund in the process. Could I do this and get more international or real-estate exposure too?

3. Do I have to be concerned about tax-loss harvesting if I intend to continue my buy-and-hold approach with the bond fund? What other aspects do I need to keep aware of that I don't have with my tax-advantaged accounts?

I’m not sure what else I should be focusing on or asking about, but I do appreciate your suggestions for the above, and ready to answer more questions.

Thank you.
Last edited by persona4826 on Mon Apr 12, 2021 9:04 pm, edited 1 time in total.
tashnewbie
Posts: 1584
Joined: Thu Apr 23, 2020 12:44 pm

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by tashnewbie »

$180k seems like a lot of cash for a single person with no debt and seemingly pretty ironclad job security (even if you own a home outright).

Is a portion of that earmarked for short or mid-term spending (house down payment, car, etc)?

I’d figure out how much you really need as an emergency fund, then plop the rest in equities in a taxable brokerage account (a Total US and/or International stock index fund such as VTSAX or the equivalent at your desired custodian). In your shoes, I’d keep bonds in the TSP.
BruinBones
Posts: 195
Joined: Sun Apr 22, 2018 5:39 pm

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by BruinBones »

tashnewbie wrote: Sun Apr 11, 2021 6:27 pm
I’d figure out how much you really need as an emergency fund, then plop the rest in equities in a taxable brokerage account (a Total US and/or International stock index fund such as VTSAX or the equivalent at your desired custodian). In your shoes, I’d keep bonds in the TSP.
I agree with these recommendations.
At your age and desired AA, you can afford to aggressively contribute most of that cash to a taxable account.
Also, the TSP G-fund is unlike any existing bond fund. If anything, it is more like a stable value fund whereas you will lose no principle while getting long term treasury bond rates. Again, at your age and desired AA, that’s where your bond allocation should stay.
Topic Author
persona4826
Posts: 71
Joined: Sun Dec 18, 2016 11:53 pm

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by persona4826 »

I'm a little surprised to come in thinking about adding bonds and being recommended equity instead. In hindsight, I reckon my goal with this post was to a find a "better savings account" - one that earned more than an online HY account, but wouldn't be locked away until I was nearing 60. I admit to some irrationality, yet just worry about a sudden and costly "unknown" and see liquidity as an antidote.
tashnewbie wrote: Sun Apr 11, 2021 6:27 pm Is a portion of that earmarked for short or mid-term spending (house down payment, car, etc)?
None of my savings are earmarked for anything - I just want to be prepared.

That said, I can accept a taxable brokerage with equities. To start, I do have one HY account ($50k) which I could turn over to brokerage.

Any particular reason that mutual funds are recommended? I feel that ETFs are more economical. With my current allocation, would any of the following be appropriate additions:

Vanguard Total Stock Market (VTI) (0.03%)
Vanguard Total International Stock Index Fund (VXUS) (0.08%)
Vanguard Total World Stock Index Fund (VT) (0.08%)

I am not beholden to Vanguard, yet don't know how Schwab's acquisition of TDA (where my HSA is) might change things in a year or two.
BruinBones wrote: Sun Apr 11, 2021 6:39 pm Also, the TSP G-fund is unlike any existing bond fund. If anything, it is more like a stable value fund whereas you will lose no principle while getting long term treasury bond rates. Again, at your age and desired AA, that’s where your bond allocation should stay.
Thanks for the vouch of the G fund. I'll keep it.
MrJedi
Posts: 747
Joined: Wed May 06, 2020 11:42 am

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by MrJedi »

Consider the taxable account as an extension of the rest of your accounts. Generally people put any bonds desired in the 401k/TSP/IRA accounts and then fill any remaining space and the taxable with stocks. This is because stocks are generally taxed favorably compared to bonds. Keep the whole portfolio balanced to your desired asset allocation.
Katietsu
Posts: 4957
Joined: Sun Sep 22, 2013 1:48 am

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by Katietsu »

Here is the alternative that you are missing. Move a chunk of money in the TSP into the G fund. Move the same amount of your cash into equities in a taxable brokerage account. Your % equities is the same after this move. It may even be a more tax efficient placement of assets.

