Best Vanguard funds for taxable account

[Trek]

I have a healthy chunk of money coming from a matured CD and am rethinking the way I want to invest it going forward.

I'm now of the opinion that I want to take a little more risk for a little more reward and open a Vanguard account which will be a taxable account.

I've read through many threads here already which have been very helpful in suggesting that it's best to give wide berth to income producing funds and target retirement funds. I also read that balanced funds are generally not tax efficient (though Vanguard has a tax managed balance fund).

I won't need this money for 5+ years and don't need it to produce income. I don't want to take wild risks with it (as I'm already retired) but would like reasonable growth. I'd like to keep it simple too, preferably split the money between 2 funds. One domestic and one international.

I'm not really sure what would be a good mix and if I should use only tax managed funds.

These are the funds that I have under consideration but am open to other suggestions of course.

50% in either Tax Managed International (VTMGX) or Total International Stock Index (VGTSX).

50% in either Tax Managed Balance (VTMFX) or Total Stock Market Index (VTSMX) or 500 Index (VFINX).

I'm unsure if the tax benefits of a tax managed fund would outweigh the higher growth of the other funds.

Would any of those be reasonable choices?

[LOL!]

Tax-managed funds are great if they don't lose any money over the next 5 years. Otherwise if you need to tax-loss harvest, you will pay an additional 1% fee.

The two classic funds for tax efficiency are Vg FTSE all-world ex US international index fund (VFWIX, VEU) and the Total Stock Market index fund (VTSMX, VTI)

See also Bogleheads Investing Advice and Info

[samclem]

What asset allocation are you shooting for with these funds? It looks like you might be open to having up to 25% in bonds?

The way I do things (and I think it is the most common way) is to look at everything in our savings and make an overall desired asset allocation. The stuff that goes in our after tax account is the most tax-efficient stuff (e.g. tax managed stock funds) while bonds, REITS, and other less tax efficient things go in our IRAs/401Ks.

So, what to buy for your taxable accounts really depends on your desired overall asset allocation (including any tax-advantaged accounts). After you know that, put the stuff that is most tax-efficient in your taxable account.

[Trek]

Thanks for the replies.

I've read that a good rule of thumb is to take your age and keep that percentage in bonds.

So I'm 2 years shy of 40, so my AA should be 60/40?

Is that a common rule of thumb to follow?

I guess one reason I've thus far been in CD's is all this investing stuff is too much like w*rk to me. But now CD rates aren't so hot and I think it's a good time to buy some stock since the prices are lower and I feel I stand to gain more over the long term.

[LOL!]

(1) There are many, many rules of thumb for asset allocation and the split between equities and fixed income. Some of them are
Stock percentage equals
(a) 100 - your age
(b) 110 - your age
(c) 120 - your age
(d) whatever is in a target retirement fund
(e) 60%
(f) somewhere between 75% and 25%

So that leaves quite a lot of leeway. And some folks make a distinction between the accumulation and decumulation phases

(2) This investing stuff is no harder than figuring out which CDs to buy. The effort put into researching CDs and purchasing them is about the same effort you need to put into researching passively managed index funds and purchasing them.

(3) I don't think one can say stock prices are lower now since things have gone up 50% to 90% since March. They were certainly much lower in March 2009 than they are now.

[samclem]

You'll find a lot of different opinions about the "correct" percentage of bonds. Some people believe that your other sources of retirement income are important in making this allocation--those with a secure COLA'd pension or even a secure non-COLA'd pension that covered a large portion of their living expenses might feel that they can afford to have a somewhat lower percentage in bonds (since they'll be getting stable income from another source, they can take slightly more risk). In addition, if you'll be retiring young and healthy your stash has to last a lot longer, and stocks are the most time-tested way to stay ahead of inflation over the long term, so some folks would probably choose to have more of them.

As a WAG, if I were retiring at 45 years old and had no pension but expected to receive the "normal" SS checks, at the time of retirement I'd probably want to have 10-15% in "cash" (e.g. MM funds or CD ladder), 20-35% in bonds (ETFs or MFs, or maybe TIPS), 60-70% in stocks (MFs or ETFs). Over time I'd slowly increase the % in bonds and decrease the % in stocks.

[friar1610]

Quote:

Originally Posted by samclem You'll find a lot of different opinions about the "correct" percentage of bonds. Some people believe that your other sources of retirement income are important in making this allocation--those with a secure COLA'd pension... that covered a large portion of their living expenses might feel that they can afford to have a somewhat lower percentage in bonds (since they'll be getting stable income from another source, they can take slightly more risk).

My situation is as you describe - secure COLA pension and early SS for both me and my wife. I really vacillate on whether that means I can take more risk by increasing my equity allocation OR that I don't have to take more risk. (I'm 64 and have been retired for almost 7 years.) Being unable to figure out what's best, I just keep 5% of assets in cash and split the remainder evenly between fixed income and equity. Of the equity portion, 20% is international. All VG index funds.

