TWO Portfolios - Please help me pick ONE

[Iamlearning]

Please help me select an investment portfolio for my taxable account!

Facts:
1. Two-thirds of the assets are in tax deferred accounts - all in 2030 target date.
2. One-third of the assets are in taxable account - all in cash. Woefully late to investing in this account.
3. In a high tax bracket (federal: 35% marginal + 3.8% net investment income) plus state.
4. Not sure how much longer I want to work: can be anywhere from 2-7 years.
5. I have moderate risk tolerance.

After some research, I have come up with two proposed portfolios for my taxable account. I want to keep them static for simplicity, with quarterly rebalancing. I am not too familiar or comfortable with ETFs, so I selected mutual funds. I am not 100% hung up on the allocations.

Portfolio 1:
VTSAX (US Total Stock Market): 35%
VTIAX (Intl. Total Stock Market): 20%
VBTLX (US Total Bond Market): 25%
VTABX (Intl. Total Bond Market): 15%
VTAPX (Short Term Inflation Protected): 5%
Total: 100%

Portfolio 2:
VTSAX (US Total Stock Market): 35%
VTIAX (Intl. Total Stock Market): 20%
VMLUX (Short Term Tax Exempt): 7.5%
VWIUX(Limited Term Tax Exempt): 10%
VWLUX(Long Term Tax Exempt): 7.5%
VTAPX (Short Term Inflation Protected): 5%
Total: 100%

The big difference between the two portfolios is taxable US vs federal tax free municipal bond funds. I personally prefer portfolio 1 even though I am currently in a high tax bracket because the current NAV's of both VBTLX and VTABX are extremely low, indicating higher head room for percent appreciation compared to the federal tax exempt muni funds.

I did not select the all-in-one LifeStrategy Moderate Growth Fund because I want to start DCA'ing money into everything except for VTSAX right now. I feel VTSAX is way too high to start right now and want to push money into it during periods of market weakness. An all-in-one fund does not allow me to do this. I included an inflation protected fund because it too is quite depressed.

Questions:
1. Which of the two, or an alternate portfolio would you recommend?
2. Are you okay with me going into mutual funds instead of ETFs? Is there a big difference?
3. Is quarterly or yearly rebalancing a lot of headache?


Thank you!

[Tom_T]

You will get pushback on this:

I did not select the all-in-one LifeStrategy Moderate Growth Fund because I want to start DCA'ing money into everything except for VTSAX right now. I feel VTSAX is way too high to start right now and want to push money into it during periods of market weakness.

Isn't the whole point of DCA to simply buy at regular intervals regardless of whether the market is up or down? What is your basis for believing the the market is "way too high"?

[dogagility]

Door number 3.

Taxable:
VTSAX: 100%

Tax-Deferred:
Total US Stock Market Index Fund
Total International Stock Market Index Fund
Total US Bond Market Index Fund

Allocate your money in the tax-deferred account to make up your desired asset allocation. Think of both accounts (taxable plus tax-deferred) as a single entity for asset allocation purposes.

[Silverado]

You will get pushback on this:

I did not select the all-in-one LifeStrategy Moderate Growth Fund because I want to start DCA'ing money into everything except for VTSAX right now. I feel VTSAX is way too high to start right now and want to push money into it during periods of market weakness.

Isn't the whole point of DCA to simply buy at regular intervals regardless of whether the market is up or down? What is your basis for believing the the market is "way too high"?

Hint: your (OP) basis is wrong.

I’ve been buying equities for 30 years, and really paying attention the last 15. It has always been a terrible time to buy VTSAX, either the market was falling or it was simply too high. Thankfully I never paid attention to that and just kept buying.


I agree with this:

Door number 3.

Taxable:
VTSAX: 100%

Tax-Deferred:
Total US Stock Market Index Fund
Total International Stock Market Index Fund
Total US Bond Market Index Fund

Allocate your money in the tax-deferred account to make up your desired asset allocation. Think of both accounts (taxable plus tax-deferred) as a single entity for asset allocation purposes.

[GMCZ71]

You will get pushback on this:

I did not select the all-in-one LifeStrategy Moderate Growth Fund because I want to start DCA'ing money into everything except for VTSAX right now. I feel VTSAX is way too high to start right now and want to push money into it during periods of market weakness.

