Audi3470 wrote: …
ST/IT Goals - Taxable Account
2) Going with the 25%-30% bonds idea, should I split the $8,000 in my Vanguard Money Market into $5,000 VTSMX and $3,000 VMLTX (I know the math is a little off, but I'd need to hit the 3K min investment) for tax-efficiency?
No. Don’t mix apples and oranges, grasshopper---LT saving for retirement vs. saving for EF and ST/IT goals.
Note. ST/IT/LT can refer to the “time frame” of your goals. Or ST/IT/LT can refer to “duration” of bonds. ST (duration) bonds are more stable so have lower 52-week price fluctuations and are less sensitive to interest rate risk. LT (duration) bonds are less stable so have higher 52-week price fluctuations and are more sensitive to interest rate risk. Do not confuse ST/IT/LT time frame with ST/IT/LT bond duration.
Retirement investing. Remember the “25%-30% bonds” idea was given to you as LT retirement investing advice---“new investor, unknown risk tolerance, savings for retirement”.
Saving for EF. In the near term you need to save your taxable account for your EF. Why? It’s refillable---put money in/take money out, as often as you like.
Do not confuse advice for one (retirement vs. EF) with advice for the other.
I'm assuming that when you said 25-30% bonds, you were going with your Swedroe concept of approximately "10 x (years - 3)" in equities since I'm thinking along a 10 year timeframe. Otherwise, you could have been saying 25-30% in bonds, and the rest in cash to go along with your "cash is king at a young age" concept.
Yes. 25-35% bonds is the advice from multiple sources for your “new investor, unknown risk tolerance, retirement investing” status. Yes, your taxable in cash until your have a large EF. They are different, don’t confuse them.
Note. The AA of your retirement investments (tax-advantaged and taxable) should differ from the AA of your taxable savings for your EF and ST/IT goals. Why? Because they have different need timeframes. So as you age, your retirement AA will change, but your EF AA probably should not.
The advice to use 25-30% bonds (your current 40yrs to retirement AA) has nothing to do with Swedroe's (my remembered) recommendation to use 70% equities to offset inflation when savings for a home down payment (your current 10yr goal). It's a coincidence that both happen to translate to ~70/30. (N.B.: remember I said that was my recollection of his advice, I don't remember what I've forgotten, so you'll need to read his book for his exact advice. No, I don't remember which book.)
My checking is linked to my Vanguard. That's how I contribute monthly to my Roth and it's how I have been depositing weekly into my Money Market Settlement fund.
Now, why are you suggesting I be so risk-averse with my taxable account? No equities at all? It seems to me that with such a flexible and longish 10 yr time horizon, I can be more risk-tolerant, no? Or are you basing this on the fact that I might depend on this account for my EF?
Again, you’re mixing apples and oranges---confusing the needs of your EF/ST/IT goals with your LT retirement investing goal.
Yes, you need to be risk-averse in your 1st-tier* EF for now and always. Why? Because an EF is to handle ST emergencies and you want to avoid ST price fluctuations (capital loss). Because an illness/injury could cost your job. Since you have so very little saved and want to avoid losing more to a market crash, then cash must be king for now.
* Your 1st-tier EF is the ready >6mos of cash in your checking/savings/mmkt. You don’t have that yet. You can only take risk when you have *large* (>12mos) multi-tied EFs---checking/savings/mmkt, ST bonds, savings bonds, HELOC,…. No you should not buy savings bonds now. Why? Better to wait until you are 35yo. Why? Because they reach final maturity at 30yrs, and assuming you don’t need them for an emergency, then you would be redeeming them starting at age 65. You have much to learn grasshopper. Bottom line: for you, for now, in your taxable account, cash is king.
Once you have >6mos saved in living expenses, then you can add other investments. So my advice for you to use VMLTX as a tier of your EFs was premature; save it until you have >6mos in your EF, and better understand how to use it.
Once you can max your annual tax-advantaged space, have >12mos in your EF, are well on your way to saving for a home down payment, and have money left over, only then can you create a 3-fund retirement portfolio in your taxable account. Not before.
I’ve thought about this for a few days. It worries me that you are not keeping the advice straight---that you are mixing EF/ST/IT advice with LT advice. If you are not able to keep the advice straight, then I worry that you may run into financial difficulties later if you use incorrectly commingled advice to create/execute a flawed EF/ST strategy.
Let’s try this again.
Currently you have almost $zero saved. Any financial emergency could cause serious difficulty. What to do? You must build up your EF as quickly as you can. This EF (1st-tier) must be in cash (cash in a drawer, checking, savings, mmkt, CDs). This means your EF/ST AA will be 0/100.
As you age, the first few tiers of your EF/ST savings will always be in cash or near-cash equivalents. This will never change.
Swedroe’s IT savings equity option, was just that, an option. You don’t have to follow it. And you should not follow it until you’ve read his book and uncover what I’ve forgotten. No I don’t remember which book.
LT retirement investing.
Currently you have “human capital”---your ability to earn an income. And today your human capital is at 100%. After you retire your human capital will be at 0%.
You begin today to save/invest for retirement. To take advantage of compound interest, you invest most of your retirement investments in equities---because they have the potential for greater LT growth than bonds.
Following the advice “age in bond”, you could reasonably start with a retirement AA of 80/20.