You are concerned that your reliable stable cash is locked away for decades. But it is not. If you have an emergency that exceeds your available cash, sell your stock ETF/mutual fund from your taxable account. But move money from the G fund in the TSP to the stock fund in the TSP most closely matching the investment that you just sold to raise cash.

I would not do this with all $180k. But it is reasonable to do with part of it.
User avatar
Beensabu
Posts: 832
Joined: Sun Aug 14, 2016 3:22 pm

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by Beensabu »

There are also better bond fund options for a taxable account than the ones you have in mind.

I am not the person to tell you what they are. Hopefully, someone else will come by soon to help you out with those.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next."
lazyinvestor30
Posts: 46
Joined: Mon Apr 12, 2021 7:58 am

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by lazyinvestor30 »

persona4826 wrote: Sun Apr 11, 2021 6:19 pm Hello all,

Here is my current standing.

Emergency funds: yes; greater than six months

Debt: none

Tax Filing Status: single

Tax Rate: 22% Federal, 3.23% State

State of Residence: Indiana (potentially MO or IL in the future)

Age: 37

Desired Asset allocation: 90-95% stocks / 5-10% bonds
Desired International allocation: unsure

Current retirement assets

I have just under $250,000 at this time.

Taxable
none

TSP
63% C – mimicking Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) (0.02%)
6% S - mimicking Vanguard Extended Market Index Fund Institutional Shares (VIEIX) (0.05%)
4% G - mimicking Vanguard Prime Money Market (VMMXX) (0.16%)
Company match? yes

Roth IRA at Vanguard
18% FTSE All-World ex-US Small-Cap Index Fund ETF Shares (VSS) (0.11%)

HSA at TDAmeritrade
9% SPDR Portfolio S&P 600 Small Cap ETF (SPSM) (0.05%)

_______________________________________________________________

Contributions

New annual Contributions
$19,500 TSP
$6,000 Roth IRA
$3,600 HSA
$00 taxable (follows in my question)

Questions:
I’ve been filling up all of my tax-advantaged accounts for several years, and saving the rest. Most of my savings (which is also my emergency fund) are presently in online HY accounts and total approx. $180,600. I’ve been reminded, again, recently that inflation makes this a “dumb” approach.

I considered ladders and peer-to-peer lending, yet neither appeal to me as much a brokerage. I am looking at bond index funds - preferably ETFs - to take over some of my current, non-retirement savings.

1. I prefer simplicity, and am considering the following:

Vanguard Total Bond Market Index Fund (BND) (0.04%)
Vanguard Total International Bond (BNDX) (0.08%)
Vanguard Total World Bond (BNDW) (0.06%)

What criteria should I be looking at in selecting one, and adding it to my current portfolio, or should I be looking at a replacing/rebalancing instead?

2. If do shake things up, I would like to remain stock-aggressive and relatively simple. I wouldn’t mind getting rid of my TSP G fund in the process. Could I do this and get more international or real-estate exposure too?

3. Do I have to be concerned about tax-loss harvesting if I intend to continue my buy-and-hold approach with the bond fund? What other aspects do I need to keep aware of that I don't have with my tax-advantaged accounts?

I’m not sure what else I should be focusing on or asking about, but I do appreciate your suggestions for the above, and ready to answer more questions.

Thank you.
I am in a similar situation as you and you already have some good suggestions. What you need to determine is the amount of risk you are willing to take.

Bonds are not totally iron clad, they could potentially lose money, but maybe a max of about 5-10% over a few years, if we are in a really bad market. But if you don't see a specific use for this money and just want it to appreciate, but you can tolerate a little bit more risk, I would consider Vanguard Life Strategy funds (or mimicking them using ETFs for taxable accounts) based on risk tolerance. Looks like from your posts you are not prepared to loose a lot of principal, in that case would consider a 20% or 40% bond fund. If you leave it there for 5 years, its very likely you will outperform HYSA / inflation
jimkinny
Posts: 1598
Joined: Sun Mar 14, 2010 1:51 pm

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by jimkinny »

Own as much equity as your need, willingness and ability to take risk requires. Easy to writwe but hard sometimes to figure out. If you are looking for a good risk free place to put cash then there is a great deal of options right now. I would take a look at I bonds and EE bonds. Both meet your desire to get a bit more than HYS.

