Moving EF Away from LifeStrategy Funds

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
ZeroWealth
Posts: 67
Joined: Sat Jan 07, 2017 12:00 am
Location: Emerald City

Moving EF Away from LifeStrategy Funds

Post by ZeroWealth » Fri Feb 03, 2017 4:27 pm

Hi folks,

I had asked this question a little while back and didn't get much direction. I thought second time's the charm and a more succinct question would help. :D

We have our 6-month emergency fund 100% in the Vanguard LifeStrategy Conservative Growth Fund (VSCGX) and I'm looking for a fund that provides similar returns but with less tax-inefficient assets. What would you recommend? The size of the EF is 20% higher than we need to ride out any bear markets, so having some exposure to risk is okay with us.

Thanks!
"I seldom end up where I wanted to go, but almost always end up where I need to be." - Douglas Adams

retiredjg
Posts: 38408
Joined: Thu Jan 10, 2008 12:56 pm

Re: Moving EF Away from LifeStrategy Funds

Post by retiredjg » Fri Feb 03, 2017 4:42 pm

To my knowledge, there are no tax-efficient balanced funds with an allocation of 40% stocks and 60% bonds . I think about 50/50 is it - Vanguard's Tax-managed Balanced Index.

The only thing I know to do is move your money into Total Stock and Total International and a tax-exempt bond fund if you are in the 28% or higher tax bracket. Maybe even the 25% bracket. In a lower bracket, LifeStrategy Conservative Growth is probably fine as far as tax-efficiency.

Do you know your tax bracket?

User avatar
willthrill81
Posts: 13865
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Moving EF Away from LifeStrategy Funds

Post by willthrill81 » Fri Feb 03, 2017 4:45 pm

ZeroWealth wrote:Hi folks,

I had asked this question a little while back and didn't get much direction. I thought second time's the charm and a more succinct question would help. :D

We have our 6-month emergency fund 100% in the Vanguard LifeStrategy Conservative Growth Fund (VSCGX) and I'm looking for a fund that provides similar returns but with less tax-inefficient assets. What would you recommend? The size of the EF is 20% higher than we need to ride out any bear markets, so having some exposure to risk is okay with us.

Thanks!
Unless they are municipal bonds, bonds are not usually tax efficient. But if you don't want the volatility of an all equity portfolio (I wouldn't either with an emergency fund), that's the price you pay. You could construct a simple two-fund portfolio tilted toward municipal bonds, but I doubt that your after-tax returns will be any better since muni bonds pay less.

To be honest, I think that VWINX beats the pants off of VSCGX in terms of both volatility (lower) and returns (higher).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Topic Author
ZeroWealth
Posts: 67
Joined: Sat Jan 07, 2017 12:00 am
Location: Emerald City

Re: Moving EF Away from LifeStrategy Funds

Post by ZeroWealth » Fri Feb 03, 2017 4:52 pm

retiredjg wrote:To my knowledge, there are no tax-efficient balanced funds with an allocation of 40% stocks and 60% bonds . I think about 50/50 is it - Vanguard's Tax-managed Balanced Index.

The only thing I know to do is move your money into Total Stock and Total International and a tax-exempt bond fund if you are in the 28% or higher tax bracket. Maybe even the 25% bracket. In a lower bracket, LifeStrategy Conservative Growth is probably fine as far as tax-efficiency.

Do you know your tax bracket?
Thanks retiredjg, we'd be okay with a 50/50 as well. I'm really looking to keep up with inflation and if the return is higher, icing on the cake. :mrgreen:

We're in the 25% bracket and will be for the foreseeable future.
"I seldom end up where I wanted to go, but almost always end up where I need to be." - Douglas Adams

Topic Author
ZeroWealth
Posts: 67
Joined: Sat Jan 07, 2017 12:00 am
Location: Emerald City

Re: Moving EF Away from LifeStrategy Funds

Post by ZeroWealth » Fri Feb 03, 2017 4:55 pm

willthrill81 wrote:Unless they are municipal bonds, bonds are not usually tax efficient. But if you don't want the volatility of an all equity portfolio (I wouldn't either with an emergency fund), that's the price you pay. You could construct a simple two-fund portfolio tilted toward municipal bonds, but I doubt that your after-tax returns will be any better since muni bonds pay less.