Isn't the whole point of DCA to simply buy at regular intervals regardless of whether the market is up or down? What is your basis for believing the the market is "way too high"?

Hint: your (OP) basis is wrong.

I’ve been buying equities for 30 years, and really paying attention the last 15. It has always been a terrible time to buy VTSAX, either the market was falling or it was simply too high. Thankfully I never paid attention to that and just kept buying.


I agree with this:

Door number 3.

Taxable:
VTSAX: 100%

Tax-Deferred:
Total US Stock Market Index Fund
Total International Stock Market Index Fund
Total US Bond Market Index Fund

Allocate your money in the tax-deferred account to make up your desired asset allocation. Think of both accounts (taxable plus tax-deferred) as a single entity for asset allocation purposes.

Yes it is always a bad time to buy!!! Thank you Silverado and Dogagility.
Your AA will DCA with rebalancing over time.

[JBTX]

Please help me select an investment portfolio for my taxable account!

Facts:
1. Two-thirds of the assets are in tax deferred accounts - all in 2030 target date.
2. One-third of the assets are in taxable account - all in cash. Woefully late to investing in this account.
3. In a high tax bracket (federal: 35% marginal + 3.8% net investment income) plus state.
4. Not sure how much longer I want to work: can be anywhere from 2-7 years.
5. I have moderate risk tolerance.

After some research, I have come up with two proposed portfolios for my taxable account. I want to keep them static for simplicity, with quarterly rebalancing. I am not too familiar or comfortable with ETFs, so I selected mutual funds. I am not 100% hung up on the allocations.

Portfolio 1:
VTSAX (US Total Stock Market): 35%
VTIAX (Intl. Total Stock Market): 20%
VBTLX (US Total Bond Market): 25%
VTABX (Intl. Total Bond Market): 15%
VTAPX (Short Term Inflation Protected): 5%
Total: 100%

Portfolio 2:
VTSAX (US Total Stock Market): 35%
VTIAX (Intl. Total Stock Market): 20%
VMLUX (Short Term Tax Exempt): 7.5%
VWIUX(Limited Term Tax Exempt): 10%
VWLUX(Long Term Tax Exempt): 7.5%
VTAPX (Short Term Inflation Protected): 5%
Total: 100%

The big difference between the two portfolios is taxable US vs federal tax free municipal bond funds. I personally prefer portfolio 1 even though I am currently in a high tax bracket because the current NAV's of both VBTLX and VTABX are extremely low, indicating higher head room for percent appreciation compared to the federal tax exempt muni funds.

I did not select the all-in-one LifeStrategy Moderate Growth Fund because I want to start DCA'ing money into everything except for VTSAX right now. I feel VTSAX is way too high to start right now and want to push money into it during periods of market weakness. An all-in-one fund does not allow me to do this. I included an inflation protected fund because it too is quite depressed.

Questions:
1. Which of the two, or an alternate portfolio would you recommend?
2. Are you okay with me going into mutual funds instead of ETFs? Is there a big difference?
3. Is quarterly or yearly rebalancing a lot of headache?


Thank you!

Here is an option that fits your goals, but in a more tax efficient manner

Tax deferred - change from TD 2030 to 2025. This changes your allocation from 65/35 to 55/45

https://www.morningstar.com/funds/xnas/vthrx/portfolio

https://www.morningstar.com/funds/xnas/vttvx/portfolio

Taxable - total mkt index 55%, total international 40%, ibonds 5%.

You can tweak the percents in taxable to get where you want, and it may take a couple / few years to build up your ibond position.

This keeps pretty comparable overall allocations and moves your taxable bonds into tax deferred. Ibonds yield a bit less but interest is tax deferred such that you can wait until retirement to cash them out if needed.

[southernlucky]

+1 door 3 but use a different fund than VTSAX for tax deferred so you can TLH (using a different large cap fund like VTCLX or VLCAX) in taxable without fear of wash sales. Perhaps use VFIAX (S&P 500) in tax deferred. Be sure to use specific id for cost basis for taxable account too. Check out the wiki on tax efficient fund placement and tax loss harvesting to learn more. And if/when you need to raise cash just sell VTSAX in taxable and exchange bonds in tax deferred for VFIAX to maintain desired AA. Same as selling bonds but without tax drag if held in taxable account.