I am sure you can search the Boglehead Wiki and find an article. The limitation is the amount of money you can put away there and I would not buy either unless you plan on keeping them for a long time. In the case of EE bonds you derive the real benefit after 20 years.

I personally don't think the risk of owning a bond fund currently is worth the term risk/interest rate risk now. My time horizon is not the same as yours though. If you don't know about duration and interest rates, read the wiki article about bonds and term/interest rate risks.

Interest rates have risen by a fairly high percentage but not a lot in practical terms to tempt back into mainstream thought about about bonds ownership right now. The 10 year Treasury has a rate of about 1.6 which is up from 0.7-0.9? at the beginning of the year but inflation is expected to be above 2% in the near term. Everything is that way. I am just parking some money in a HYS and I am going to wait until the Fed quits their quantitative easing bond purchasing program. I don't know even if that will happen or when or what will happen but I just like what I see as the asymetric risk of bonds now and I don't have 30-40 years of investing life left. That is my ability and willingness and need to take this specific risk. Not yours necessarily.

Some people have begun using fixed annuities that are essentially a short term loan you make to an insurance company. Check out [urlhttps://www.blueprintincome.com/][/url]

I don't use them because of the single company risk but I don't know enough about them to say anything else.
livesoft
Posts: 76590
Joined: Thu Mar 01, 2007 8:00 pm

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by livesoft »

MrJedi wrote: Wed Apr 14, 2021 9:27 pm Consider the taxable account as an extension of the rest of your accounts. Generally people put any bonds desired in the 401k/TSP/IRA accounts and then fill any remaining space and the taxable with stocks. This is because stocks are generally taxed favorably compared to bonds. Keep the whole portfolio balanced to your desired asset allocation.
Yes. And to use the G fund in one's TSP while having Total US Stock Market Index fund in one's taxable account do this:
https://www.bogleheads.org/wiki/Placing ... ed_account
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
persona4826
Posts: 71
Joined: Sun Dec 18, 2016 11:53 pm

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by persona4826 »

Katietsu wrote: Wed Apr 14, 2021 9:33 pm Here is the alternative that you are missing. Move a chunk of money in the TSP into the G fund. Move the same amount of your cash into equities in a taxable brokerage account. Your % equities is the same after this move. It may even be a more tax efficient placement of assets.

You are concerned that your reliable stable cash is locked away for decades. But it is not. If you have an emergency that exceeds your available cash, sell your stock ETF/mutual fund from your taxable account. But move money from the G fund in the TSP to the stock fund in the TSP most closely matching the investment that you just sold to raise cash.

I would not do this with all $180k. But it is reasonable to do with part of it.
I think this what I will do. To return to an earlier question:
persona4826 wrote: Wed Apr 14, 2021 9:17 pm To start, I do have one HY account ($50k) which I could turn over to brokerage.

Any particular reason that mutual funds are recommended? I feel that ETFs are more economical. With my current allocation, would any of the following be appropriate additions:

Vanguard Total Stock Market (VTI) (0.03%)
Vanguard Total International Stock Index Fund (VXUS) (0.08%)
Vanguard Total World Stock Index Fund (VT) (0.08%)
While I understand that ETFs are "baskets", I also have a weak understanding of which best-complement my current holdings - ie, filling in the gaps, rather than too much of the same.
Topic Author
persona4826
Posts: 71
Joined: Sun Dec 18, 2016 11:53 pm

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by persona4826 »

Returning to this topic after a few days away, and still looking for the best place to re-settle a portion of my high-yield savings.

I haven't made any changes for my TSP, HSA or Roth yet; but have decided to go with the advice of keeping my non-equity in the TSP. I'll keep it all in the G Fund, and might bring it up to 10% of my portfolio.

For sake of keeping things simple, I plan to use only VTI in the brokerage that I plan to open with Vanguard. Would VTI well-complement my SPSM holdings in my HSA, VSS in Roth, and the C and S holdings my TSP? Or would it be prudent to add the I fund as well?

