Equity funds for taxable accounts

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Rick Ferri
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Equity funds for taxable accounts

Post by Rick Ferri » Sat May 04, 2019 9:03 am

Be prepared to marry forever the equity mutual funds and ETFs you buy in a taxable account because divorce is often a taxing experience. Consider using only total US and total International ETFs. Avoid theme funds, factors, and trendy funds because your love will eventually fade. This keeps your portfolio simple and uncluttered.

Anything exotic requires having the understanding and discipline to hang on for a lifetime - and only if the fees are low enough 😉. If you’re not 100% committed, then don't own factors, themes, industries etc. or only own them in an IRA rollover, Roth, 401 or some other account where taxes do not influence buy and sell decisions.

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The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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House Blend
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Re: Equity funds for taxable accounts

Post by House Blend » Sat May 04, 2019 11:42 am

Rick Ferri wrote:
Sat May 04, 2019 9:03 am
Be prepared to marry forever the equity mutual funds and ETFs you buy in a taxable account
And if you tax loss harvest, plan on bigamy.

livesoft
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Re: Equity funds for taxable accounts

Post by livesoft » Sat May 04, 2019 11:45 am

I have followed what Rick Ferri preaches.

Also when selecting a fund/ETF for the first purchase already think about what fund/ETF one will use for a tax-loss harvesting partner.

In the old days, the Total International Stock Index funds did not exist in their current rendition, so investors starting a taxable account are lucky to live in these times.
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Re: Equity funds for taxable accounts

Post by SimpleGift » Sat May 04, 2019 11:50 am

Rick Ferri wrote:
Sat May 04, 2019 9:03 am
Be prepared to marry forever the equity mutual funds and ETFs you buy in a taxable account because divorce is often a taxing experience.
An important, but less discussed, aspect of equity investing in taxable accounts. Early in my investing career, I dabbled in some actively-managed funds, an energy sector fund, and a few other "experiments." In a taxable account, it quickly became apparent that even if my experiments were doing well, the embedded capital gains would soon lock me into a lifelong commitment to them — since a sale would involve a 15%-20% loss on taxable capital gains (beyond what tax loss harvesting would offset).

All the more reason to emphasize broad market index funds in one's equity investments — and to make sure that any tilts or sector funds carry with them the expectation of a career-long commitment.

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Re: Equity funds for taxable accounts

Post by garlandwhizzer » Sat May 04, 2019 12:23 pm

I think Rick's advice above is right on target. I hold considerable levels of TSM in my personal non-tax advantaged account in addition to fixed income. It's dividends get preferential tax treatment (almost 100% qualified dividends) and it does not generate any capital gains unless you sell it. Furthermore it tends to be less volatile than most active, factor, or INTL equity approaches. It is nice to have a relatively stable (for equity) storehouse of value which throws off tax advantaged dividend income in personal accounts. Finally if you need money for emergencies, you have the option of selling the highly liquid TSM in any amount needed, any time needed, and paying no taxes at all on your cost basis and only reduced (maximum 20%) or absent (if total income does not exceed the 12% bracket) federal tax on your capital gains. It's a nice way to get a lot of money as needed without generating a lot of tax.

Garland Whizzer

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Taylor Larimore
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Equity funds for taxable accounts?

Post by Taylor Larimore » Sat May 04, 2019 1:15 pm

Rick Ferri wrote:
Sat May 04, 2019 9:03 am
Be prepared to marry forever the equity mutual funds and ETFs you buy in a taxable account because divorce is often a taxing experience. Consider using only total US and total International ETFs. Avoid theme funds, factors, and trendy funds because your love will eventually fade. This keeps your portfolio simple and uncluttered.

Rick Ferri
Rick:

Thank you for your important message about what funds to buy (and not buy) in a taxable account.

One of the most common problems we see on this forum is from investors who want to exchange their old poorly performing taxable funds into more tax-efficient total market index funds--but can't because the exchange will trigger a capital-gain tax.