Forget trying to time the market. It’s too difficult. Just pick an AA you can live with through thick and thin. That is what works long term. It is liberating when you finally come to terms with that and just stay the course. You no longer care what is going on with the market and can focus on other things.

Good luck.

[grabiner]

1. Two-thirds of the assets are in tax deferred accounts - all in 2030 target date.
2. One-third of the assets are in taxable account - all in cash. Woefully late to investing in this account.

View everything as one portfolio; this will help with the tax issues. It doesn't matter for your risk level what is in taxable and what is in tax-deferred, but it can reduce the tax cost.

3. In a high tax bracket (federal: 35% marginal + 3.8% net investment income) plus state.

In that tax bracket, you should certainly hold munis if you hold bonds in a taxable account. And I would probably recommend holding all your bonds as munis in the taxable account, since you pay a higher federal tax on stocks than most investors (23.8% on qualified dividends and long-term gains) but no higher tax on munis.

Thus, if you want a portfolio which is 55% stock, I would recommend having Vanguard Tax-Exempt Bond Index for the entire taxable account (rather than Portfolio 2's separate short-term, intermediate-term, and long-term bond funds), and Total Bond Market Index in the 401(k) for the rest of your bond holding.

[Iamlearning]

Thank you, dogagility for suggesting the door 3 alternative!

Trying now to digest everyone's excellent inputs to come up with a plan.

Need to learn about TLH. I suppose that is a step to even further tax optimize.

Related questions:
1. Pros and Cons of combining old and new 401K?
2. When you exchange (not sell/buy) one mutual fund for another at Vanguard in a taxable account, are there any tax implications for that exchange?

[runcyc]

Thank you, dogagility for suggesting the door 3 alternative!

Trying now to digest everyone's excellent inputs to come up with a plan.

Need to learn about TLH. I suppose that is a step to even further tax optimize.

Related questions:
1. Pros and Cons of combining old and new 401K?
2. When you exchange (not sell/buy) one mutual fund for another at Vanguard in a taxable account, are there any tax implications for that exchange?

I'd follow grabiner's suggested allocations to optimize your taxes, in your stated marginal tax bracket.

[Iamlearning]

Grabiner, the taxable account is 33% of the assets.

Are you saying I should hold ALL the US bond funds in it (Total Tax Exempt Bond: VTEAX), approximately 27% of my assets, and push the remaining 6% into stocks (US or International)? International Bond funds into tax deferred, and no US bond funds into tax deferred?

[grabiner]

Grabiner, the taxable account is 33% of the assets.

Are you saying I should hold ALL the US bond funds in it (Total Tax Exempt Bond: VTEAX), approximately 27% of my assets, and push the remaining 6% into stocks (US or International)? International Bond funds into tax deferred, and no US bond funds into tax deferred?

This depends on your overall allocation. In your tax bracket, munis are probably more tax-efficient than either stocks or taxable bonds. Therefore, if your desired US bond allocation is less than your taxable account, then holding all of that allocation in munis, then adding Total Stock Market for the rest, is likely to be the most tax-efficient way to arrange your portfolio.

And I don't think international bonds make much of a difference, so I would just put the whole taxable account in munis, as that is less than your target bond allocation. The remainder of the allocation could be in either US or international bonds in your tax-deferred account.

[Iamlearning]

Grabiner, thank you, this is indeed eye opening, and a direct contrast to door 3 placement strategy. I anticipate being in a lower tax bracket in 2-7 years, wonder if that changes the strategy?

On the International Bond point, the fact it doesn't make much of a difference is perhaps why the 2030 funds have such a big variation (Vanguard vs Fidelity vs State Street) for that asset. Now I know.

I've got a couple of less than optimal (VTIAX) choices for the international stock fund in my 401Ks: BDOKX and FSPSX: is either okay or is one better than the other? Or neither is good enough?

[arcticpineapplecorp.]

