Vanguard funds for someone in late 20's, taxable account

[knockoutned]

Hi, everyone, I'm getting ready to start automatic investments in a couple of Vanguard funds, but I wanted to check in with the experts here before I drop the $6000 in minimum investments. I've done my research and read most of the books people here recommend (including "Bogleheads" and "The Four Pillars of Investing"), but I'd like to hear your critiques before I take the first step.

The first thing you need to know is that everything I invest will be taxable. I work in Japan and have no earned income in America, so I can't invest in a Roth IRA. Also, I'm making good money with my job here, but the retirement package is almost nonexistent, so I'm basically on my own to invest for my retirement.

To keep things simple, I'm going to stick with two funds:

Vanguard Total Stock Market Index: 60%
Vanguard FTSE All-World ex-US Index: 40%

I'd like to invest a minimum of $20,000 a year, starting this year and continuing indefinitely. Other information you might want to know: I'm 29, I don't own property or plan to in the next 4 years, my only debt is $8000 in student loans, and I already have about $30,000 in equities (half in a Vanguard 500 Index fund (Roth IRA); half in individual stocks).

So, does this look sensible? Are those the proper funds for a taxable account? Critiques or suggestions? Is this plan too simple? I'm basically just looking for some feedback--there aren't many people around here to talk to about this kind of thing. Thanks in advance.

 

[chinaco]

Max out the IRA.

The only comment that I have is related to how you want to manage the money.

IMHO - I would split the funds up a bit more. For example:

Instead of the Total Market, I would use

- LC Index
- MC Index
- SC Index

So I could re balance between them and shift the allocations as I age. The same for foreign investments. I prefer the control. This is more of an issue with taxable funds... over time, if you choose to shift allocations you will incur a capital gain.

This is less of an issue with the tax deferred funds... you can shift that around with out a tax consequence.

Not sure... but if you commit to a regular contributions (monthly)... you might be able to open accounts with less than the minimum.

 

[Arc]

Welcome Knockoutned,
Maxing out on the KISS method I see. I think it is a great way to start. As your portfolio increases in value - and you get more knowledgable - you will most likely develop a more comprehensive approach. You have lots time. Good luck!

 

[LOL!]

Your plan and choice of funds is perfect and very tax efficient. chinaco's plan would have you rebalancing occassionally which would cost you taxes. Your tax-efficient, all-market-cap total US market fund avoid rebalancing among market caps.

The all-world FTSE fund is not all-market-cap in that it lacks foreign small cap. You can use your Roth IRA and any other tax-deferred accounts to fill in any additional asset allocation that you need.

You should also go to Bogleheads :: View Forum - Investing - Portfolio Help and read away.

 

[W2R]

I think your investment scheme is great for someone in their 20's. One caution would be that with a portfolio that consists of two equity funds only, like this one, you need to be able to stand a good degree of volatility without panic so that you don't sell low. Hopefully you have a good risk tolerance and can hang on during market slumps. If so, you are likely to be rewarded with very good earnings in the long term.

When you get older, you may want to gradually add something more stable like bond funds. I am nearing 60, with a very low risk tolerance (and planning to retire next year), so although I hold the same two funds in the same proportion to one another, they constitute less than half of my total portfolio.

 

[travelover]

........................When you get older, you may want to gradually add something more stable like bond funds. I am nearing 60, with a very low risk tolerance (and planning to retire next year), so although I hold the same two funds in the same proportion to one another, they constitute less than half of my total portfolio.

Good advice and by maxing out your Roth yearly you'll have a good tax efficient place for those bonds to reside long term, when you start buying them.

 

[innova]

Great choices for a taxable account. I'd not slice out the domestic equity portion, as tax drag will be your biggest hurdle in a taxable account. Hold TSM and VFWIX/VEU for international.

You may wish to checkout the diehards.org forum as well - lots of folks there that share your philosophy.

I'd second the recommendation for bonds in your portfolio. 80/20 stocks:bonds versus 100% stocks has similar long-term rate of return, but with much less risk (as measured by variation). Your IRA would make a nice holding area for bonds as well as any other holdings not suitable for a taxable account (REIT funds for example).