I agree with you. It is extremely important when opening a taxable account to use only tax-efficient funds (or ETFs) that can be held 'forever.'

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Equity funds for taxable accounts

Post by stan1 » Sat May 04, 2019 1:55 pm

House Blend wrote:
Sat May 04, 2019 11:42 am
Rick Ferri wrote:
Sat May 04, 2019 9:03 am
Be prepared to marry forever the equity mutual funds and ETFs you buy in a taxable account
And if you tax loss harvest, plan on bigamy.
Marry the fund/ETF forever but you can divorce your brokerage without going to court or even hiring a lawyer. Only buy products that can be transferred, bought and sold someplace else.

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Spinola
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Re: Equity funds for taxable accounts

Post by Spinola » Sat May 04, 2019 4:08 pm

So far in taxable I only have VTI, VT and a few shares of VWO. Are these OK? I pretty much will just keep adding to these. Taxable is a whole new ballpark for me..

I had considered ETHO, but have held off..

https://www.ethoetf.com/

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Taylor Larimore
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Re: Equity funds for taxable accounts

Post by Taylor Larimore » Sat May 04, 2019 7:38 pm

Spinola wrote:
Sat May 04, 2019 4:08 pm
So far in taxable I only have VTI, VT and a few shares of VWO. Are these OK? I pretty much will just keep adding to these. Taxable is a whole new ballpark for me..

I had considered ETHO, but have held off..

https://www.ethoetf.com/
spinola:

According to Morningstar, VTI (Vanguard Total Stock Market) is in the TOP 4% in its category for tax-efficiency during the past 15 years.

http://performance.morningstar.com/fund ... ture=en_US

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Spinola
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Re: Equity funds for taxable accounts

Post by Spinola » Sat May 04, 2019 10:14 pm

Taylor Larimore wrote:
Sat May 04, 2019 7:38 pm
According to Morningstar, VTI (Vanguard Total Stock Market) is in the TOP 4% in its category for tax-efficiency during the past 15 years.

http://performance.morningstar.com/fund ... ture=en_US

Best wishes.
Taylor
Good to know! Thank you! VT and VWO not so much though..

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Re: Equity funds for taxable accounts

Post by typical.investor » Sat May 04, 2019 10:17 pm

Rick Ferri wrote:
Sat May 04, 2019 9:03 am
Be prepared to marry forever the equity mutual funds and ETFs you buy in a taxable account because divorce is often a taxing experience. Consider using only total US and total International ETFs. Avoid theme funds, factors, and trendy funds because your love will eventually fade. This keeps your portfolio simple and uncluttered.

Anything exotic requires having the understanding and discipline to hang on for a lifetime - and only if the fees are low enough 😉. If you’re not 100% committed, then don't own factors, themes, industries etc. or only own them in an IRA rollover, Roth, 401 or some other account where taxes do not influence buy and sell decisions.

Rick Ferri
Or buy the non cap weighted market funds in taxable because you can’t sell them without tax consequences and it will force you to hold. Kinda like paying an advisor but cheaper!

But yeah, don’t get into the wrong strategy in taxable!

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Re: Equity funds for taxable accounts

Post by Prahasaurus » Sat May 04, 2019 11:53 pm

While my bond allocation is a bit more complex in taxable, my equity position is simple: VTWAX. I own the entire market, no need to rebalance US v International or fiddle with specific industries. Just buy regularly and forget.

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Re: Equity funds for taxable accounts

Post by alpine_boglehead » Sun May 05, 2019 12:42 am

Thanks for posting this. It very true. Even more when you made the right "bets", i..e. you have lots of capital gains. You can either stick with the undiversified investment (or bad fund choice), or take the tax hit. The same also works for individual stocks. You're placing yourself in a catch-22. If your picks are successful, you either have to keep them, or give up part of your gains (unless you have losses to offset the gains and can tax loss harvest).

Adding insult to injury, more specialized funds (factor, industry, actively managed subset of the market) apart from higher fees usually also have much higher internal turnover, distributing capital gains year by year which would have accumulated in a total market fund.

