Portfolio Review 2021 - Am I using tax advantaged accounts efficiently?

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Topic Author
jbuenoo
Posts: 28
Joined: Wed Jul 06, 2016 2:49 pm

Portfolio Review 2021 - Am I using tax advantaged accounts efficiently?

Post by jbuenoo »

Emergency funds: 6 months worth

Debt: None

Tax Filing Status: Single

Tax Rate: xx% Federal, xx% State

State of Residence: TX

Age: 31

Desired Asset allocation: 100% stocks / 0% bonds
Desired International allocation: 40% of stocks

Portfolio size: $200-300k


Current retirement assets - all % are of ENTIRE portfolio
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Taxable
Vanguard
11.36% VTSAX - Vanguard Total Stock Market Index Fund Admiral Shares - .04% ER


Fidelity
Purpose: Individual dividend stocks for longterm hold. This probably won't count towards the % of any asset allocation.
95% Cash
5% PFE

Tax-Advantaged
Vanguard ROTH IRA
2.01% VTIAX - Vanguard Total International Stock Index Fund Admiral Shares - .11% ER
22.59% VMMSX - Vanguard Emerging Markets Select Stock Fund - .93% ER (Note: I plan on switching this to VEMAX with .14% ER)

401k
16.44% FXAIX - Fidelity® 500 Index Fund - .015% ER
7.79% FSMDX - Fidelity® Mid Cap Index Fund - .025% ER
21.59% FSSNX - Fidelity® Small Cap Index Fund - .025% ER
14.87% FSPSX - Fidelity® International Index Fund - .035% ER
Company match: none


______________________________________________________________
Contributions

New annual Contributions
401k and IRA limits maxed out

______________________________________________________________

My current portfolio is designed to match the following asset allocation:
Format: Category - Current % / Desired %
US Large Cap - 38.25% / 35%
US Mid Cap - 21.88% / 25%
US Small Cap - 39.74% / 40%

Emerging Markets - 57.37% / 60%
Developed Markets - 42.63% / 40%

______________________________________________________________

Questions:
1. Am I wasting space in my 401k by only using it for international funds? Even though my entire portfolio hits my desired asset allocation, I feel like I should be using it for higher growth opportunities, like Vanguard sector ETFs.


2. I'm also questioning whether I really need VTSAX in my Vanguard brokerage account. I can get total market exposure via my 401k and use the money that is currently invested in VTSAX to either fund my Fidelity brokerage account for individual stocks or invest in some popular ETFs.

The reason I'm looking to change things up is that I have learned SO much over the last few years since getting into investing. I feel more confident (and genuinely enjoy) managing my money. But, I want to make sure the plan I create going forward is something I want to follow for the next few years.
lakpr
Posts: 6697
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio Review 2021 - Am I using tax advantaged accounts efficiently?

Post by lakpr »

Answer 1: it depends on what your outlook on the international equities is. My outlook is bearish; I do not expect the returns from international equities to outweigh the returns of US equities. Since the growth in the Roth accounts is tax free, and I want to maximize the growth in them, I want to pack with only US equities. No bonds, no international equities there for me.

Next stop is taxable accounts. A case can be made to house all your international equities here. They provide you with foreign tax credits. However, they also throw off non-qualified dividends and short-term capital gains distributions, both of which are taxed as ordinary income. It seems to me that the plus and minus cancel out, and leave only headache at the tax time. I would rather not wrestle with obscure tax forms, and I much prefer to keep my sanity.

So the default location is pre-tax IRA or 401k, so that's where I house them. If as I suspect they will provide lower returns, Uncle Sam shares the pain with me; his cut is correspondingly smaller. The flip-side of the equation, if the international equities considerably outperform domestic equities -- well, that's a deal that is quite alright with me also. My retirement will also be more secured that way, and I do not begrudge Uncle Sam his cut.

Answer 2: VTSAX is really the most tax-efficient fund out there, due to the patent that Vanguard carries (until 2023) that uses the ETF share class to cancel out the capital gains distributions. I do not recommend investing in single stocks, that's simply not the Boglehead way.
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grabiner
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Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Portfolio Review 2021 - Am I using tax advantaged accounts efficiently?

Post by grabiner »

jbuenoo wrote: Tue Jan 12, 2021 2:20 pm 1. Am I wasting space in my 401k by only using it for international funds? Even though my entire portfolio hits my desired asset allocation, I feel like I should be using it for higher growth opportunities, like Vanguard sector ETFs.
Sector funds are riskier, but do not inherently have higher or lower returns. Neither do US or international stocks, which is why you are holding 40% of your stock holding in international stock (slightly below the market weight because international stocks have additional risk). Thus it is fine to hold either US or international stock in any tax-favored account.

Your question would be relevant if you held bonds. Since bonds grow more slowly, the relative benefit of tax-deferral is greater for stocks the longer you hold them. Therefore, depending on bond yields, it might be better to hold stocks in tax-deferred and bonds in taxable for a very long time horizon. But in practice, the difference is much less relevant, because the reason you hold bonds is to reduce risk; if you are holding any bonds, it is because you want to have more money if the stock market falls, and if it falls, stocks will be much more tax-efficient.
Wiki David Grabiner
Topic Author
jbuenoo
Posts: 28
Joined: Wed Jul 06, 2016 2:49 pm

Re: Portfolio Review 2021 - Am I using tax advantaged accounts efficiently?

Post by jbuenoo »

Thanks for the info, both of you! I'll probably just continue what I've been doing then. Maybe add a tiny bit of a sector ETF that I feel like I'm missing (which from my own analysis seems to be energy).
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