I've got a couple of less than optimal (VTIAX) choices for the international stock fund in my 401Ks: BDOKX and FSPSX: is either okay or is one better than the other? Or neither is good enough?

they're close though bdokx has more stocks (2024) and is a global (ex US) fund whereas fspsx has fewer stocks (808) and the benchmark is EAFE. fspsx is cheaper, probably because it's not in emerging markets (which are more costly). fspsx did have better returns since 2011 (inception) but the past is not always prologue.

source:
https://www.portfoliovisualizer.com/bac ... ion2_2=100

[grabiner]

Grabiner, thank you, this is indeed eye opening, and a direct contrast to door 3 placement strategy. I anticipate being in a lower tax bracket in 2-7 years, wonder if that changes the strategy?

If you drop to a lower tax bracket, you can sell the municipal bonds with little or no tax cost. You can either replace them with taxable bonds, or replace them with stocks and sell stock to buy an equal amount of bonds in your IRA if the tax situation makes that more attractive.

[southernlucky]

Perhaps I’m missing something but I don’t see how munis at ~3.5% yield in taxable account are better than regular bonds at ~4.5% yield in tax deferred account (assuming intermediate term durations). Plus using stock index funds in taxable will offer more opportunities to TLH.

[BabaWawa]

I fall in the camp recommending all tax inefficient assets (taxable bonds) in tax deferred, then more tax efficient equities in taxable and tax free Roth, with the rest of equities filling up your leftover tax deferred space. Selling the target date fund will make asset allocation and rebalancing easier IMO.

Also, unless you feel you will always stay with Vanguard as custodian, get more familiar with ETFs and hold Vanguard ETFs, which are universally portable, wherever you go and are very tax efficient.

[grabiner]

Perhaps I’m missing something but I don’t see how munis at ~3.5% yield in taxable account are better than regular bonds at ~4.5% yield in tax deferred account (assuming intermediate term durations). Plus using stock index funds in taxable will offer more opportunities to TLH.

Tax costs are relative, and the tax cost of stocks includes not only the tax on dividends but also the tax on capital gains when you sell. In a very high tax bracket, those combined costs may exceed the tax loss from holding munis in a taxable account.

Suppose you pay 23.8% federal tax on capital gains and qualified dividends, and 5% state tax. If munis yield 3% and taxable bonds of comparable risk yield 4%, then the tax cost of holding bonds in taxable is the 1% yield difference, plus the 0.15% state tax on the munis, a total of 1.15%. If stocks have a 2% yield, all qualified dividends, the tax cost of holding stocks in taxable is the 0.58% annual tax on the dividends, plus the annualized cost of the capital-gains tax on the sale, which is likely to be about the same amount.

Another advantage of holding bonds in taxable is that you can switch if the tax situation changes. If bond yields rise further, or you drop to a lower tax bracket, there will be little or no tax cost for switching to stocks in taxable. If you start with stocks in taxable, and then bond yields fall, or you move to NY and thus get a big tax advantage on NY munis, you will have to pay a large capital-gains tax to switch to munis. This is why I prefer bonds in taxable if things are close.

(And things aren't always close. I have always held all my bonds in my employer plan, because I am in a high-tax state with no low-cost muni fund for the state. Working out the numbers above with 15% tax on qualified dividends and 8.2% state tax makes stocks in taxable come out well ahead.)

[nisiprius]

Portfolio 2:
VTSAX (US Total Stock Market): 35%
VTIAX (Intl. Total Stock Market): 20%
VMLUX (Short Term Tax Exempt): 7.5%
VWIUX(Limited Term Tax Exempt): 10%
VWLUX(Long Term Tax Exempt): 7.5%
VTAPX (Short Term Inflation Protected): 5%
Total: 100%

I'm not getting 100%.

[Iamlearning]

Thank you Babawawa, looking into ETFs such as VTI: for DCA'ing, does it matter which of the four options (market, limit, stop, stop limit) is selected as the method to buy? Also, is there an automatic recurring transaction option available for these on Vanguard?

[Iamlearning]

Further looked at grabiner's take on where to place bonds. I ran a portfolio backtest and am stunned to see that the pre-tax growth of Tax Free Bond (VTEAX) is higher than that of Taxable Bond (VBTLX). This makes no sense to me. Am I missing something? Not to mention, if the Taxable Bond Fund was held in a taxable account, the growth would be even less!