 

[SecondCor521]

Not sure... but if you commit to a regular contributions (monthly)... you might be able to open accounts with less than the minimum.

Some fund families do this but last time I checked Vanguard did not. Most Vanguard funds require $3K minimum, except they do have one (the Star Fund?) that has a $1K minimum.

2Cor521

 

[GoodSense]

Most Vanguard funds require $3K minimum, except they do have one (the Star Fund?) that has a $1K minimum.

2Cor521

Yup, the Star Fund is the only one I know in the VG family that has a $1K minimum.

I think Fidelity has a reduced minimum if you contribute regularly (maybe $200/month?), but I thought it was only for an IRA/Roth IRA.

 

[knockoutned]

Thank you for the replies so far. A few people have mentioned maxing out my Roth IRA. I should clear this up--because I work in Japan and don't pay American taxes, I can't contribute even one dollar to my Roth IRA. I wish that weren't the case, but I won't have earned income in the States for at least 4 years, and I may be working abroad for the next couple of decades. All of the money in my Roth is from working back home a few years ago.

Considering that it has to be in a taxable account, would you still invest a portion in bonds?

Also, for rebalancing, instead of selling one fund and buying the other, I think it would be easier to just buy more of one fund the next year until I'm back to my original asset allocation. Does that make sense? Do other people do that?

 

[TickTock]

Considering that it has to be in a taxable account, would you still invest a portion in bonds?

Also, for rebalancing, instead of selling one fund and buying the other, I think it would be easier to just buy more of one fund the next year until I'm back to my original asset allocation. Does that make sense? Do other people do that?

Unless you have a cast-iron stomach (that is, very high risk tolerance) I do recommend at least 20% in bonds (preferably Vanguard's Short Term Index, second choice Total Bond Index). Yes, it does drag total return, but it also damps the volatility, and if it stops you at some point from panicing and selling stocks at a low point, it's actually saved you money.

On directing funds as a rebalancing method, I recommend it. At some point you probably won't be able to totally rebalance that way, and then I'd sell/buy that portion of it. I don't do it myself, but the bulk of our assets are in tax-advantaged accounts, so it isn't an issue. If it was, I would direct purchases accordingly.

 

[DblDoc]

Thank you for the replies so far. A few people have mentioned maxing out my Roth IRA. I should clear this up--because I work in Japan and don't pay American taxes, I can't contribute even one dollar to my Roth IRA. I wish that weren't the case, but I won't have earned income in the States for at least 4 years, and I may be working abroad for the next couple of decades. All of the money in my Roth is from working back home a few years ago.

Considering that it has to be in a taxable account, would you still invest a portion in bonds?

Also, for rebalancing, instead of selling one fund and buying the other, I think it would be easier to just buy more of one fund the next year until I'm back to my original asset allocation. Does that make sense? Do other people do that?

I would put bonds in your old Roth as a first choice. After that you will need to balance your need for the bond allocation against the cost of having bond funds in a taxable account. That will be driven alot by your tax rate.

The other consideration depending on how much and how often you plan on investing you might want to use the ETF versions of the mutual funds you are considering. The Vanguard site will allow you to compare the MF against the ETF to see which will have lower costs long term.

For rebalancing you are fine to just "buy the laggards", most of us who buy and hold and are accumulating do just that. Because you will have most of your funds in taxable you will want to avoid selling as that incurs costs and taxes. One exception would be if you want to get into tax loss harvesting.

DD

 

[soupcxan]

I am in a similar position to you, late 20s, and I hold mostly VEIPX in my taxable account at Vanguard because I enjoy the dividends. But that's just me.

Even though you are young you should hold 20% bonds, preferably in a tax-advantaged account. Historically, holding a small portion of bonds does not reduce your expected portfolio return, but does reduce your risk - you get something for nothing! People who go 100% equity are leaving money on the table and taking on more risk for no reason.

Also, I don't know if you're planning to make monthly purchases of these funds but that could cause headaches down the road if/when you sell the funds (particularly if you have 20 years of purchases) at tax time because it will be laborious to calculate the cost basis. Vanguard does a good job of keeping track of this information, but I think it would still be a hassle. Stick with semi-annual investments and don't automatically reinvest the dividends/capital gains (put them in a money market account and then reinvest them on your normal schedule).

