What funds for a fully balanced portfolio in a taxable account?

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lvrpl
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What funds for a fully balanced portfolio in a taxable account?

Post by lvrpl » Sun Feb 10, 2019 8:58 am

I'd like to have a fully balanced portfolio in a single taxable account. Any suggestions on which funds I should use to make sure it's properly diversified and balanced, and as tax efficient as possible (or should I say, reasonably tax efficient?)? For reference, I'm going with a 75/25 equities to bonds ratio. Also note that I'll definitely be in the 24% tax bracket this year, and probably well into the 32% bracket.


Domestic equities: I assume VTSAX, right?

International equities: is VTIAX good to use here? Or is something else?

Bonds: this is where I'm really not sure...any suggestions?


Thanks for any thoughts or help.

lakpr
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Re: What funds for a fully balanced portfolio in a taxable account?

Post by lakpr » Sun Feb 10, 2019 9:20 am

Life Strategy Aggressive Growth Fund which has a 80:20 ratio of stocks and bonds
Life Strategy Moderate Growth Fund which has a 60:40 ratio
Wellington Fund, which has a ratio of 60:40, but actively managed
Vanguard Balanced Index Fund, which has a ration of 60:40, purely index fund, passively managed (but unlike LifeStrategy funds, does not include international equities).

Vanguard does not have a single fund that's precisely 75:25 ratio that you want, you will have to either pick a 80:20 or a 60:40 fund as the closest approximation, OR split your funds between a 80:20 and 60:40 fund to achieve the balance you want. Or purely go with individual index funds (Total Stock Market Index and Total Bond Market Index) and split your money in a 3:1 ratio and periodically rebalance.

Topic Author
lvrpl
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Re: What funds for a fully balanced portfolio in a taxable account?

Post by lvrpl » Sun Feb 10, 2019 9:39 am

lakpr wrote:
Sun Feb 10, 2019 9:20 am
Life Strategy Aggressive Growth Fund which has a 80:20 ratio of stocks and bonds
Life Strategy Moderate Growth Fund which has a 60:40 ratio
Wellington Fund, which has a ratio of 60:40, but actively managed
Vanguard Balanced Index Fund, which has a ration of 60:40, purely index fund, passively managed (but unlike LifeStrategy funds, does not include international equities).

Vanguard does not have a single fund that's precisely 75:25 ratio that you want, you will have to either pick a 80:20 or a 60:40 fund as the closest approximation, OR split your funds between a 80:20 and 60:40 fund to achieve the balance you want. Or purely go with individual index funds (Total Stock Market Index and Total Bond Market Index) and split your money in a 3:1 ratio and periodically rebalance.
Is Vanguards Total Bond Market Index the best bond fund for the taxable account in my situation?

And is there any reason you excluded an international equities fund when you suggested the Total Stock Market Index for the equities side if I go with individual index funds (which is what I think I want to do unless there's some overwhelming reason not to)?

livesoft
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Re: What funds for a fully balanced portfolio in a taxable account?

Post by livesoft » Sun Feb 10, 2019 9:46 am

I don't think the previous responder thought at all about tax efficiency.

Typically the 3-fund portfolio is recommended for folks who want to think about rebalancing. The bond fund used will be a national tax-exempt muni bond fund and if warranted by one's state income taxes, a state-tax-exempt muni bond fund.

If one didn't want to do 3-funds, then there is the Vanguard Tax-managed Balanced fund which used muni bonds within it. If you research it, I think you find that it does not have foreign equities which is not the end of the world, but one can add a Total International Stock index fund and be fine.

I prefer to have tax-loss harvesting opportunities, so I would have 2 equities funds and eventually their replacement funds if I was an accumulator. And I would end up with 2 bond funds, too.
Last edited by livesoft on Sun Feb 10, 2019 9:48 am, edited 1 time in total.
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lakpr
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Re: What funds for a fully balanced portfolio in a taxable account?

Post by lakpr » Sun Feb 10, 2019 9:47 am

Well, any bond fund in taxable account is not going to be tax efficient. They throw off periodic coupon payments that are taxable to you as interest. But you asked for a 75:25 split within taxable, and within those parameters the Total Bond Index fund is the best there is.