My second question is how I should rebalance my portfolio. Not sure how to best-present the parameters, but it looks something like this:

-addition of VTI, that will be $50k to start (and perhaps $100 by late summer)
-continued maxing of Roth with VSS, and HSA with SPSM
-continued maxing of TSP, with up to 10% going to G

At what percentages should I have C and S, and - optionally - I Fund?

Please let me know if you need additional or updated information.
Topic Author
persona4826
Posts: 71
Joined: Sun Dec 18, 2016 11:53 pm

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by persona4826 »

I'm inching closer to opening that brokerage for VTI (Vanguard Total Stock Market, 0.03%), and would still be interested in the forum's observations on adding that to my current set-up (just over $250,000):
persona4826 wrote: Sun Apr 11, 2021 6:19 pm TSP
63% C – mimicking Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) (0.02%)
6% S - mimicking Vanguard Extended Market Index Fund Institutional Shares (VIEIX) (0.05%)
4% G - mimicking Vanguard Prime Money Market (VMMXX) (0.16%)
Company match? yes

Roth IRA at Vanguard
18% FTSE All-World ex-US Small-Cap Index Fund ETF Shares (VSS) (0.11%)

HSA at TDAmeritrade
9% SPDR Portfolio S&P 600 Small Cap ETF (SPSM) (0.05%)
By adding $50, $100 or even $150k, the portfolio percentages would, respectively, become approximately...

16.5% - VTI
??% - VIIIX
??% - VIEIX
10% - VMMXX
15% - VSS
7.5% - SPSM
---51% to split between VIIIX, VIEIX (and optionally I Fund, mimicking iShares MSCI EAFE ETF, ARCX, 0.32%)

28.5% - VTI
??% - VIIIX
??% - VIEIX
10% - VMMXX
13% - VSS
6.5% - SPSM
---42% to split between VIIIX, VIEIX (and optionally I Fund, mimicking iShares MSCI EAFE ETF, ARCX, 0.32%)

37.5% - VTI
??% - VIIIX
??% - VIEIX
10% - VMMXX
11% - VSS
5.5% - SPSM
---36% to split between VIIIX, VIEIX (and optionally I Fund, mimicking iShares MSCI EAFE ETF, ARCX, 0.32%)

Am I asking the right questions (or on the right path) about efficiently adding a large amount of money to the portfolio that plays well with the other items already in it?
DangerDad
Posts: 12
Joined: Tue Apr 27, 2021 7:37 pm

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by DangerDad »

To address your original question re bond fund as a replacement for HYS—if you’re looking for slightly higher risk/return you could consider VUSFX—Vanguard Ultra-Short-Term Bond Fund. We use this as our EF.

Cheers..
Topic Author
persona4826
Posts: 71
Joined: Sun Dec 18, 2016 11:53 pm

Rebalancing after adding a large brokerage

Post by persona4826 »

[Thread merged into here --admin LadyGeek]

Hello all,

This post follows an earlier topic I created that changed direction significantly. Thanks to those that assisted me there.

Now, I am looking to set up a brokerage rather than keeping more cash than I need in a high-yield savings account. I'm open to starting "small" ($50,000), or going big ($150,000).

My current portfolio (approx. $250,000):

TSP
63% C – mimicking Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) (0.02%)
6% S - mimicking Vanguard Extended Market Index Fund Institutional Shares (VIEIX) (0.05%)
4% G - mimicking Vanguard Prime Money Market (VMMXX) (0.16%)
Company match? yes

Roth IRA at Vanguard
18% FTSE All-World ex-US Small-Cap Index Fund ETF Shares (VSS) (0.11%)

HSA at TDAmeritrade
9% SPDR Portfolio S&P 600 Small Cap ETF (SPSM) (0.05%)

***

I am open to bringing bonds up to 10% of my portfolio. By adding $50, $100 or even $150k, the percentages would roughly come to...

