Simplest, most efficient, longer term taxable investment?

[librarianaire]

The wiki entry on "Tax-efficient fund placement" is remarkable. Here's the question I want to discuss after reading it:

Assuming you have maxed out your tax-advantaged accounts, have plenty of money in your emergency fund, and you find that you still have money left over that should probably be invested — money you likely won't need for at least five years and that you want to hold in liquid investments — what's the simplest, most efficient, longer term taxable investment that's likely to be the best general fit for most Bogleheads most of the time?

Additional qualifications:

• Let's assume the investor is US-based.
• I realize people live in different states, have different tax brackets, span different ages, have different appetites for risk, etc. I'm looking for a rule of thumb, not a perfect fit for everyone in every instance.
• Let's assume the person doesn't want to be tied to a specific brokerage and doesn't want to trigger a taxable event if they decide to transfer their holdings from one brokerage to another. I'd like to avoid the Fido Zero vs. Vanguard debate, since that's been covered extensively elsewhere in the forum. For this discussion, let's keep the conversation focused on ETFs (unless there's another, better way to avoid de facto brokerage lock-in).
• Let's assume the person has access to free trades, as everyone now does, thanks to Firstrade, Robinhood, Webull, and the many other more traditional brokerages that offer other ways to invest in ETFs without paying commissions. And let's not worry about fractional shares; for the purposes of this discussion, the person has enough funds to buy whole shares of the prospective investments.

The wiki entry links to a forum post on Relative Tax Efficiency that's incredibly useful in answering this question. Using this forum thread as a guide to tax efficiency (which incorporates expense ratios), and giving a nod to Taylor Larimore and others' extraordinary work on the Three-Fund Portfolio, it seems to me that the "rule of thumb" portfolio for taxable accounts would be:

• Approximately 50% in Vanguard Total Stock Market ETF (VTI)
• Approximately 50% in iShares Core MSCI Total Intl Stk ETF (IXUS)

Given their current price per share, the simplest way to handle this investment would be to buy two shares of IXUS for every one share of VTI, and to occasionally rebalance, solely with new funds, by buying an extra share of one of the other if your holdings begin to vary dramatically from the target allocation.

The wiki entry on Tax-efficient fund placement also links to a wiki entry on Tax loss harvesting (TLH), and the above funds seem like good ways for those who wish to complicate things just a bit by dipping their toes into TLH (being sure to have their brokerage use "specific identification" each time they make a purchase, and being sure not to use automatic reinvestment for dividends or capital gains). As the wiki entry on TLH mentions in the chart at the bottom of the page, there are highly efficient substitutes for both funds:

• Schwab US Broad Market ETF (SCHB) can be substituted for Vanguard Total Stock Market ETF (VTI)
• Vanguard Total International Stock ETF (VXUS) can be substituted for iShares Core MSCI Total Intl Stk ETF (IXUS)

Does the above check out? What am I missing?

[Clever_Username]

Series I Savings bonds are very simple. They're definitely long term. How efficient are they? There's a very weak tax break -- interest accumulates but tax on that interest isn't due until you redeem the bonds.

The part of my portfolio outside of tax-advantaged accounts is Series I Bonds (I buy the maximum each year) and CA Municipal bonds -- I use intermediate term, but if I had more money involved, I would probably buy 50/50 of federal short-term and CA long term.

[librarianaire]

I have my emergency fund in I Bonds. I agree: they’re one of the most sensible investment options. My question is more about additional funds, beyond what you’re allowed to invest in I Bonds each year.

[yogesh]

FDIC Savings, CDs and Ladders
Treasury/Government/Prime Money Market
Short Term Municipal Bonds
Intermediate Term Municipal Bonds
VTMFX
VTWAX
VTSAX+VTIAX

[jeffyscott]

The wiki entry links to a forum post on Relative Tax Efficiency that's incredibly useful in answering this question. Using this forum thread as a guide to tax efficiency (which incorporates expense ratios), and giving a nod to Taylor Larimore and others' extraordinary work on the Three-Fund Portfolio, it seems to me that the "rule of thumb" portfolio for taxable accounts would be:

• Approximately 50% in Vanguard Total Stock Market ETF (VTI)
• Approximately 50% in iShares Core MSCI Total Intl Stk ETF (IXUS)

Stocks in taxable is the generally the most tax-efficient. I don't use ETFs but if I did, I'm not sure that I would count on one ETF being persistently more tax efficient than another when they are investing in the same things. I'd want to investigate why IXUS is supposedly better than VXUS. Also not sure why a 50/50 split would be chosen.

Putting international in taxable consigns you to more complicated taxes, if you want to actually reap all of the tax-efficiency via the foreign tax credit. For this reason, I am choosing to stick with US stocks in taxable and keeping international mostly in Roth with some in TIRA (awaiting Roth conversion). Since I don't want to deal with ETFs, Vanguard index funds have an advantage over all others in that they are just as tax efficient as the ETFs, so that's what I am choosing to use.

In our situation the only real issue is avoiding short term cap gains and non-qualified dividend distributions. Since we will be Roth converting to the top of 12% bracket every year, long term cap gains and qualified dividends would just mean a bit less converting.

[Horton]

I suspect an additional criteria you had in mind, but which I do not see listed, is that you are debt free? If this is not an additional criteria, then I would advocate paying off all debt, including mortgage.

Once debt free, then beef up the emergency fund - say 12 months of expenses - using your vehicle of choice (savings accounts, CDs, MMF, IBonds).

Last, put the rest in stock index funds - VTI, VXUS, VT, etc. - all the while maintaining the appropriate asset allocation by tilting tax-advantaged accounts to more fixed income.

P.S. - consider giving a lot (at least 10%) to charity along the way.

[aristotelian]

VT or the appropriate Lifestrategy fund for your risk tolerance.

[james22]

Berkshire