Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

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orsocorso
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Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

Post by orsocorso » Mon Jun 10, 2019 11:32 am

I am interested in putting taxable money into Vanguard Balanced Index Fund (VBIAX).

Many here believe it is not an ideal candidate for taxable account.

In an article entitled "Me and My Money," Mr. Bogle calls this fund "very tax efficient."

Here is a link to the article:

https://www.reuters.com/article/us-colu ... LI20120911

And here is the excerpt which contains the quote:

Q: Do you set a little aside for those grandkids in 529 college-savings plans? (Vanguard has about $40 billion in assets in 27 state 529 plans.)

A: I don’t really like the idea of tying up your money in 529 plans, because of all the restrictions on withdrawals. I’m not against them, I just like having more flexibility than being required to use those funds specifically for educational purposes. We do save a little money for all my grandkids every year, but we just chose the Vanguard Balanced Index Fund (VBINX). It’s about 60 percent stocks, 40 percent bonds, and it’s been wonderful. We give them what we can within annual gift-tax limitations, and put it all into that very tax-efficient fund.

I am about simplicity. In what context would John Bogle say this is tax-efficient? And do the arguments against this fund in taxable -- provided one is very comfortable with a fixed asset allocation of 60/40 and very much likes automatic rebalancing -- hold more sway than Mr. Bogle's own opinion?


Thanks in advance.

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grabiner
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Re: Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

Post by grabiner » Mon Jun 10, 2019 6:50 pm

Balanced Index is tax-efficient in a low tax bracket, in which you would not use munis; the stock portion is just as tax-efficient in the balanced index as it would be stand-alone. This may be fine for the grandchildren, who are probably in a low bracket (particularly with the new kiddie tax rules0. If you want a similar balanced fund in a higher tax bracket, you would use Tax-Managed Balanced Fund.

The problem with both funds is that you cannot change your allocation without a tax bill. If you want to hold fewer bonds, or a different type of bonds, or bonds in a different account, you have to sell stocks at the same time you sell bonds, paying a capital-gains tax. If the grandchildren don't spend the money in college, and then get high-paying jobs in New York, they will have a tax bill switching Balanced Index fund into Total Stock Market Index and NY Long-Term Tax-Exempt, which are the funds they would want to hold in a taxable account. With separate bond and stock funds, they could sell just the bond fund to buy the NY muni fund, for little or no tax cost.
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Re: Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

Post by retiringwhen » Mon Jun 10, 2019 8:00 pm

Everything grabiner says is true. BUT, if you are looking for simplicity and a US-only 60/40 AA for a long-term, it hard to find a simpler, cheaper, more diversified solution that is also about as tax-efficient as you can get while holding taxable bonds.

IOW, it is not a general purpose fund for all seasons, but it can be very good for those cases. In fact, Jack's use as a fund essentially to fill up a minor's trust account it can be very very efficient.

BTW, I disagree with Jack on the utility of 529's. They come with a major feature that UTMA/UGMA accounts don't and that is the ability of the grantor to retain control (ownership) and even change beneficiaries. This feature is worth the limitations in my estimation (as learned by hard experience).

The concern about later increased tax rates that make taxable bonds undesirable can be mitigated by stopping reinvestment and using other vehicles to invest. It is not the end of the world. The need/desire to hold taxable bonds for the foreseeable future must be true for the fund to make sense though.

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Re: Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

Post by Christine_NM » Mon Jun 10, 2019 10:07 pm

I have a large amount of VBIAX in a taxable account along with a bit of VTWAX (Total World). I no longer add to VBIAX, but I really like the distributions as income. There are never distributions of capital gains so that may be why Mr. Bogle called it tax-efficient. I'm not planning on ever selling.

It is the right fund if you would see no tax advantage from muni bonds. If munis are better for your tax rate then go for Tax-Managed Balanced fund.
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Re: Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

Post by michaeljmroger » Mon Jun 10, 2019 11:30 pm

Are we sure it’s not a mistake from the journalist? If I remember correctly, Bogle often praised VTMFX (which is indeed very tax efficient), not VBIAX.

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Re: Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

Post by mortfree » Tue Jun 11, 2019 5:07 am

grabiner wrote:
Mon Jun 10, 2019 6:50 pm
If you want a similar balanced fund in a higher tax bracket, you would use Tax-Managed Balanced Fund.
What MFJ tax bracket(s) would that be?

Also, for others, this fund has a 10k minimum.

Thanks!

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Re: Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

Post by grabiner » Tue Jun 11, 2019 8:29 pm

mortfree wrote:
Tue Jun 11, 2019 5:07 am
grabiner wrote:
Mon Jun 10, 2019 6:50 pm
If you want a similar balanced fund in a higher tax bracket, you would use Tax-Managed Balanced Fund.
What MFJ tax bracket(s) would that be?
24% or higher would be my best guess. That is, I assume that taxable bonds and munis of comparable risk have comparable returns in a moderate tax bracket.