No particular reason why I excluded International Index funds, I personally subscribe to the belief that we do not need international equities, but that's a personal call to take. I have posted this in multiple past posts: over the last decade, international equities under-performed an average of 5% per year compared to US equities; and an average of 3% under performance over the last 40 years (4 decades)! It's an asset class that never performs to your expectation and is a perennial under-achiever ... plus, if you have only US equities, they are half-exposed to international markets anyway. You need to really really believe that US is going to underperform over the coming decades and that international equities will outshine for all that time period. I roll my dice that that's not going to be the case, given that US dollar is the supreme currency in the world, and there's no other currency that's even remotely challenging that supremacy.

Topic Author
lvrpl
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Re: What funds for a fully balanced portfolio in a taxable account?

Post by lvrpl » Sun Feb 10, 2019 9:59 am

livesoft wrote:
Sun Feb 10, 2019 9:46 am
I don't think the previous responder thought at all about tax efficiency.

Typically the 3-fund portfolio is recommended for folks who want to think about rebalancing. The bond fund used will be a national tax-exempt muni bond fund and if warranted by one's state income taxes, a state-tax-exempt muni bond fund.

If one didn't want to do 3-funds, then there is the Vanguard Tax-managed Balanced fund which used muni bonds within it. If you research it, I think you find that it does not have foreign equities which is not the end of the world, but one can add a Total International Stock index fund and be fine.

I prefer to have tax-loss harvesting opportunities, so I would have 2 equities funds and eventually their replacement funds if I was an accumulator. And I would end up with 2 bond funds, too.
I'd like to have separate index funds that I can tax loss harvest also.

If you don't mind, which two equity funds would you use (VTSAX and VTIAX?) and which two bond funds would you use in my situation (i.e. taxable account and 24 - 32% tax bracket)?

Note also that I likely won't worry about a muni bond fund that is deductible on state taxes (I'm in a state with very poor finances and so don't want a bond fund concentrated on my state in order to get state tax deductibility).

livesoft
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Re: What funds for a fully balanced portfolio in a taxable account?

Post by livesoft » Sun Feb 10, 2019 10:06 am

For US equities:
VTSAX, VLCAX, VFIAX or their ETFs

For Int'l equities:
VTIAX, VFWAX, VTMGX or their ETFs

For muni bonds
There are two Vanguard tax-exempt muni bonds mentioned all the time on the forum. I would like you to post their names and ticker symbols. Thanks!
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BL
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Re: What funds for a fully balanced portfolio in a taxable account?

Post by BL » Sun Feb 10, 2019 10:10 am

You have your two total funds in equities; check out an intermediate national muni with your tax rates since it seems you don't want all your bonds in 401k or IRAs. I think Livesoft has a second/third fund at the ready for a tax loss partner, so you might think about that, too.

nolesrule
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Re: What funds for a fully balanced portfolio in a taxable account?

Post by nolesrule » Sun Feb 10, 2019 10:13 am

The jump between 24% and 32% is rather significant, and you also need to look at whether the Net Investment Income Tax comes into play, which will depend on your AGI (and also whether you are single or married, as the threshold differs). NIIT is a 3.8% additional tax on bank interest and investment income that lands above the threshold in your AGI stack. A tax-exempt bond fund will not be subject to NIIT.

Topic Author
lvrpl
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Re: What funds for a fully balanced portfolio in a taxable account?

Post by lvrpl » Mon Feb 11, 2019 10:35 pm

So for the bond fund, I see a lot of people using

VWITX - Vanguard Intermediate-Term Tax-Exempt Fund

Would this be a good selection for me to put in taxable for my bond allocation? I've also seen a few people using

VMLTX - Vanguard Limited-Term Tax-Exempt Fund

How would this compare to VWITX for my purposes? Thanks for any help, all of this bond stuff is pretty new to me.

michaeljmroger
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Re: What funds for a fully balanced portfolio in a taxable account?

Post by michaeljmroger » Mon Feb 11, 2019 11:47 pm

lvrpl wrote:
Mon Feb 11, 2019 10:35 pm
So for the bond fund, I see a lot of people using

VWITX - Vanguard Intermediate-Term Tax-Exempt Fund

Would this be a good selection for me to put in taxable for my bond allocation? I've also seen a few people using

VMLTX - Vanguard Limited-Term Tax-Exempt Fund

How would this compare to VWITX for my purposes? Thanks for any help, all of this bond stuff is pretty new to me.
The difference is the duration of these bonds. If your time horizon is shorter than approximately 4 years, or if you want your bond allocation to be really stable, go with VMLTX.

As for your stocks, I’d suggest VFWAX unless the high ex-US allocation bothers you for some obscure reason :wink:

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