16.5% - VTI
??% - VIIIX
??% - VIEIX
10% - VMMXX
15% - VSS
7.5% - SPSM
---51% to split between VIIIX, VIEIX (and optionally I Fund, mimicking iShares MSCI EAFE ETF, ARCX, 0.32%)

28.5% - VTI
??% - VIIIX
??% - VIEIX
10% - VMMXX
13% - VSS
6.5% - SPSM
---42% to split between VIIIX, VIEIX (and optionally I Fund, mimicking iShares MSCI EAFE ETF, ARCX, 0.32%)

37.5% - VTI
??% - VIIIX
??% - VIEIX
10% - VMMXX
11% - VSS
5.5% - SPSM
---36% to split between VIIIX, VIEIX (and optionally I Fund, mimicking iShares MSCI EAFE ETF, ARCX, 0.32%)

Am I asking the right questions (and on the right path) of efficiently adding a large amount of money to the portfolio that plays well with the other items already in it?
typical.investor
Posts: 2732
Joined: Mon Jun 11, 2018 3:17 am

Re: Rebalancing after adding a large brokerage

Post by typical.investor »

I don't know what all the tickers are, but I think you are being too sensitive.

4% more or less in VSS isn't going to be materially different. Neither is +/-2% in SPSM.

What you should do is set an AA (asset allocation).

% stocks %bonds

And then for stocks

%US %International

Then once you have your AA, look at the funds you can buy to meet that goal.

You said 95% stocks 5% bonds in a previous thread. Did you decide an international stock percent?

Adding more or less money really shouldn't change your AA. You should adjust your holdings to hit that AA (or +/- 5% of it).

The previous thread is viewtopic.php?f=1&t=345845
livesoft
Posts: 76590
Joined: Thu Mar 01, 2007 8:00 pm

Re: Rebalancing after adding a large brokerage

Post by livesoft »

If you are going to put $50K to $150K in long-term investing in a taxable account, then put ALL of that into a Total US Stock Market Index fund.

Then use changes in your TSP account to adjust your overall portfolio asset allocation to desired asset allocation.

Do NOT start messing around with multiple funds in your taxable account.
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
persona4826
Posts: 71
Joined: Sun Dec 18, 2016 11:53 pm

Re: Rebalancing after adding a large brokerage

Post by persona4826 »

livesoft wrote: Fri May 07, 2021 6:15 am If you are going to put $50K to $150K in long-term investing in a taxable account, then put ALL of that into a Total US Stock Market Index fund.

Then use changes in your TSP account to adjust your overall portfolio asset allocation to desired asset allocation.

Do NOT start messing around with multiple funds in your taxable account.
Perhaps I got too verbose, but I am not adding multiple funds to my taxable -- but after I do add the taxable, how should I determine what percentages my C, S (and I, if helpful) Funds in the TSP should be?
livesoft
Posts: 76590
Joined: Thu Mar 01, 2007 8:00 pm

Re: Rebalancing after adding a large brokerage

Post by livesoft »

persona4826 wrote: Fri May 07, 2021 5:23 pmPerhaps I got too verbose, but I am not adding multiple funds to my taxable -- but after I do add the taxable, how should I determine what percentages my C, S (and I, if helpful) Funds in the TSP should be?
Use the asset allocation software on the web site of your brokerage firm. Pencil and paper works well, too.
Wiki This signature message sponsored by sscritic: Learn to fish.
typical.investor
Posts: 2732
Joined: Mon Jun 11, 2018 3:17 am

Re: Rebalancing after adding a large brokerage

Post by typical.investor »

persona4826 wrote: Fri May 07, 2021 5:23 pm
livesoft wrote: Fri May 07, 2021 6:15 am If you are going to put $50K to $150K in long-term investing in a taxable account, then put ALL of that into a Total US Stock Market Index fund.

Then use changes in your TSP account to adjust your overall portfolio asset allocation to desired asset allocation.