I normally use this as a recommendation of whether to hold Intermediate-Term Tax-Exempt or Total Bond Market Index, but it is just as relevant in the decision whether to hold a balanced fund that has one or the other as its bond component.
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Re: Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

Post by rustymutt » Tue Jun 11, 2019 8:47 pm

I switched both my IRA, and regular taxed investment to VBIAX 3 years, and have been happy since. .07% er. :sharebeer
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Re: Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

Post by mortfree » Tue Jun 11, 2019 9:18 pm

grabiner wrote:
Tue Jun 11, 2019 8:29 pm
mortfree wrote:
Tue Jun 11, 2019 5:07 am
grabiner wrote:
Mon Jun 10, 2019 6:50 pm
If you want a similar balanced fund in a higher tax bracket, you would use Tax-Managed Balanced Fund.
What MFJ tax bracket(s) would that be?
24% or higher would be my best guess. That is, I assume that taxable bonds and munis of comparable risk have comparable returns in a moderate tax bracket.

I normally use this as a recommendation of whether to hold Intermediate-Term Tax-Exempt or Total Bond Market Index, but it is just as relevant in the decision whether to hold a balanced fund that has one or the other as its bond component.
Thanks for that info.

In my vanguard taxable I am 100% VTI.
Other taxable accounts are in individual stocks.

I’d like to get a balanced fund to eliminate my 100% stock taxable position (minus EF at CapOne).

I believe I am 22% (is that a bracket)?

So between that and the fact that KlangFool said a small amount in taxable would be 100k or less I think I would be ok with VBIAX in taxable. I also just started this years Roth at VG with VBIAX. So I will have to be careful if I ever want to TLH that fund.

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Re: Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

Post by grabiner » Tue Jun 11, 2019 9:23 pm

mortfree wrote:
Tue Jun 11, 2019 9:18 pm
In my vanguard taxable I am 100% VTI.
Other taxable accounts are in individual stocks.

I’d like to get a balanced fund to eliminate my 100% stock taxable position (minus EF at CapOne).

I believe I am 22% (is that a bracket)?
I recommend holding a separate bond fund, not a balanced fund, so that you can sell bonds for little or no tax cost. In the 22% tax bracket, I would recommend Total Bond Market. Putting $30K of new money in Total Stock Market and $20K in Total Bond Market would give you the same portfolio as putting $50K in Balanced Index, but it would be easier to manage.
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Re: Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

Post by yousha » Tue Jun 11, 2019 9:25 pm

I have the fund and am very satisfied with it.

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Re: Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

Post by sixtyforty » Wed Jun 12, 2019 8:57 am

I own VBIAX as well and like it. It's a set it and forget it fund. Below is a comparison of the after-tax returns of VBIAX (1st column) and VTMFX - Tax Managed Balanced fund (2nd column). It appears to be fairly tax efficient to me. Obviously it won't be as tax efficient as having bonds in tax deferred and equities in taxable.

Average annual total return—after taxes on distributions
Vanguard Balanced Index Fund Adm Vanguard Tax-Managed Balanced Adm
1-year 6.57% 6.86% — — —
3-year 8.17% 7.51% — — —
5-year 6.66% 6.62% — — —
10-year 10.49% 9.67% — — —
Since inception 5.35% 7.35% — — —
Inception date 11/13/2000 09/06/1994 — — —
1-, 3-, 5-, 10-year as-of date 03/31/2019 03/31/2019 — — —


Average annual total return—after taxes on distributions and sale of fund shares
Vanguard Balanced Index Fund Adm Vanguard Tax-Managed Balanced Adm
1-year 4.55% 4.85% — — —
3-year 6.68% 6.27% — — —
5-year 5.54% 5.62% — — —
10-year 9.03% 8.41% — — —
Since inception 4.72% 6.74% — — —
Inception date 11/13/2000 09/06/1994 — — —
1-, 3-, 5-, 10-year as-of date 03/31/2019 03/31/2019 — —
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Re: Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

Post by dbr » Wed Jun 12, 2019 9:08 am

I agree with Grabiner in his two comments.

As funds go and for this case the fund probably is relatively tax efficient, but if you are already at a position to consider Vanguard funds and maybe separating the stock and bond components to say that fund is "very" tax efficient is probably not the word most people here would use. I suspect the implied alternatives he might have had in mind would be funds that persistently distribute unwanted capital gains distributions.

It is very easy to run across these little seemingly contradictory comments somewhere in something Mr. Bogle has said.

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Re: Jack Bogle: Vanguard Balanced Index is "Very Tax Efficient Fund"

Post by grabiner » Wed Jun 12, 2019 10:17 pm

sixtyforty wrote:
Wed Jun 12, 2019 8:57 am
I own VBIAX as well and like it. It's a set it and forget it fund. Below is a comparison of the after-tax returns of VBIAX (1st column) and VTMFX - Tax Managed Balanced fund (2nd column).
Comparing the total returns is not a fair comparison, since Balanced Index is 60% stock and Tax-Managed Balanced is 49% stock. Balanced Index will outperform after-tax in almost any tax bracket in a rising stock market, and the market has been rising over the last ten years.

But either fund is as tax-efficient as the underlying funds if you stick with the allocation, and are willing to sell bonds and stocks in that proportion when you do sell. This isn't too bad even for Balanced Index in a moderate tax bracket.
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