Makes me wonder why I would want to hold VBTLX even in tax deferred over VTEAX in taxable? Or is this an anomaly because of 2022?

[grabiner]

Further looked at grabiner's take on where to place bonds. I ran a portfolio backtest and am stunned to see that the pre-tax growth of Tax Free Bond (VTEAX) is higher than that of Taxable Bond (VBTLX). This makes no sense to me. Am I missing something? Not to mention, if the Taxable Bond Fund was held in a taxable account, the growth would be even less!

There is no particular reason to expect this in the future. What happened is that taxable bond yields rose more than muni yields in 2022, and thus all muni funds outperformed all taxable-bond funds.

The best forward-looking measure of returns is the SEC yield, which is what you would earn if you held all the bonds in the fund to maturity. The current yield on Total Bond Market is 4.65%, and on Tax-Exempt Bond Index is 3.63%, which would make the after-tax yields equal in a 22% bracket. I believe Tax-Exempt Bond Index is slightly riskier; while it has a slightly shorter duration, long-term munis are usually callable and lose more than indicated by the duration when rates rise.

[Iamlearning]

Okay, I have taken all excellent suggestions into account and come up with the following new portfolio and placement:

Taxable Account:
Total US Stock: 33.12%

Tax Deferred Accounts:
Total Intl Stock: 22.52%
Total US Bond: 27.00%
Total Intl Bond: 9.57%
Infl. Protected (VIPIX): 5.35%
Short Term Infl. Protected (VTAPX): 2.43%

Some of the non rounded %s are because of where the tax deferred accounts exist and what choices they offer. The inflation protected allocation may be a bit high?

I am thinking of keeping this allocation static by rebalancing quarterly. Does that sound reasonable?

Speaking of which, am I correct that the primary objective should be to get the AA right? The reason I ask is I feel I need more time to understand TLH and that it is a second order effect for optimization compared to proper AA and placement. If it is extremely important I should either understand it sooner or hire a Vanguard PAS for 0.3%?

However, I am not sure why I would ever want to sell anything at a loss, which is when TLH becomes important.

[typical.investor]

Speaking of which, am I correct that the primary objective should be to get the AA right? The reason I ask is I feel I need more time to understand TLH and that it is a second order effect for optimization compared to proper AA and placement. If it is extremely important I should either understand it sooner or hire a Vanguard PAS for 0.3%?

However, I am not sure why I would ever want to sell anything at a loss, which is when TLH becomes important.

There is no need to pay PAS 0.3% for TLH. It isn't difficult. If you are extremely time constrained then that 0.3% might be worthwhile but not just for the TLH.

Do understand that when you sell at a loss to TLH, you usually buy back a similar but not substantially identical fund. So essentially you stay invested and when the stocks recover, you will benefit from the recovery. The return difference between a US Total Market fund and the S&P 500 isn't much, so you aren't taking much if any risk by switching positions. Sure (for example), Total market might lose a little more and you sell it to TLH and buy the S&P 500 which doesn't recover as much and you lose a little bit. But it can go the other way too, and anyway the tax savings should make it worthwhile.

[dogagility]

Okay, I have taken all excellent suggestions into account and come up with the following new portfolio and placement:

Taxable Account:
Total US Stock: 33.12%

Tax Deferred Accounts:
Total Intl Stock: 22.52%
Total US Bond: 27.00%
Total Intl Bond: 9.57%
Infl. Protected (VIPIX): 5.35%
Short Term Infl. Protected (VTAPX): 2.43%

Since this is a long-term investment, I would drop the VTAPX investment and put this allocation into VIPIX. Reduces complexity and the bond duration of VIPIX (6.8 years) better matches your investment timeline than VTAPX (2.6 years).

The inflation protected allocation may be a bit high?

It's fine. If anything, I would match the amount in VIPIX to that in the total US bond allocation.

I am thinking of keeping this allocation static by rebalancing quarterly. Does that sound reasonable?

Yes, it's reasonable. You could even do this only once/year for simplicity sake.

Speaking of which, am I correct that the primary objective should be to get the AA right?

Yes, stock/fixed income asset allocation and staying the course are the main drivers of long-term investment returns.