Do NOT start messing around with multiple funds in your taxable account.
Perhaps I got too verbose, but I am not adding multiple funds to my taxable -- but after I do add the taxable, how should I determine what percentages my C, S (and I, if helpful) Funds in the TSP should be?
#1) Set your AA.
#2) choose funds to hit your AA with consideration of:

A] fund availability and cost (some plan have limited cheap options and so you pick the best option and fill out your AA in accounts with better options))
B] consider taxes (ie why put bonds in a ROTH where earnings are tax free)
C] plan for ongoing contributions [ie if you are holding something in a ROTH but can’t add much to it then you allocation might become off]
D] plan on how to rebalance

Actually, people will help with this. You need to state how much you have in each account and how much contributions will be and fund availability (with ER) for anyone to help with that.
typical.investor
Posts: 2732
Joined: Mon Jun 11, 2018 3:17 am

Re: Rebalancing after adding a large brokerage

Post by typical.investor »

livesoft wrote: Fri May 07, 2021 5:45 pm
persona4826 wrote: Fri May 07, 2021 5:23 pmPerhaps I got too verbose, but I am not adding multiple funds to my taxable -- but after I do add the taxable, how should I determine what percentages my C, S (and I, if helpful) Funds in the TSP should be?
Use the asset allocation software on the web site of your brokerage firm. Pencil and paper works well, too.
Google sheets is another popular method as it can look up prices, but I don’t know if it can look up TSP funds.
User avatar
LadyGeek
Site Admin
Posts: 72902
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by LadyGeek »

persona4826 - In order to provide appropriate advice, it's best to keep all the info in one spot. I merged your update back into the original thread.

If you have any questions, ask them here.

(Thanks to the member who reported the post and provided a link to this thread.)
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Topic Author
persona4826
Posts: 71
Joined: Sun Dec 18, 2016 11:53 pm

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by persona4826 »

LadyGeek wrote: Fri May 07, 2021 5:53 pm persona4826 - In order to provide appropriate advice, it's best to keep all the info in one spot. I merged your update back into the original thread.

If you have any questions, ask them here.

(Thanks to the member who reported the post and provided a link to this thread.)
Thank you; I do appreciate the notice. My target changed markedly within the first topic, and it seemed to confuse readers. I could not find a way to change the topic title, and was not sure how to best-proceed re-introducing my concern.
typical.investor wrote: Fri May 07, 2021 5:48 pm #1) Set your AA.
#2) choose funds to hit your AA with consideration of:

A] fund availability and cost (some plan have limited cheap options and so you pick the best option and fill out your AA in accounts with better options))
B] consider taxes (ie why put bonds in a ROTH where earnings are tax free)
C] plan for ongoing contributions [ie if you are holding something in a ROTH but can’t add much to it then you allocation might become off]
D] plan on how to rebalance

Actually, people will help with this. You need to state how much you have in each account and how much contributions will be and fund availability (with ER) for anyone to help with that.
1) I have decided to go for 10% bond and 90% stock. (I will use the TSP G Fund as my "bond" percentage.) I've been able to estimate currently having 18% international stock, and I am fine with this. Once I add the brokerage though, VTI will become the bulk of my portfolio. With VTI being a world fund, I assume my international percentage will go up further. I don't believe this to be a "bad" thing, or is this something that should be checked?
2a) I prefer to use commission-free ETFs that Vanguard provides.
2b) I have learned in recent weeks that having bonds in my brokerage or Roth is not efficient; hence my new goal of holding 10% with the TSP G Fund. I plan to buy-and-hold all that I put into my brokerage. I am too skittish to do anything else with it. The only tax concern for the short-term will be how to report it on my annual taxes.
2c) I have automated my HSA and TSP contributions to reach the annual limits by year's end, and will continue to do so. I max out my Roth contribution at the beginning of every year, and will continue to do so. My brokerage will have a significant starting amount within the first few weeks of opening it, and I will then have my paycheck direct-deposited to it every two weeks.
2d) I plan to rebalance when I find my G Fund deviating by more than 5%.
livesoft wrote: Fri May 07, 2021 6:15 am If you are going to put $50K to $150K in long-term investing in a taxable account, then put ALL of that into a Total US Stock Market Index fund.

Then use changes in your TSP account to adjust your overall portfolio asset allocation to desired asset allocation.

Do NOT start messing around with multiple funds in your taxable account.
I feel that my HSA, Roth, and brokerage have their outlines; and I did break out percentages in a previous post. The TSP is the last area I can "fine-tune" with C and S re-allocations. If I need to re-present this with additional information, or a "portfolio X-Ray", please let me know.
Last edited by persona4826 on Sat May 08, 2021 10:39 pm, edited 1 time in total.
User avatar
dratkinson
Posts: 5377
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by dratkinson »

Late to the party.


