How Should I Rebalance My After Tax Vanguard Accounts

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Topic Author
MrCheapo
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How Should I Rebalance My After Tax Vanguard Accounts

Post by MrCheapo »

Short overview. I plan to retire in 3-5 years. Currently 50. Will use this after tax account to draw $20K-$30K a year until 65 then less so as SS kicks in which is $45K a year). Total value of account is about $1.5M. $580K is kept in a MM because it will be needed for kids college ($400K - one kid starts 2023 the other 2026) and $180K as dry powder for snap investment opportunities.

The portfolio is in many funds as I bought what-ever was cheap at the time. It's treated me well (I did materially better (450% vs 300%) than the SP500 over the same period). But it's too complex for me now and it doesn't factor in I'm no longer in accumulation mode.

I would like to keep the a value tilt as its served me well.


SYMBOL BALANCE Percentage

Bonds

VCAIX $36,119.19 2.3%
Vanguard California Intermediate-Term Tax-Exempt Fund Investor Shares

VFIIX $47,675.24 3.0%
Vanguard GNMA Fund Investor Shares

VFSTX $17,815.20 1.1%
Vanguard Short-Term Investment-Grade Fund Investor Shares

VWITX $17,955.78 1.1%
Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares



Cash

VMRXX $587,810.61 37.2%
Vanguard Cash Reserves Federal Money Market Fund Admiral Shares


Stocks


VEMAX $29,621.54 1.9%
Vanguard Emerging Markets Stock Index Fund Admiral Shares

VFIAX $227,896.69 14.4%
Vanguard 500 Index Fund Admiral Shares

VGENX $16,293.51 1.0%
Vanguard Energy Fund Investor Shares

VGHCX $10,566.13 0.7%
Vanguard Health Care Fund Investor Shares

VGSLX $3,989.64 0.3%
Vanguard Real Estate Index Fund Admiral Shares

VIMAX $102,831.65 6.5%
Vanguard Mid-Cap Index Fund Admiral Shares

VMVAX $39,414.75 2.5%
Vanguard Mid-Cap Value Index Fund Admiral Shares

VSMAX $116,757.14 7.4%
Vanguard Small-Cap Index Fund Admiral Shares

VWNAX $80,784.17 5.1%
Vanguard Windsor II Fund Admiral Shares


International


VEUSX $39,646.91 2.5%
Vanguard European Stock Index Fund Admiral Shares

VPADX $21,381.75 1.4%
Vanguard Pacific Stock Index Fund Admiral Shares

VTIAX $38,303.59 2.4%
Vanguard Total International Stock Index Fund Admiral Shares

VTRIX $19,191.19 1.2%
Vanguard International Value Fund


Value


VSEQX $67,504.10 4.3%
Vanguard Strategic Equity Fund

VVIAX $30,830.12 2.0%
Vanguard Value Index Fund Admiral Shares

VVIAX $26,930.43 1.7%
Vanguard Value Index Fund Admiral Shares

$1,579,319.33
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grabiner
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Re: How Should I Rebalance My After Tax Vanguard Accounts

Post by grabiner »

Turn off dividend reinvestment in all funds; you don't need to accumulate more in funds that you decide later you don't want to sell, nor in funds that you do want to keep but don't want to add any more to. You may wind up using all your stock dividends to buy bond funds if you have too much in stock.

The actively-managed stock funds (Energy, Health Care, Windsor II, Strategic Equity, International Value) should likely be sold regardless of your other plans.. They will probably cost you more in capital gains to hold than to sell. Also, Real Estate Index is tax-inefficient and should be sold. This decision is independent of asset allocation; you could replace these with other stock funds to keep the same stock allocation, or with bond funds if you hold too much stock. (And if you do like any of these funds, hold them in your IRA.)

The bond funds can be simplified as needed, as any capital gains should be small. It's probably best to hold only one bond fund in your taxable account, or two if you would otherwise have too much in CA munis. (My normal recommendation for CA investors is to get an intermediate-term duration with half in Vanguard CA Long-Term Tax-Exempt, and half in Limited-Term Tax-Exempt if you are in a high tax bracket, or in Short-Term Bond Index if you are in a moderate bracket so that national munis aren't worthwhile.) You might also split your bond allocation with CA munis in taxable and other bonds in your IRA/401(k).