To be honest, I think that VWINX beats the pants off of VSCGX in terms of both volatility (lower) and returns (higher).
Thanks willthrill81, yeah that was my initial conclusion as well after poking around a bit.

Funny enough, I was just reading about VWINX this morning and was thinking that might be my best bet if nothing more tax-efficient was available that met my desired risk tolerance for this account.
"I seldom end up where I wanted to go, but almost always end up where I need to be." - Douglas Adams

User avatar
willthrill81
Posts: 13865
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Moving EF Away from LifeStrategy Funds

Post by willthrill81 » Fri Feb 03, 2017 4:59 pm

ZeroWealth wrote:
willthrill81 wrote:Unless they are municipal bonds, bonds are not usually tax efficient. But if you don't want the volatility of an all equity portfolio (I wouldn't either with an emergency fund), that's the price you pay. You could construct a simple two-fund portfolio tilted toward municipal bonds, but I doubt that your after-tax returns will be any better since muni bonds pay less.

To be honest, I think that VWINX beats the pants off of VSCGX in terms of both volatility (lower) and returns (higher).
Thanks willthrill81, yeah that was my initial conclusion as well after poking around a bit.

Funny enough, I was just reading about VWINX this morning and was thinking that might be my best bet if nothing more tax-efficient was available that met my desired risk tolerance for this account.
:sharebeer
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

retiredjg
Posts: 38408
Joined: Thu Jan 10, 2008 12:56 pm

Re: Moving EF Away from LifeStrategy Funds

Post by retiredjg » Fri Feb 03, 2017 5:03 pm

In the 25% tax bracket whether to use tax-exempt bonds or taxable bonds is something of a toss up and it seems to vary from time to time.

Consider holding a portion of the tax-managed balanced fund and a "side" of a short term bond fund or something cash like (money market or CDs). This would give you some of each type of bond at a less aggressive allocation than 50/50. Holding your extra 20% is helpful, but if both bonds and stocks take a dive at the same time, it may not be enough of a buffer.

It is possible your short term bond or cash like investment would take care of many emergencies, leaving the Balanced Fund untouched.

Topic Author
ZeroWealth
Posts: 67
Joined: Sat Jan 07, 2017 12:00 am
Location: Emerald City

Re: Moving EF Away from LifeStrategy Funds

Post by ZeroWealth » Fri Feb 03, 2017 5:16 pm

retiredjg wrote:In the 25% tax bracket whether to use tax-exempt bonds or taxable bonds is something of a toss up and it seems to vary from time to time.

Consider holding a portion of the tax-managed balanced fund and a "side" of a short term bond fund or something cash like (money market or CDs). This would give you some of each type of bond at a less aggressive allocation than 50/50. Holding your extra 20% is helpful, but if both bonds and stocks take a dive at the same time, it may not be enough of a buffer.

It is possible your short term bond or cash like investment would take care of many emergencies, leaving the Balanced Fund untouched.
Great stuff retiredjg, really helpful! I'm looking at VTMFX now and it seems right up my alley. For the "side", what do you think about I-Bonds compared VBIRX? I know there's a 1-year restriction on withdrawal, but after that they're pretty darn secure and would protect against inflation.
"I seldom end up where I wanted to go, but almost always end up where I need to be." - Douglas Adams

retiredjg
Posts: 38408
Joined: Thu Jan 10, 2008 12:56 pm

Re: Moving EF Away from LifeStrategy Funds

Post by retiredjg » Fri Feb 03, 2017 5:30 pm

I think I Bonds are a perfect emergency fund if you are flexible enough to work around the 1 year waits.