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Re: Equity funds for taxable accounts

Post by FederalFIRE » Sun May 05, 2019 3:03 am

Excellent advice. Thankfully I made this mistake early on by trying to do asset-class based investing in a mutual fund portfolio. I ended up selling all those funds and dealing with the taxes, but it was before I had a substantial investment in my taxable. In hindsight, the move to a Boglehead philosophy, holding only VTI and VXUS in taxable was not only a wise investment decision, but also a good tax decision.

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Re: Equity funds for taxable accounts

Post by Rick Ferri » Sun May 05, 2019 10:05 am

House Blend wrote:
Sat May 04, 2019 11:42 am
Rick Ferri wrote:
Sat May 04, 2019 9:03 am
Be prepared to marry forever the equity mutual funds and ETFs you buy in a taxable account
And if you tax loss harvest, plan on bigamy.
LOL! Yes.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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Re: Equity funds for taxable accounts

Post by 747driver » Mon May 06, 2019 1:17 pm

I divorce a few each year by donating them to my donor advised fund instead of writing a check.
A clear conscience is a great pillow.

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Re: Equity funds for taxable accounts?

Post by MikeG62 » Mon May 06, 2019 2:48 pm

Taylor Larimore wrote:
Sat May 04, 2019 1:15 pm
Rick Ferri wrote:
Sat May 04, 2019 9:03 am
Be prepared to marry forever the equity mutual funds and ETFs you buy in a taxable account because divorce is often a taxing experience. Consider using only total US and total International ETFs. Avoid theme funds, factors, and trendy funds because your love will eventually fade. This keeps your portfolio simple and uncluttered.

Rick Ferri
Rick:

Thank you for your important message about what funds to buy (and not buy) in a taxable account.

One of the most common problems we see on this forum is from investors who want to exchange their old poorly performing taxable funds into more tax-efficient total market index funds--but can't because the exchange will trigger a capital-gain tax.

I agree with you. It is extremely important when opening a taxable account to use only tax-efficient funds (or ETFs) that can be held 'forever.'

Best wishes
Taylor
+2.

I speak from experience. I still hold a few active funds in taxable for this reason. They are not poor performers either, but in recent years no better than a comparable index fund/ETF and although I’d like to consolidate/simplify it’s not as easy decision. I’ve told some friends over the last few years the dangers here. Even if the investment performs as well or better than you hoped, it becomes quite difficult to ever get out (kind of handcuffed to them). It’s not something people think a lot about when making the investments.

Great point Rick.
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Freeman305
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Re: Equity funds for taxable accounts

Post by Freeman305 » Mon May 06, 2019 5:31 pm

Rick Ferri wrote:
Sat May 04, 2019 9:03 am
Be prepared to marry forever the equity mutual funds and ETFs you buy in a taxable account because divorce is often a taxing experience. Consider using only total US and total International ETFs. Avoid theme funds, factors, and trendy funds because your love will eventually fade. This keeps your portfolio simple and uncluttered.

Anything exotic requires having the understanding and discipline to hang on for a lifetime - and only if the fees are low enough 😉. If you’re not 100% committed, then don't own factors, themes, industries etc. or only own them in an IRA rollover, Roth, 401 or some other account where taxes do not influence buy and sell decisions.

Rick Ferri
+1 for providing the solution as well: You can do a portfolio tilt towards various sectors in your tax deferred accounts to your heart's content. For example, this late in the cycle, I shift a bit towards consumer defensive stocks and away from small caps. But I only do that in my IRA - my taxable portfolio has VTI and nothing else! It also raises, by implication, an important point I recall many years ago from a CFA review course: Too many look at their various investments as separate portfolios, but if you're an individual, EVERYTHING you own needs to be evaluated as one portfolio from the perspective of correlation, tax consequences, over-weighting, etc, because it will impact your wealth on that combined basis.