While there is no benefit for holding separate Europe, Pacific, and emerging markets indexes as well as Total International, there is also no cost, so there is no reason to sell the regional funds unless you want to sell stock anyway. Likewise with large-cap (S&P 500), mid-cap, and small-cap US. However, you might decide that the tax cost of selling some of the small holdings is worth the simplicity. (Or, if you are charitably inclined, you could donate those funds to charity.)

The fact that you are no longer in accumulation mode should determine your risk tolerance, but it is independent of the decision to overweight value or small-cap. You will need to hold more bonds in retirement, but you can keep the same fraction of your portfolio in value stocks. (This is what I do; my IPS says that my US stock should be 1/8 large growth, 3/8 large value, 1/8 small growth, 3/8 small value, but the percentage of my portfolio in US stock is decreasing by 1% per year as retirement gets closer.)

If you do want to overweight international value, there are now ETFs which do this in a more tax-efficient way, so they can be held in a taxable account. iShares MSCI Factor Value ETF (IVLU) would fill the same role as International Value; you can also use Avantis International Small-Cap Value (AVDV) if you want to hold that asset class.
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MrCheapo
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Re: How Should I Rebalance My After Tax Vanguard Accounts

Post by MrCheapo »

Thanks for the detailed feedback. Let me think through it and then reply.

But I did want to keep a value tilt (and strategic equity is value focused) because the market is quite frothy now and value should out-perform growth going forward.
grabiner wrote: Sun Sep 12, 2021 9:52 am Turn off dividend reinvestment in all funds; you don't need to accumulate more in funds that you decide later you don't want to sell, nor in funds that you do want to keep but don't want to add any more to. You may wind up using all your stock dividends to buy bond funds if you have too much in stock.

The actively-managed stock funds (Energy, Health Care, Windsor II, Strategic Equity, International Value) should likely be sold regardless of your other plans.. They will probably cost you more in capital gains to hold than to sell. Also, Real Estate Index is tax-inefficient and should be sold. This decision is independent of asset allocation; you could replace these with other stock funds to keep the same stock allocation, or with bond funds if you hold too much stock. (And if you do like any of these funds, hold them in your IRA.)

The bond funds can be simplified as needed, as any capital gains should be small. It's probably best to hold only one bond fund in your taxable account, or two if you would otherwise have too much in CA munis. (My normal recommendation for CA investors is to get an intermediate-term duration with half in Vanguard CA Long-Term Tax-Exempt, and half in Limited-Term Tax-Exempt if you are in a high tax bracket, or in Short-Term Bond Index if you are in a moderate bracket so that national munis aren't worthwhile.) You might also split your bond allocation with CA munis in taxable and other bonds in your IRA/401(k).

While there is no benefit for holding separate Europe, Pacific, and emerging markets indexes as well as Total International, there is also no cost, so there is no reason to sell the regional funds unless you want to sell stock anyway. Likewise with large-cap (S&P 500), mid-cap, and small-cap US. However, you might decide that the tax cost of selling some of the small holdings is worth the simplicity. (Or, if you are charitably inclined, you could donate those funds to charity.)

The fact that you are no longer in accumulation mode should determine your risk tolerance, but it is independent of the decision to overweight value or small-cap. You will need to hold more bonds in retirement, but you can keep the same fraction of your portfolio in value stocks. (This is what I do; my IPS says that my US stock should be 1/8 large growth, 3/8 large value, 1/8 small growth, 3/8 small value, but the percentage of my portfolio in US stock is decreasing by 1% per year as retirement gets closer.)

If you do want to overweight international value, there are now ETFs which do this in a more tax-efficient way, so they can be held in a taxable account. iShares MSCI Factor Value ETF (IVLU) would fill the same role as International Value; you can also use Avantis International Small-Cap Value (AVDV) if you want to hold that asset class.
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grabiner
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Re: How Should I Rebalance My After Tax Vanguard Accounts

Post by grabiner »

MrCheapo wrote: Sun Sep 12, 2021 10:54 am Thanks for the detailed feedback. Let me think through it and then reply.

But I did want to keep a value tilt (and strategic equity is value focused) because the market is quite frothy now and value should out-perform growth going forward.
And I have no problem with keeping a value tilt; I am a long-time value investor myself.