The reason I ask is I feel I need more time to understand TLH and that it is a second order effect for optimization compared to proper AA and placement. If it is extremely important I should either understand it sooner or hire a Vanguard PAS for 0.3%?

TLH is a portfolio optimizer (like rebalancing). I certainly wouldn't pay Vanguard a 0.3% AUM to TLH.

[Iamlearning]

Thank you, Dogagility for that suggestion. Makes sense to me. I was hedging: Fidelity 2030 target date has a VIPIX type allocation, Vanguard 2025 target date has VTAPX.

I am no longer too time constrained, I am going to read up on TLH and follow up here. TLH may influence the AA too, as right now my only envisioned asset in taxable is US Stock and there probably needs to be another asset in taxable to take advantage of losses, otherwise the losses may be limited to certain amount every year. If this correct? If so, I may need to rethink/rebuild AA again from ground up

I have two more educational questions as I continue to plan:

1. Transferring/rolling over assets in tax deferred account: Let's say I have an old 401K that has certain holdings and a current 401K that has other holdings; to support an overall AA plan. Then let's say at some point I want to transfer the old 401K into the new one. For those of you who have done this, you know it is much easier if you have all the incoming assets go into a single fund. Is it okay to destroy the old 401Ks AA temporarily by having all incoming assets into the new 401K go into a stable value fund, and then right away, reconstruct the desired AA by moving out of the stable value into the intended funds? I am thinking this is a non-issue as: (a) There are no tax implications, and (b) the NAV's of the funds acquired in the new 401K will be about the same as what they were in the old 401K. Please share your thoughts about this.

2. ETF vs. mutual funds: Based on everything I've read, it appears ETFs are more tax efficient than mutual funds. However, I am not sure to what degree: e.g., VTI vs. VTSAX. An advantage I see with funds is the ability to DCA on a recurring basis automatically. Also, if I go with ETF, do I simply place market orders? Or limit, stop limit, etc.? I have funds and am familiar with those, but not with ETFs.

[grabiner]

2. ETF vs. mutual funds: Based on everything I've read, it appears ETFs are more tax efficient than mutual funds. However, I am not sure to what degree: e.g., VTI vs. VTSAX.

This isn't relevant with Vanguard index funds. The ETF creation-redemption process allows ETFs to avoid most capital gain distribution. However, at Vanguard, the ETF is a share class of the mutual fund, so they share the tax benefit. Only a few Vanguard stock ETFs have ever distributed a capital gain.

Also, if I go with ETF, do I simply place market orders? Or limit, stop limit, etc.?

If you do use high-volume ETFs such as VTI and VXUS, market orders are the simplest way to transact. These ETFs trade at very small spreads, with lots of traders, so you will get a fair price with a market order.

[Iamlearning]

Actually, going back to a comment on US bonds vs. international bonds: backtest shows international bonds have done better than US bonds in the past. On the other hand, international stocks have done much worse than US stocks.

In reading some other threads, it seems VTMFX is a an easy choice (despite the downside that you get a lump of 50-50 stock and bond) in a tax deferred account. Both my portfoilo, as well as the Vanguard Lifestrategy moderate growth porfolio, both of which have similar returns, are vastly inferior to VTMFX, this is before accounting for any tax implications. Clearly this is the past and no guarantee of the future, but very hard to ignore.

[Iamlearning]

Sorry for a go back re: my AA - still designing. IF I need to invest into US Bonds in my taxable account, not tax deferred, VTEAX was suggested (I am in 38.6% federal marginal). What are your thoughts about VWALX as an alternative to VTEAX? Backtest starting from 2016 shows VWALX is a clear winner, but clearly that is not a long sample space. Additionally, I know we are talking apples and oranges for maturity and duration (VWALX has much higher). But one can't neglect the superior returns, therefore the question. Please pardon my ignorance.

Update: Thanks to all the encouragement, I now understand tax loss harvesting.

[Gaston]

Think of both accounts (taxable plus tax-deferred) as a single entity for asset allocation purposes.

+1. A much cleaner approach.