The typical recommendation for someone in the 22% fed tax bracket, can withstand more risk, and wanting ETF bonds in taxable is:
--VTI (more risk)
--BND (recommended bonds)

Why?

During a crash:
--Stocks can lose 50-90%. (Lost 40% in 2008-2009, 90% during great depression.)
--Bonds can lose 5-15%. (Don't sweat owning good bonds.)
--Stock/bond crashes are not typically coincidental.
--Most crashes recover within 4yrs. (There have been notable exceptions.)

TBM (fund or ETF) is recommended because of its IT (intermediate-term) duration. IT is reported to be on the sweet spot of the risk reward yield curve.

Since bonds are for safety, international bonds are deprecated because they must be hedged (to US bonds) to avoid currency risk, and hedging costs money. So the safest/cheapest bonds are US bonds.



Alternative view. On the other hand, I'm in a similar situation (22% fed, can tolerate more risk) and decided to use VWLUX (LT national muni fund). Why?
--Dividends are the major component of bond fund/ETF total return---longer duration = higher yield.
--TBM's MBS are deprecated* + munis are safer than corp = munis are preferred over 2 of 3 TBM components.
--The TEY (taxable-equivalent yield) is better: VWLUX's TEY > BND's SEC yield.
--VWLUX dividends are fed tax exempt, don't add to taxable income so don't push me toward next higher income tax bracket, so protects QDI/LTCG benefits---the major component of TSM/TISM annual return.
--VWLUX dividends are state taxable, but that's okay because the state tax bite is much less than fed tax bite.
--If important, VWLUX dividends can be reinvested---fund vs ETF characteristic. I redirect distributions to rebalance.

TEY = SEC yield / (1-fed tax bracket)
--VWLUX SEC yield = 1.27%; TEY = 1.27% / (1-.22) = 1.63%
--BIV (IT bond index) SEC yield = 1.62%
--BND SEC yield = 1.31%
--VWIUX (IT national muni) SEC yield = 0.81%; TEY = .81%/.78 = 1.04%

* Idea. Recall those who want BND (treasury+MBS+corp) but want to avoid its MBS, could instead use BIV (treasury+corp). But BIV dividends are also taxable, so each $1 of dividends pushes another $1 of QDI/LTCG (from TSM+TISM) toward/into higher tax bracket due to income stacking**. This effect is missed in TEY calculation; you'll need to produce sample tax returns to determine the benefit of BIV vs VWLUX.

** See "income stacking": https://thefinancebuff.com/reset-cost-b ... gains.html

VWITX/VWIUX is IT duration so safer/recommended for folks who can benefit from muni funds---folks in 30% marginal tax bracket, where next ordinary $1 is taxed + $1 of QDI/LTCG is pushed into higher tax bracket and taxed.

VWITX/VWIUX does not always produce more after-tax income than TBM in 22% tax bracket, but it does produce more after-tax income than local CDs. I use 3yrs of safer VWIUX as the last tier of my formal EFs as a CD substitute---easy to buy, sell, no EWP.

Munis are not recommended for folks in lower tax brackets. Why? Muni are believed to be more risky than TBM. You can see the extra risk if your compare 52-week price spreads: munis' vs TBM's. Munis are more volatile. So in lower tax brackets, TBM (fund or ETF) is recommended---it's safer.


Disclosure. I went through this drill several years back, while in 15% fed tax bracket and noted that:
--VWLUX SEC yield = 1.27%; TEY = 1.27% / (1-.15) = 1.49%

So I could have slightly more* after-tax income with VWLUX than TBM, if I could withstand the extra risk.

* More still when you consider munis kept me in 15% bracket longer so I also benefited from 0% taxation of QDI/LTCG. This effect is not seen in TEY calculation; must produce sample tax returns to see it.

What to do? I needed bonds in taxable so I could put equities in my Roth for “shoot for the moon” growth potential, wanted the muni advantages, but must handle the extra risk.

My solution. Put equities in my Roth. Put all my bonds in taxable as munis---Vanguard munis are good enough for me. Given that bonds can lose 5-15% during a crash, I overfill my bonds to ~120% (=1/(1-.15)) of anticipated need and stopped worrying. Worst case: the bond money will be there when needed, and I'll get a TLH.