My point is that Strategic Equity and International Value are not the best funds for getting a value tilt in a taxable account, as the capital-gains tax increases the cost. If you replace them with value ETFs, or hold your actively-managed value funds in an IRA, you can get the same value exposure at a lower tax cost.
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MrCheapo
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Re: How Should I Rebalance My After Tax Vanguard Accounts

Post by MrCheapo »

Okay. Just to be clear, your saying Strategic Equity being actively managed generates lots of selling each year which generates capital gains each and every year? Is that right.

But are there any value funds which are not like that? Perhaps the index value funds?
grabiner wrote: Sun Sep 12, 2021 2:29 pm
MrCheapo wrote: Sun Sep 12, 2021 10:54 am Thanks for the detailed feedback. Let me think through it and then reply.

But I did want to keep a value tilt (and strategic equity is value focused) because the market is quite frothy now and value should out-perform growth going forward.
And I have no problem with keeping a value tilt; I am a long-time value investor myself.

My point is that Strategic Equity and International Value are not the best funds for getting a value tilt in a taxable account, as the capital-gains tax increases the cost. If you replace them with value ETFs, or hold your actively-managed value funds in an IRA, you can get the same value exposure at a lower tax cost.
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grabiner
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Re: How Should I Rebalance My After Tax Vanguard Accounts

Post by grabiner »

MrCheapo wrote: Sun Sep 12, 2021 4:41 pm Okay. Just to be clear, your saying Strategic Equity being actively managed generates lots of selling each year which generates capital gains each and every year? Is that right.

But are there any value funds which are not like that? Perhaps the index value funds?
Yes, that is exactly my point. Vanguard doesn't have an international value ETF, but other providers do, and as ETFs, they should be tax-efficient.
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Re: How Should I Rebalance My After Tax Vanguard Accounts

Post by UpperNwGuy »

OP, don't limit yourself to Vanguard or to mutual funds. Check out ETFs from other fund families.
Topic Author
MrCheapo
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Re: How Should I Rebalance My After Tax Vanguard Accounts

Post by MrCheapo »

grabiner wrote: Sun Sep 12, 2021 5:00 pm
MrCheapo wrote: Sun Sep 12, 2021 4:41 pm Okay. Just to be clear, your saying Strategic Equity being actively managed generates lots of selling each year which generates capital gains each and every year? Is that right.

But are there any value funds which are not like that? Perhaps the index value funds?
Yes, that is exactly my point. Vanguard doesn't have an international value ETF, but other providers do, and as ETFs, they should be tax-efficient.
Paraphrasing the God Father, Just when you thought you had learnt enough to get out, they pull you back in. I swear to God I learn something new every week. What's an easily acccessible (i.e. not huge amounts of verbiage) list of tips/tricks? The ideal book would have two categories: i) Tips and tricks to generate more wealth and ii) Tips and tricks to pass on more wealth heirs.

I did some research and found out that ETF's have fewer taxable events than the comparable MF which can produce tax savings for active managed funds. But how much savings are we talking about here over a 20 year period? That was less clear.
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grabiner
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Re: How Should I Rebalance My After Tax Vanguard Accounts

Post by grabiner »

MrCheapo wrote: Mon Sep 13, 2021 7:30 am I did some research and found out that ETF's have fewer taxable events than the comparable MF which can produce tax savings for active managed funds. But how much savings are we talking about here over a 20 year period? That was less clear.
This depends on the fund, and on your tax rate; you'll have to look at the historical distributions. However, 1% per year is a reasonable estimate for most funds, which would be an 18% loss over 20 years. If you sell after 20 years, the net loss will be slightly less because the reinvested capital gains and lower after-tax returns give you a lower capital gain upon sale.

For example, suppose that you pay 24% federal and 9.3% CA tax, and your fund distributes 1% of its value every year in short-term gains and 3% in long-term gains. That would be a tax cost of .01*33.3% + .03*24.3% = 1.06%, in addition to any tax cost on the dividends.

You may also be able to check the data from the fund provider, which assumes the highest federal tax rate and no state tax. For example, over the last ten years, Vanguard Strategic Equity had a tax cost of 1.23% (pre-tax minus after-tax returns), while Value Index (which benefits from the ETF class) had a tax cost of 0.65%. (Morningstar also publishes after-tax returns, but its numbers may be inaccurate because it doesn't always know about qualified dividends.)
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