As your portfolio grows, there is less and less need for holding a separate emergency fund. Maybe that point would coincide with higher education for your kids if you have any. Some people get a tax break when they use I bonds for education.

Topic Author
ZeroWealth
Posts: 67
Joined: Sat Jan 07, 2017 12:00 am
Location: Emerald City

Re: Moving EF Away from LifeStrategy Funds

Post by ZeroWealth » Fri Feb 03, 2017 5:51 pm

retiredjg wrote:I think I Bonds are a perfect emergency fund if you are flexible enough to work around the 1 year waits.

As your portfolio grows, there is less and less need for holding a separate emergency fund. Maybe that point would coincide with higher education for your kids if you have any. Some people get a tax break when they use I bonds for education.
Nice, we can easily weather smaller emergencies with our rainy day savings account, so we're pretty flexible. The EF is really about job loss (a low probability for us), so the 1-year wait will come and go quickly.

I'd probably go 70%/30% VTMFX/I-Bonds so that my 20% buffer was part of the I-Bonds and therefore protected from anything too crazy. Agree? :)
"I seldom end up where I wanted to go, but almost always end up where I need to be." - Douglas Adams

retiredjg
Posts: 38408
Joined: Thu Jan 10, 2008 12:56 pm

Re: Moving EF Away from LifeStrategy Funds

Post by retiredjg » Sat Feb 04, 2017 8:56 am

I think it is reasonable. Have you found the I Bonds page in the Wiki? If not, you should take a look. Link to Wiki in upper right.

Topic Author
ZeroWealth
Posts: 67
Joined: Sat Jan 07, 2017 12:00 am
Location: Emerald City

Re: Moving EF Away from LifeStrategy Funds

Post by ZeroWealth » Sat Feb 04, 2017 10:37 am

retiredjg wrote:I think it is reasonable. Have you found the I Bonds page in the Wiki? If not, you should take a look. Link to Wiki in upper right.
Just finished reading up on the articles and they look great, thanks again!
"I seldom end up where I wanted to go, but almost always end up where I need to be." - Douglas Adams

Topic Author
ZeroWealth
Posts: 67
Joined: Sat Jan 07, 2017 12:00 am
Location: Emerald City

Re: Moving EF Away from LifeStrategy Funds

Post by ZeroWealth » Tue Mar 07, 2017 10:59 am

Thanks again for all the advice on this. This morning I did a 1:1 exchange from the LifeStrategy to VTMFX and will be moving some out for I-Bonds in the next few weeks.
"I seldom end up where I wanted to go, but almost always end up where I need to be." - Douglas Adams

Texanbybirth
Posts: 1232
Joined: Tue Apr 14, 2015 12:07 pm

Re: Moving EF Away from LifeStrategy Funds

Post by Texanbybirth » Tue Mar 07, 2017 11:20 am

Thanks for this interesting topic. I've considered moving our EF into the LS Income Fund, but the capital gains distributions turned me off slightly. Keep us updated how the transition to VTMFX goes for you! :beer
Old Tom Bombadil is a merry fellow, | Bright blue his jacket is, and his boots are yellow. | None has ever caught him yet, for Tom, he is the master: | His songs are stronger songs, and his feet are faster.

Northern Flicker
Posts: 4915
Joined: Fri Apr 10, 2015 12:29 am

Re: Moving EF Away from LifeStrategy Funds

Post by Northern Flicker » Tue Mar 07, 2017 11:53 pm

To be honest, I think that VWINX beats the pants off of VSCGX in terms of both volatility (lower) and returns (higher).
Wellesley Income has a very low non-US equity position, vs VSCGX which has 40% of equities in non-US holdings. There is no guarantee the outperformance of VWINX will continue, as the recent outperformance was just the outperformance of US equities in USD terms.
Index fund investor since 1987.

Post Reply