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Re: Equity funds for taxable accounts

Post by AtlasShrugged? » Tue May 07, 2019 6:41 am

Bogleheads....Is a target date index fund good for a taxable account? I have FXIXF (Fidelity Freedom Index fund 2030). I was going for the ultimate in simplicity, but am wondering if I hurt myself taxwise.
“If you don't know, the thing to do is not to get scared, but to learn.”

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Re: Equity funds for taxable accounts

Post by 3-20Characters » Tue May 07, 2019 7:12 am

I agree, Rick. I use taxable as my total stock market cornerstone, which only changes due to tlh or tgh. When tlh-ed from total us to sp500, I just added extended market in tax advantaged to round it out, because I don’t want anything besides the 2 total stock market funds and some cash in taxable. I let the allocation in my total stock in taxable drive my other decisions in tax advantaged to reach the proper AA, tilts. Of course, it helps to have a 40/60 split between taxable and tax advantaged.

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Re: Equity funds for taxable accounts

Post by GoldenFinch » Tue May 07, 2019 7:19 am

AtlasShrugged? wrote:
Tue May 07, 2019 6:41 am
Bogleheads....Is a target date index fund good for a taxable account? I have FXIXF (Fidelity Freedom Index fund 2030). I was going for the ultimate in simplicity, but am wondering if I hurt myself taxwise.
One issue is that you cannot only sell equities or only sell bonds. The other is that bonds are best kept in tax-deferred accounts.

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Re: Equity funds for taxable accounts

Post by fourniks » Tue May 07, 2019 7:27 am

SimpleGift wrote:
Sat May 04, 2019 11:50 am
Rick Ferri wrote:
Sat May 04, 2019 9:03 am
Be prepared to marry forever the equity mutual funds and ETFs you buy in a taxable account because divorce is often a taxing experience.
An important, but less discussed, aspect of equity investing in taxable accounts. Early in my investing career, I dabbled in some actively-managed funds, an energy sector fund, and a few other "experiments." In a taxable account, it quickly became apparent that even if my experiments were doing well, the embedded capital gains would soon lock me into a lifelong commitment to them — since a sale would involve a 15%-20% loss on taxable capital gains (beyond what tax loss harvesting would offset).

All the more reason to emphasize broad market index funds in one's equity investments — and to make sure that any tilts or sector funds carry with them the expectation of a career-long commitment.
This.

My father gifted me some Vanguard Windsor II probably about 20 years ago - it's in my taxable. Even though I eventually found the Boglehead way (I also have 500 Index and International Index/FTSE ex US), and I stopped adding to it a long time ago, it has grown significantly. Right now, with the 2x/year dividends and approx. 4% year-end capital gain distributions as of late, it adds well over $10k/year, which at times, is enough to put me over to the next tax bracket. With the 10-year run-up, the cost basis is such that there have been few opportunities to sell without incurring taxable gains and no offsets available.

It will be the first to go when I retire.

Four

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Makaveli
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Re: Equity funds for taxable accounts

Post by Makaveli » Tue May 07, 2019 12:42 pm

Sage advice as always. I committed early to tilting 10% of EQ to small cap value because I wanted some sexiness to my portfolio. 7 years later, if I had to do it again, I’d go simple 3 fund and not worry about adding (and keeping up) my VBR target percentage.

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Re: Equity funds for taxable accounts

Post by lukestuckenhymer » Tue May 07, 2019 12:55 pm

AtlasShrugged? wrote:
Tue May 07, 2019 6:41 am
Bogleheads....Is a target date index fund good for a taxable account? I have FXIXF (Fidelity Freedom Index fund 2030). I was going for the ultimate in simplicity, but am wondering if I hurt myself taxwise.
I wouldn't recommend it for a few reasons. First of all, Fidelity Freedom funds have relatively higher ERs. Secondly, they're tax inefficient (Fidelity funds will distribute taxable capital gains, Vanguard index funds won't). Third, it's highly recommended that you use multiple funds in order to Tax Loss Harvest. I would highly recommend building your own three-fund portfolio.

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