[Iamlearning]

I am really sorry to post again, I am still struggling a bit on how to start investing the taxable account. You can tell I am a novice, I hope you don't mind. I feel like I am losing a bit of time going back and forth in coming up with a strategy that makes sense and I am comfortable with.

I know holding bonds in tax deferred and equities in taxable has been suggested, but it makes things a but complicated for me as the current tax deferred (multiple accounts) is fully invested in 2030. To do the bonds in tax deferred and start stocks in taxable is a point of inertia for me and requires selling then careful asset location across several tax deferred accounts. I am still working and contributing biweekly to 2030 to a tax deferred account.

I went to Vanguard digital advisor out of curiosity and it threw the following recommendation for taxable:
VTI: 40%
VEU: 26%
VTEB: 34%

Two questions for the taxable account, assuming no changes to the tax deferred:
1. Apart from losing ~1% yield with bonds in taxable, do you see any downsides with this?
2. Since I am new, I want to automatically DCA twice a month (this is the highest frequency I can set up at Vanguard) as opposed to a lump sum. I know this may be a purely psychological issue. Given this, is it okay to invest in the corresponding mutual funds for the above ETFs?
3. TLH - while I understand it, I have no experience with it - is it worthwhile paying Vanguard Digital Advisor 0.2% for it (in other words, is the benefit higher than the cost)? I know this has not been recommended by several, just double checking. The web-site says they scrape the investments daily to look for TLH opportunities.

I suppose I will have to mimic the retirement date fund type glide path on the above taxable AA with time. That is the only thing I am not too worried about as it is easy to do and a slow process.

[the_wiki]

I think you are hanging on to those 2030 a bit tight. If you are going to manually allocate your taxable, you already have to pay attention to what is in those accounts - single fund or not. So it kind of defeats the purpose of an all-in-one fund you don't have to think about.

You have enough room to hold your tax unfriendly stuff in deferred accounts and just the stocks in taxable. That's the most tax efficient play.


If you do want to have a set-it-and-forget it type portfolio in taxable, you may consider a robo portfolio like Wealthfront. They seem to be a bit more tax-aware and customizable than vanguard and they still use primarily vanguard ETFs. They have higher fees than target date funds, but with their tax management, you will almost always come out ahead because they won't dump random capital gains on you and they will TLH aggressively.

[steadyosmosis]

You have enough room to hold your tax unfriendly stuff in deferred accounts and just the stocks in taxable. That's the most tax efficient play.

Agree.

OP, FWIW:
My simple, self-managed, low-cost, tax-efficient, basically-3-fund portfolio is held mainly at Schwab.
Maximum expense ratio for any single fund/ETF in the portfolio is 0.07%.

Taxable brokerage account (Schwab): 100% VTI (Vanguard Total Stock Market ETF).
Roth IRA (Schwab): 100% SCHB (Schwab US Broad Market ETF).
Traditional IRA (Schwab) (rollover from 401k): 27% SCHF (Schwab International Index ETF), 73% bonds (TIPS, BND, SGOV).
HSA (Optum Bank): 100% VITSX (Vanguard Total Stock Market Index Fund).
Treasury Direct (treasurydirect.gov): 100% Series I Savings Bonds.
Checking account (large national bank): few hundred dollars to pay monthly bills.
Summary below.

[ilovepizza]

You have enough room to hold your tax unfriendly stuff in deferred accounts and just the stocks in taxable. That's the most tax efficient play.

Agree.

Why isn't Grabiner's suggestion (munis in taxable) the most tax-efficient play?
edit: That wasn't meant as a loaded question or anything. I truly don't know who's correct. Or how the different bond funds' different market correlations might outweigh tax efficiency.

[Iamlearning]

grabiner, regarding your 9/13/23 post on tax costs in taxable, I am having some trouble understanding the precise numbers. Are my calculations below correct? Please note that my tax cost ratio calculation is based on Morningstar's (https://www.morningstar.com/articles/83 ... ratio-tool) and is sensitive to pretax return (PTR).

