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Starting point for taxable account?
Old 05-09-2015, 06:01 PM   #1
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Starting point for taxable account?

Hey guys,

Thanks for taking the time to read this. I recently started a taxable brokerage with Vanguard. I already maxed-out my HSA, my Roth IRA, and will max out my 401k by the end of the year. Those accounts are allocated as:
  • 54% US (total stock market)
  • 36% Int'l (29% Large+Mid Cap, 7% Developing Markets)
  • 10% Bonds
This roughly follows the Vanguard target date allocation. Those accounts are for when I reach 59 years of age. I opened a taxable Vanguard brokerage in hopes that I can retire, or at least work part time/freelance/adjunct teach, by 45 years old (I'm 28 now). Currently, the account allocation is:
  • 70% total US stock market
  • 30% total Int'l
Does this seem like a reasonable breakdown? I have about $8k total in there now. While I'm somewhat risk-tolerant, I don't really see myself ever investing in individual stocks or things like options. Any opinions on reasonable things that I could potentially do to increase my rate of return, such as over-weighting small caps or sectors like health care?

I plan to put in $12k this year and will invest (at least) $20k/year after that. Using a 7% rate of return, this would make the account worth about $570k by the time I'm 45, which would give me about $41k/yr to live off of until age 59, assuming no further growth. I could make anywhere from $20-40k/yr working part time.

Any opinions would be much appreciated!
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Old 05-09-2015, 06:24 PM   #2
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Kudos to you for starting to plan early! Time goes by far faster than you think. About 35 years ago, I was in your position and maxed out my retirement accounts for many years. Now that I'm about to tap them, they're in the 7 figures. This even though my earnings were never huge and there were lean years to boot.

As for your allocations, I'd be inclined to put some into small cap stocks via an ETF or mutual fund and I'm also a big believer in the healthcare and/or biotech sector. They may have swooned a bit lately but long term, IMHO they'll be great investments for someone your age. I would take some out of the total US stock allocation to fund them. Shorter term, I believe an opportunity exists in the energy sector which has really been beaten down in the past six months. Specifically, I like energy services as once oil comes back up, they'll shoot up even more.

I assume you have an emergency cash fund set up just in case you lose your job. Maybe 6 months of living expenses as you may not want to tap your investments. You might also want to keep some cash in your brokerage account: I was fully invested in October 1987 and long regretted that I had no cash to buy the many bargains. BTW I'm not a financial planner and I didn't even play one on TV.
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Old 05-09-2015, 07:02 PM   #3
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I wouldn't sweat the details of the allocation. What is critical is investing as much as you can, as early as you can, while still having a life.
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Old 05-09-2015, 07:32 PM   #4
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Hi Sergio,

Good work getting your foundations set at a relatively early age! For your taxable account, the two funds you listed are appropriate due to their tax properties and what fits best into a taxable account:
Principles of tax-efficient fund placement - Bogleheads

Getting some exposure to alternate funds is good, like REITs and healthcare funds, however they should be held in your tax advantaged accounts since they tend to yield more dividends.

You could also temporarily unbalance your taxable asset allocation by putting all future contributions into the Vanguard Total Stock fund til you hit $10k and convert to the Admiral version (lower ER), then do the same with the Intl fund. Then resume your desired AA. Kind of a low-pri move, given the good ERs to begin with, but something to consider.

Happy investing!
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Old 05-09-2015, 10:32 PM   #5
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Quote:
Originally Posted by Ian S View Post
Kudos to you for starting to plan early! Time goes by far faster than you think. About 35 years ago, I was in your position and maxed out my retirement accounts for many years. Now that I'm about to tap them, they're in the 7 figures. This even though my earnings were never huge and there were lean years to boot.

As for your allocations, I'd be inclined to put some into small cap stocks via an ETF or mutual fund and I'm also a big believer in the healthcare and/or biotech sector. They may have swooned a bit lately but long term, IMHO they'll be great investments for someone your age. I would take some out of the total US stock allocation to fund them. Shorter term, I believe an opportunity exists in the energy sector which has really been beaten down in the past six months. Specifically, I like energy services as once oil comes back up, they'll shoot up even more.

I assume you have an emergency cash fund set up just in case you lose your job. Maybe 6 months of living expenses as you may not want to tap your investments. You might also want to keep some cash in your brokerage account: I was fully invested in October 1987 and long regretted that I had no cash to buy the many bargains. BTW I'm not a financial planner and I didn't even play one on TV.
I do have an 8+ month emergency fund set up. I'll also consider slightly overweighting small caps/health care once I have a little more money in the account. Thanks for the advice!

