Seeking to Add Value Stocks Fund to Taxable Account

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Topic Author
sharppencilinvestor
Posts: 8
Joined: Sat Nov 16, 2019 6:10 pm

Seeking to Add Value Stocks Fund to Taxable Account

Post by sharppencilinvestor » Sat Nov 16, 2019 6:27 pm

Hello Everyone,

This is my first post on this forum, and I look forward to contributing as I read more of your posts . . . .

I would appreciate advice on my situation:

I am a single guy in my early thirties. Putting retirement accounts and checking accounts aside, my sole financial investment is a traditional Vanguard account, with 100% of the funds (which I will disclose are somewhere between $ 20,000 and $ 100,000) invested in the mutual fund VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares). I regularly add additional funds into this account; I have been managing to add $ 1,500 each month.

I am of the belief that I should stop adding to my VTSAX investment and should instead, for a while, put the ongoing monthly additions in an actively-managed mutual fund that invests in value stocks. I believe in this approach based on intuition and interpretation of the current market conditions and I am fairly determined to do it, even though I understand the existence of a strong, compelling case to stick with passive indexing.

The obstacle, as I see it, is that I have a lot of taxable income, with a large fraction of my income federally taxed at 24 % and further taxed by the state (I live in a high-tax state) and I'm not sure it is possible to find a reasonably tax-efficient actively-managed fund that focuses on value stocks. Most of the funds I have looked at, like VCVLX (Vanguard Capital Value Fund) have a high turnover and seem designed for retirement accounts, not taxable accounts.

Is there a solution to this issue, or does the problem I perceive basically rule out the approach I am contemplating? Are there any alternatives that achieve the same ends?

[Edited to clean up formatting -- mod oldcomputerguy]

typical.investor
Posts: 1258
Joined: Mon Jun 11, 2018 3:17 am

Re: Seeking to Add Value Stocks Fund to Taxable Account

Post by typical.investor » Sat Nov 16, 2019 8:52 pm

sharppencilinvestor wrote:
Sat Nov 16, 2019 6:27 pm

I am of the belief that I should stop adding to my VTSAX investment and should instead, for a while, put the ongoing monthly additions in an actively-managed mutual fund that invests in value stocks.
Yeah, um no. As a value investor myself, I disagree with your view.
sharppencilinvestor wrote:
Sat Nov 16, 2019 6:27 pm
I believe in this approach based on intuition and interpretation of the current market conditions and I am fairly determined to do it, even though I understand the existence of a strong, compelling case to stick with passive indexing.
Ok, fine I will agree value is attractively priced. That said, it may become even more attractively priced and stay that way for a long time. You have a long investing horizon, but be mentally prepared.
sharppencilinvestor wrote:
Sat Nov 16, 2019 6:27 pm
The obstacle, as I see it, is that I have a lot of taxable income, with a large fraction of my income federally taxed at 24 % and further taxed by the state (I live in a high-tax state) and I'm not sure it is possible to find a reasonably tax-efficient actively-managed fund that focuses on value stocks. Most of the funds I have looked at, like VCVLX (Vanguard Capital Value Fund) have a high turnover and seem designed for retirement accounts, not taxable accounts.
Yeah, so this is the problem. Actively managed funds are less tax friendly than index funds [due to capital gains when changing positions]. Also, mutual funds are less tax friendly than ETFs [due to yearly capital gains issued by mutual funds but some Vanguard index mutual funds have an ETF share class so are equivalent].
sharppencilinvestor wrote:
Sat Nov 16, 2019 6:27 pm
Is there a solution to this issue, or does the problem I perceive basically rule out the approach I am contemplating? Are there any alternatives that achieve the same ends?
Good questions.

Select a passive ETF for your value exposure. That will eliminate the yearly capital gains issue and allow you to only pay capital gains when you sell. Then the only remaining issue is potentially higher dividend tax costs from value funds.

Different value methodologies and funds though result in varying yields. For instance, VB (Vanguard small) has a 30 day SEC yield of 1.60%. VBR (Vanguard Small Value) has a yield of 2.25%. So the difference isn't that great.

A more comprehensive tax comparison will take into account QDI (“Qualified Dividend Income”) and you can see an example here viewtopic.php?t=242137#p3791554

The funds I use aren't included there and weigh value exposure slightly differently and include buybacks. This results in a small value fund [FNDA -Schwab Fundamental U.S. Small Company Index] having a SEC Yield (30 Day) of 1.51%.

I haven't compared QDI but the info is here for 2018 if you wanted to look http://ims.schwab.wallst.com/repository ... omeSummary

Anyway, forget actively managed value funds in taxable. They are not tax efficient.
Last edited by typical.investor on Mon Nov 18, 2019 1:19 am, edited 2 times in total.

retired@50
Posts: 646
Joined: Tue Oct 01, 2019 2:36 pm

Re: Seeking to Add Value Stocks Fund to Taxable Account

Post by retired@50 » Sat Nov 16, 2019 9:10 pm

I have exactly one actively managed fund in my taxable portfolio and I often wish it were in my Roth IRA... My advice is don't do it. Stick with the broadly diversified index funds for your taxable portfolio, and get "creative" in your IRA / 401k / Roth IRA if you must.

Regards,

Topic Author
sharppencilinvestor
Posts: 8
Joined: Sat Nov 16, 2019 6:10 pm

Re: Seeking to Add Value Stocks Fund to Taxable Account

Post by sharppencilinvestor » Sun Nov 17, 2019 5:51 pm

Thank you typical.investor and retired@50, your replies are most helpful.

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