This risky 80/20 retirement AA is offset---made less risky---by your human capital of 100%, so your total investing for retirement (retirement accounts + human capital) is more conservative than it first appears.
In retirement, your retirement AA will be near 40/60 and your human capital will be 0%, so your total retirement AA is still conservative.
But as you are a young new investor, with unknown risk tolerance, and worry about small losses---and a market correction/crash can seem to be a multi-year killer---then I suggest you be more conservative with your retirement investing and start with 25-30% bonds as recommended by many sources.
Synthesis of these two ideas.
You can be risky with your retirement investing because of your 40+ years of human capital---your potential to earn more
But potential to earn more
is no guarantee. So with effectively $zero saved and $zero invested for retirement, and a serious injury/disease requiring long hospitalization and physical rehabilitation… your future will be bleak. What to do?
--Maximize your retirement investing to benefit your retired self. Follow appropriate advice, don’t mix apples and oranges.
--Quickly build up and maintain a cash EF of >6mos of living expenses. Follow appropriate advice, don’t mix apples and oranges.
Once you’ve done these two things, then you can begin saving for a home down payment, and begin thinking about extending your retirement investing into your taxable account. Not before. Why? The time it will require to get you to that point, and the learning you will experience in personal financial management up to then, will give you the experience to do it successfully. (Note: as money is fungible, the savings for your home down payment can be an extension of your EF---an extended tier---if you need it.)
Simple actions steps.
For the next few years and until you have a better understanding of personal finance and retirement investing, keep things simple.
--401k. Max your contributions and use a TDR fund (not an ETF) containing 25-30% bonds. It will run on autopilot.
--IRA. Max your contributions and use a TDR fund (not an ETF) containing 25-30% bonds. It will run on autopilot.
--Brownbag your lunch one day each year so you will know you are coming out ahead over the small ER differences---money is fungible.
--Read Tobias’ book to get a better handle on personal finances. Re-read a few months later because you missed something the first time.
--Read Boglehead’s book to get a better handle on retirement investing. Re-read….
--Save your EF/ST/IT money in a taxable account---it’s refillable. Make cash king (0/100 AA). Use only checking/savings/mmkt/CDs.
--When your EF is >6mos, then can begin saving for a home down payment. (This money does double-duty as an extended EF tier.)
--When your EF (+ home down payment) is >12mos, then can begin saving for retirement in your taxable account. (Use munis now.)
Note. While bank checking/savings/mmkt accounts are insured, a mmkt fund is not insured.
For now, don’t save for EF/ST/IT goals using a muni (or any) bond fund. Why? The need (1) to turn off reinvested distributions to avoid small lot tax reporting, (2) to use “specific lot identification” cost basis to minimize capital gains and maximize tax-loss harvesting, and (3) Sch D tax reporting when you sell, will unnecessarily complicate your life. For you, for now, it’s much simpler to save using only checking, savings, mmkt, and CDs.
Maybe don’t save for EF/ST/IT goals using CDs. Why? If you can’t handle small ER cost differences, then you will truly hate the CD EWP (early withdrawal penalty). And the idea of building/managing a CD ladder to avoid EWPs is too much work for you for now. (Disclosure: I’ve thought CD ladders were too much work for me, always.)
You ask the forum for advice on saving/investing for goals. Our replies advise what has worked for us and are based on our study and experience; but they are no substitute for conducting your own due diligence. You may not (should not) use any advice until after you’ve done your own due diligence and resolved all confusion. Otherwise, “Here be dragons.” You are forewarned.
Example. Investing in total markets. Have you read and understood:
--Sharpe’s paper on The Arithmetic of Active Management
? (See Stanford University’s website.)
--The MarketWatch website tracking the long-term results of multiple Lazy Portfolios implementing Sharpe’s idea?
--Swedroe’s The Quest for Alpha
which lists the failures of competing ideas? (Or several other recommended books?)
--Buffett’s demonstration of indexing superiority (using only one fund) by (soon?) winning a 10yr $1M bet against 5 hedge funds?
Example. Do you understand that saving for ST goals must differ from savings for LT goals? Why? In the ST, market volatility is your enemy so your primary goal must be “return OF your money”. In the LT, market growth is your friend so your primary goal can be “return ON your money”.
Example. Some advise that when we have “enough” (as defined by us) that we don’t need a dedicated EF because all of our investments become our EF. Do you understand that this advice is inappropriate for someone just starting out and so has not saved “enough” to use it? Do you understand that even those who can follow the “enough” strategy will still have a large amount in cash (and near-cash equivalents) as the first money they will withdraw? Our need for a large chunk of liquid cash never goes away, so it's appropriate to begin building it from our beginning.
Bottom line. You must conduct your own due diligence, resolve all confusion, and accept any risk before taking the advice of (even well-meaning) strangers.
Disclosure. It required ~10yrs on the BH forum, following discussions that were beyond my ability to completely understand, and reading the recommended books and linked articles, before I was knowledgeable/comfortable enough to perform my due diligence to select a single-state muni fund. (If interested, I posted my process; search forum for “WTCOX”.)
Expect it to require several years too, before you are knowledgeable enough to be comfortable. So while you come up to speed, the above advice is mainstream conservative and will keep you safe while allowing you to jumpstart your retirement investing.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.