 

[lswswein]

Also, I don't know if you're planning to make monthly purchases of these funds but that could cause headaches down the road if/when you sell the funds (particularly if you have 20 years of purchases) at tax time because it will be laborious to calculate the cost basis. Vanguard does a good job of keeping track of this information, but I think it would still be a hassle. Stick with semi-annual investments and don't automatically reinvest the dividends/capital gains (put them in a money market account and then reinvest them on your normal schedule).

I have been doing biweekly investing at Vanguard and it has NOT been an hassle. The do the cost basis and when you sell it is really easy to figure out the long term and short term gains stuff as long as you DON'T try to do sales by lots. So go ahead a DCA as often as you like is my suggestion

-h

 

[lswswein]

Btw surprised that the Expense Ratio has not been discussed.

0. FTSE All-World ex-US Inv is a good fund but is a new fund. The ER is relatively high - 0.40% with a 0.25% purchase fee.

The other options that you should look into are
1. Total Int'l Stock Index - ER of 0.27% and missing Canada in it. This is generally not recommended for taxable accounts because you are losing out on the Foreign tax credit but your case it might not matter
2. Tax-Managed International - ER of 0.15% but with long lockin (1% redemption fee < 5yrs) Missing emerging markets.

You can start building your portfolio with one of the 2 funds above and then add the missing components as your portfolio size increases. So the 2 funds above should also be considered before making your decision

-h
p.s: btw keeping the plan simple is a good thing and keep asking those questions.
p.p.s: Btw you should start checking out bpp 's posts. He has been in Japan for a few yrs now and he does a lot of investing both stateside and in Japan. His posts might have a lot of information for you

 

[billman]

Is that true you can't contribute to your Roth IRA if you live abroad? I would like to know myself?

 

[lswswein]

Is that true you can't contribute to your Roth IRA if you live abroad? I would like to know myself?

As long as you have taxable compensation after you take your Foreign Income exclusion you can contribute.
Refer:
http://www.overseastaxservices.com/IRA.html

From the horse's mouth
Individual Retirement Arrangements


-h

 

[knockoutned]

Is that true you can't contribute to your Roth IRA if you live abroad? I would like to know myself?

It took me a little bit of time to figure this out. That first website sums it up pretty well. If you have earned income in the States, then you can contribute to a Roth IRA.

I don't work for the American government (or an American corporation). I pay Japanese taxes, which means I'm excluded from American taxes (under the foreign earned income exclusion). This exclusion is good for the first $82,400 that you earn abroad.

It's nice not having to pay US taxes, but I'd rather pay some taxes and still be able to contribute to a Roth IRA. Unfortunately, I don't think that's an option. I've thought about trying to work in the States during my summer holiday but am not too keen on that idea. The other option is to get my salary up above $82,400

 

[clifp]

At age 29, and I am sensing not particularly risk adverse, I think 0% bonds is fine. By 40 you should definitely have some bonds though.

I am clueless about the tax consquence of holding a Vanguard Fund in Japan. But would second the recommendation for the Tax Managed international. It is possible you maybe bettter of purchasing the ETF version of the FTSE international (VEU). Since it has a lower expense ratio and no purchase fee. Vanguard has a nice calculator to help you decide.

 

[kumquat]

I can't contribute even one dollar to my Roth IRA.

What's the problem, at $0 you've maxed it.

Considering that it has to be in a taxable account, would you still invest a portion in bonds?

Since you're essentially a passive investor, it might be a good idea, maybe 10-20%. Allows you to re-balance into stocks in case of a [-]meltdown/recession[/-] dip.

Also, for re-balancing, instead of selling one fund and buying the other, I think it would be easier to just buy more of one fund the next year until I'm back to my original asset allocation. Does that make sense? Do other people do that?

Depends on how long it would take. If the next contribution (or two) would fix it up, yes. If the next five years of contributions are required, no.



That being said, I don't eat my own [-]young[/-] cooking. No-one on this board would approve of someone who is FI and RE with 50% of NW in one stock, that's me. If you are interested in financial markets, you may want to allocate a small portion (0 - <10%) of your portfolio as 'play money' that you invest in individual stocks that you've researched yourself. Keeps you interested in becoming FI.