Assumptions:
- 35% federal tax bracket + 3.8% NIT
- 5% state
- 5% long term stock capital gains, including qualified dividends (PTR)
- 5% taxable bond yield to maturity (PTR)
- 4% muni bond yield to maturity (PTR)

Stocks in taxable:
=> Tax adjusted return (TAR) = 5% - 5*(20+3.8+5)/100 = 3.56%
=> Tax Cost Ratio = ( 1 - ( (1+TAR) / (1+PTR) ) ) = 1.37%

Munis in taxable:
=> TAR = 4% - 4*(5)/100 = 3.8%
=> TCR = 1 - ( (1+TAR) / (1+PTR) ) ) = 0.19%
=> Add to this the 1% lower yield relative to taxable bonds => Total TCR = 1.19%

Therefore, munis have a slightly lower TCR compared to stocks (for equivalent returns)?

[Iamlearning]

If you do want to have a set-it-and-forget it type portfolio in taxable, you may consider a robo portfolio like Wealthfront. They seem to be a bit more tax-aware and customizable than vanguard and they still use primarily vanguard ETFs. They have higher fees than target date funds, but with their tax management, you will almost always come out ahead because they won't dump random capital gains on you and they will TLH aggressively.

Very interesting. Wealthfront robo-advisor recommends all bond holding as munis regardless of the tax bracket.

[the_wiki]

If you do want to have a set-it-and-forget it type portfolio in taxable, you may consider a robo portfolio like Wealthfront. They seem to be a bit more tax-aware and customizable than vanguard and they still use primarily vanguard ETFs. They have higher fees than target date funds, but with their tax management, you will almost always come out ahead because they won't dump random capital gains on you and they will TLH aggressively.

Very interesting. Wealthfront robo-advisor recommends all bond holding as munis regardless of the tax bracket.

If you look at Vanguard's oldest muni bond fund and taxable bond fund, you find a tiny 5% margin in average returns over nearly 40 years. That means if you pay ANY taxes at all, muni bonds would have been better since 1986.
https://www.portfoliovisualizer.com/fun ... PYB9csrt90

If you compare just the last couple decades, they are actually even, so you come out way ahead on taxes at any bracket.

https://www.portfoliovisualizer.com/fun ... Y17tEyDBe9

I'm not surprised that they would recommend them for all tax brackets. I think anyone would recommend them at your tax bracket, though.

[grabiner]

grabiner, regarding your 9/13/23 post on tax costs in taxable, I am having some trouble understanding the precise numbers. Are my calculations below correct? Please note that my tax cost ratio calculation is based on Morningstar's (https://www.morningstar.com/articles/83 ... ratio-tool) and is sensitive to pretax return (PTR).

Morningstar's tax cost ratio assumes the highest federal tax bracket and no state tax; to get a better measure of tax cost, you should use your own tax rates, as you did below:

Assumptions:
- 35% federal tax bracket + 3.8% NIT
- 5% state
- 5% long term stock capital gains, including qualified dividends (PTR)
- 5% taxable bond yield to maturity (PTR)
- 4% muni bond yield to maturity (PTR)

Stocks in taxable:
=> Tax adjusted return (TAR) = 5% - 5*(20+3.8+5)/100 = 3.56%
=> Tax Cost Ratio = ( 1 - ( (1+TAR) / (1+PTR) ) ) = 1.37%

Munis in taxable:
=> TAR = 4% - 4*(5)/100 = 3.8%
=> TCR = 1 - ( (1+TAR) / (1+PTR) ) ) = 0.19%
=> Add to this the 1% lower yield relative to taxable bonds => Total TCR = 1.19%

Therefore, munis have a slightly lower TCR compared to stocks (for equivalent returns)?

The tax cost of stocks is not 28.8% of the pre-tax return, because the tax on capital gains is deferred. If the price of a stock appreciates by $1000 and you had to pay tax immediately, you could only reinvest $712. Instead, you can invest the whole $1000, and only pay the $288 tax when you sell, after years of growth on that $288. (And if you are in this high a tax bracket, you may well leave some of the stock to your heirs or charity, and never pay capital-gains tax on it.)

Also, I normally estimate a break-even tax rate of 25%, not 20%, between taxable bonds and munis of comparable risk; this increases the effective tax cost of munis.

At current yields, munis in taxable might still be reasonable if you pay 23.8% tax on qualified dividends, particularly if you can use a low-cost muni fund for your state. In particular, I regularly recommend munis for high-bracket investors in CA and NY.