I had the opportunity to TLH munis in 2018, and did. It wasn't terrible.

Notice, bonds in taxable can perform multiple duties: more after-tax income than HY savings/CDs/TBM, extended EF tier, more space for equities in our tax-advantaged accounts, save for home projects/new car, dry powder, and retirement bonds if not otherwise used.


So my suggested solution for your taxable situation is:
--VTI
--VWLUX

But it is not recommended for anyone who has not thought seriously about their true risk tolerance, or produced the sample tax returns required to compare the after-tax incomes produced by their bond fund candidates. It'll require ~10 sample tax returns to compare: ST/IT/LT/HY, treasury/muni/TBM/corp.

Disclosure. I used TBM as my benchmark and ignored all bond candidates that produced less after-tax income than TBM. The remaining bonds I compared to my risk tolerance, and remembered that AMT may once again be more onerous with tax code sunset in ~2027.

Once you've produced sample tax returns for your bond fund candidates, you'll know which bonds should produce more after-tax income for your income situation. Simplifying assumptions:
--(1) tax rates may change, but tax code should remain stable with respect to bonds' dividend treatments,
--(2) meaning different bonds should maintain their preference ranking with respect to each other,
--(3) meaning the answer you choose today, should work going forward (tax code sunset, promotions, retirement).

And since all bonds are currently higher than their mean, any bond shares bought today will have a future TLH opportunity.
--See BND 10-yr price: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D
--See VWLUX 10-yr price: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D



Edit. Multiple typos and second thoughts.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
Topic Author
persona4826
Posts: 71
Joined: Sun Dec 18, 2016 11:53 pm

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by persona4826 »

I did some homework with my asset allocations and ran scenarios through the X-Ray that TD Ameritrade offers. The hypothesis was that I at-once add the max that I am comfortable to VTI in brokerage, and have 90% equity in my AA.

I ran two scenarios: one where I continue with my current percentage of S Fund (aka "VIEIX") roughly equal to G; and a second, eschewing S and dividing it between G and C ("VIIIX").

The X-Ray says that both are "Core" portfolio styles, but I get the following stock grids:

"S=G"

14---22---21
06---11---07
06---09---04

and "No S"

16---24---24
06---10---05
05---07---03

Could someone please help me interpret these, please? I know what the vertical and horizontal axes are; but how can I determine which of these is better in terms of efficiency, performance, cost, etc?
User avatar
dratkinson
Posts: 5377
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Adding a bond index fund to taxable to replace HYS, and the rebalancing after

Post by dratkinson »

With minor allocation differences, you can expect the long-term outcome difference to also be minor.

But the market, from now until you retire, might give a slight edge to one allocation over the other. But you can only know that after you retire, so in hindsight, which doesn't help you now.

And since you'll be adding bonds as you age, you'll not maintain your current AA to retirement, so ....

I recall reading somewhere, that when given the choice between ~identical investments, that we should choose the cheapest, so we pick up additional expected return by lowering our costs.

So choose your preferred variety of "close", "low cost", "simplicity" and go from there.

By accepting "simplicity" and "close is good enough", you avoid worrying about trivial things (how many angels can dance on the head of a pin today? tomorrow?), so don't sweat the small stuff, so more easily pass the SWAN (sleep well at night) test.


Disclosure. I came to accept the market return by being unable to predict the direction of individual stocks or market sectors, not having the patience to wait out their multi-year decline and hopefully one-day return to the mean, Vanguard changing sector fund direction (gold and precious metals fund became a contra-commodities fund with a precious metals tilt... whatever that means), and market forces negatively affecting sectors (onset of fracking changed energy fund into a truer commodities fund, meaning it should only grow at the rate of inflation).

So if you can't beat/control the market, can't tolerate under-performing the market, can't wait for RTM, and can't control fund families, then choose low-cost broad-market index funds (stocks/bonds) less easily perverted, and accept the market return.

I don't get bitcoin return, but I also don't have bitcoin volatility, so I worry less about my investments, so I more easily pass the SWAN test.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
Post Reply