 

[soupcxan]

At age 29, and I am sensing not particularly risk adverse, I think 0% bonds is fine. By 40 you should definitely have some bonds though.

I still don't understand why people advise anyone, even twenty-somethings, to hold 0% bonds. The link below shows returns for various asset classes from 1973-2007. If you held 100% stocks, your annualized return was 11.66% and the standard deviation (risk) was 16.09%. However, if you held 80%/20% stocks/bonds, your return only went down to 11.32% but your risk went down to 13.71%. You give up a miniscule amount of return for a large reduction in risk. Seems like a no-brainer to me.

http://www.russell.com/SyndicateLibrary/Marketing/single_vs_multiasset_portfolios004000547.pdf

 

[innova]

0. FTSE All-World ex-US Inv is a good fund but is a new fund. The ER is relatively high - 0.40% with a 0.25% purchase fee.

Consider the ETF version of this fund, VEU. 0.25% ER and no purchase fee.

Considering that it has to be in a taxable account, would you still invest a portion in bonds?

Depends on the marginal tax rate. I'd think for anyone over a combined 25% or so, it would be best to place bonds in tax-deferred accounts OR hold munis or iBonds if absolutely necessary.

If you are interested in financial markets, you may want to allocate a small portion (0 - <10%) of your portfolio as 'play money' that you invest in individual stocks that you've researched yourself. Keeps you interested in becoming FI.

I'd only do that with non-retirement money. I'm not willing to gamble on retirement - its deadly serious to me and not a game. If I was interested in playing markets instead of going to the bar, going hunting, camping, etc.. I'd dabble in stocks. Not with my retirement though.

As for rebalancing, do it by any means possible that results in capturing the highest after-costs returns. In other words, in a taxable account, add to the lagging position rather than creating short-term capital gains to rebalance - never do that if at all possible. For those of us in the accumulation phase adding to a lagging position is the smartest way to go provided you can invest enough to reach your rebalancing targets.

 

[clifp]

I still don't understand why people advise anyone, even twenty-somethings, to hold 0% bonds. The link below shows returns for various asset classes from 1973-2007. If you held 100% stocks, your annualized return was 11.66% and the standard deviation (risk) was 16.09%. However, if you held 80%/20% stocks/bonds, your return only went down to 11.32% but your risk went down to 13.71%. You give up a miniscule amount of return for a large reduction in risk. Seems like a no-brainer to me.

http://www.russell.com/SyndicateLibrary/Marketing/single_vs_multiasset_portfolios004000547.pdf

Because say you invest $10,000 in 1973 after 24 years you end up with an extra $10,000 in all stock portfolio vs 80/20 and you are still in your 40s. Then switch to an 80/20 portfolio for you last 15 years, the extra 10K will eventually end up an extra $30K. More if you are periodically investing.

 

[SecondCor521]

I still don't understand why people advise anyone, even twenty-somethings, to hold 0% bonds. The link below shows returns for various asset classes from 1973-2007. If you held 100% stocks, your annualized return was 11.66% and the standard deviation (risk) was 16.09%. However, if you held 80%/20% stocks/bonds, your return only went down to 11.32% but your risk went down to 13.71%. You give up a miniscule amount of return for a large reduction in risk. Seems like a no-brainer to me.

Disclaimer: I didn't click on the link, but I've seen the curve you're describing elsewhere before. So I'm taking your numbers at face value.

I'm 39 and have been 100% stocks since I began investing in 1993. From where I sit, those 34 basis points of return compound quite nicely (and non-miniscule-ly), thankyouverymuch. As for risk, the notion that standard deviation = risk is one I have always doubted as a LTBH person. Further, I am not certain that the subjective difference in risk between 16.09% and 13.71% would be noticeable.

I will admit, however, that the volatility I currently experience at 100% stocks is beginning to give me some heartburn, so when I decide I can't take it any more I will probably go 5% bonds and see if that takes the edge off enough.

2Cor521

 

[TickTock]

What's No-one on this board would approve of someone who is FI and RE with 50% of NW in one stock, that's me.

Yeah, I can't approve of that. Too much risk, reardless of the specific company. Why take the chance of becoming non-FI for the chance of outperformance?