Quote:
Originally Posted by travelover View Post
I wouldn't sweat the details of the allocation. What is critical is investing as much as you can, as early as you can, while still having a life.
That's the plan!

Quote:
Originally Posted by growerVon View Post
Hi Sergio,

Good work getting your foundations set at a relatively early age! For your taxable account, the two funds you listed are appropriate due to their tax properties and what fits best into a taxable account:
Principles of tax-efficient fund placement - Bogleheads

Getting some exposure to alternate funds is good, like REITs and healthcare funds, however they should be held in your tax advantaged accounts since they tend to yield more dividends.

You could also temporarily unbalance your taxable asset allocation by putting all future contributions into the Vanguard Total Stock fund til you hit $10k and convert to the Admiral version (lower ER), then do the same with the Intl fund. Then resume your desired AA. Kind of a low-pri move, given the good ERs to begin with, but something to consider.

Happy investing!
Unfortunately with only $11.5k in my Roth IRA, it's hard to cram in REIT, health care, etc... and my 401k/HSA only really offer the bread-and-butter US/Int'l/Bond mutual funds. I should be able to convert the total stock market fund to admiral next year, and maybe even the international fund as well depending on how much I contribute. Thanks for the suggestions!
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Old 05-10-2015, 10:31 AM   #6
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Consider the tax efficiency of your investments over a very long term. Here are two lists I have in my investing sheet.

Securities in approximate order of tax-efficiency.
15 Hi-Yield bonds (least tax-efficient)
14 TIPS
13 Taxable bonds
12 REIT stocks
11 Stock trading accounts
10 Balanced funds
9 Small-Value stocks
8 Small-Cap stocks
7 Large Value stocks
6 International stocks
5 Large Growth stocks
4 Most stock index funds
3 Tax-Managed funds
2 EE and I-Bonds
1 Tax-Exempt bonds (most tax-efficient)

slowest growing Securities in approximate order of tax-efficiency.
14 Commodities Futures (least tax-efficient)
13 Foreign REITs
12 US Bonds
11 TIPs
10 US REITs
9 Foreign Bonds
8 International Emerging Equities
7 Small Cap US Value
6 International Developed LC Value
5 Large Cap US Value
4 Small Cap US
3 International Developed LC Equities
2 Large Cap US
1 Precious Metals (most tax-efficient)
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Old 05-10-2015, 01:57 PM   #7
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Quote:
Originally Posted by target2019 View Post
Consider the tax efficiency of your investments over a very long term. Here are two lists I have in my investing sheet.

Securities in approximate order of tax-efficiency.
15 Hi-Yield bonds (least tax-efficient)
14 TIPS
13 Taxable bonds
12 REIT stocks
11 Stock trading accounts
10 Balanced funds
9 Small-Value stocks
8 Small-Cap stocks
7 Large Value stocks
6 International stocks
5 Large Growth stocks
4 Most stock index funds
3 Tax-Managed funds
2 EE and I-Bonds
1 Tax-Exempt bonds (most tax-efficient)

slowest growing Securities in approximate order of tax-efficiency.
14 Commodities Futures (least tax-efficient)
13 Foreign REITs
12 US Bonds
11 TIPs
10 US REITs
9 Foreign Bonds
8 International Emerging Equities
7 Small Cap US Value
6 International Developed LC Value
5 Large Cap US Value
4 Small Cap US
3 International Developed LC Equities
2 Large Cap US
1 Precious Metals (most tax-efficient)
This is super helpful, I've added it to my "stuff to study" pile! The plan is to have my taxable account consist of only #s 2-5 of the second list.
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Old 05-10-2015, 06:02 PM   #8
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By starting out early and then having a good savings amount (and assume a good portion of income as regarding the rate of savings) you will do fine. I was nearly 100% equities for many years, just now starting to transition to 70/30 mix. Since you are in for longer term, staying high equities is fine by my viewpoint. Don't mind the shorter term volatility and swings, it is the long term you are concerned with. 90/10 is a fine mix for your age and timeframe. Stay the course.

Your mix has more int'l than I would, but maybe I am more biased to US equities. I think around 20% might be better, just as a suggestion. Otherwise keep up the good savings and ER will be your result.
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