I spoke to a VG financial planner the other day and he seemed to think 50-50 was appropriate in my situation.

[Dennis]

If not risk adverse? VWELX and forget about it till you hit like 60
If risk adverse, VWINX.
If not sure? 50/50 into each for the next 5-10 yrs
" a 50/50 port vs a 70/30 port only did about 1/2% apy difference since 1970... so why take on the added risks? and can sleep alot better at nite as well...

Source: FundAdvice.com - The perfect portfolio
Jonathan Burton's Life Savings: How to invest well and sleep better, in good m

and a All Bond Port has outperform them for the past 10 yrs now @ Core Bond Port . so don't think you just Have to Have Equities anymore.. Bill Gross and Pimco will say otherwise..as well. ;-)

[Trek]

Quote:

Originally Posted by LOL! This investing stuff is no harder than figuring out which CDs to buy. The effort put into researching CDs and purchasing them is about the same effort you need to put into researching passively managed index funds and purchasing them.

Certainly can't agree there. Figuring out tax consequences, expense ratio's, fund holdings, past performance, etc of many different funds is quite a bit more work than finding a high rate CD to put your money in. But I appreciate your input.

Quote:

Originally Posted by samclem if I were retiring at 45 years old and had no pension but expected to receive the "normal" SS checks, at the time of retirement I'd probably want to have 10-15% in "cash" (e.g. MM funds or CD ladder), 20-35% in bonds (ETFs or MFs, or maybe TIPS), 60-70% in stocks (MFs or ETFs). Over time I'd slowly increase the % in bonds and decrease the % in stocks.

Thanks, this sounds reasonable.

Quote:

Originally Posted by Dennis If not risk adverse? VWELX and forget about it till you hit like 60 If risk adverse, VWINX. If not sure? 50/50 into each for the next 5-10 yrs

Dennis, would the slightly higher returns on these funds outweigh say the tax advantages of the Tax Managed Balance Fund (VTMFX)?

Also, should I wait until after January 1st to make a purchase for tax reasons?

[LOL!]

Quote:

Originally Posted by Trek Certainly can't agree there. Figuring out tax consequences, expense ratio's, fund holdings, past performance, etc of many different funds is quite a bit more work than finding a high rate CD to put your money in. But I appreciate your input. ... Also, should I wait until after January 1st to make a purchase for tax reasons?

Actually, there is no need to look at fund holdings nor past performance of many different funds. This is why you think it is complicated. All you really need to do is figure out an asset allocation plan such as 60% equities (split 50:50 into US:foreign) and 40% bonds. After that the fund selection is trivial: select the Vanguard index funds that fulfill your asset allocation categories. What could be simpler?

I do not like tax-managed funds because they are no more tax-efficient than a regular passively-managed, low-expense ratio index fund. Instead, they have a 1% early redemption fee (before 5 years since purchase) which hinders you from taking advantage of tax-loss harvesting opportunities.

For tax reasons, I would purchase a fund AFTER its annual December distribution, but BEFORE the end of the year. That way, if you wish to sell next December, any gains will have a chance of being LongTerm and get a favorable tax rate.

The FundAdvice web site does have excellent articles as already mentioned. You may also wish to avail yourself of all the free personal portfolio advice at Bogleheads :: View Forum - Investing - Help with Personal Investments

Anyways, get an asset allocation plan going first. Fund selection after that is no harder than picking out CDs.

[teejayevans]

Quote:

Originally Posted by Trek Dennis, would the slightly higher returns on these funds outweigh say the tax advantages of the Tax Managed Balance Fund (VTMFX)?

The answer to that question depends on your tax bracket.
TJ

[Dennis]

Ditto on teejay said..
And you ( or your tax advisor) just have to compare both sides of the fence of whatever invsetments you want to get into and see if one is better vs the other for you..

Such as: Lets say:
Owning a tax managed Fund has a 5% apy, while a not as tax effecent one has a 6% apy for the next 10 yrs..
You are in a 25% tax bracket
Per $10k Cost basis..
A. 1% more income - 25% taxes = 0.75% more income

So it would have to depend on How much More that taxable or higher tax-Innefecient Investment provides to justify owning it..

Just like Using a FA who "saves you $1,000 yr in Paying Less taxes" , but they Charge you $1,000 yr in their Fee.. What did you get out of that? Nottin-Honey.. It's just they got that Tax $ and not IRS and you got nottin out of it..

and even worse, if that FA's Investments returned even Less than a Better -but Not as good a Tax Ineffecent Investment provided..
Like They use Indexes, ave 6% rtn vs Some more aggressive Active Mge Funds that did say 8%.. a 2% apy dif can make a Big Dif. over the Long Term right?

Using the rule of 72? Doubles in 36 yrs, +50% in 18 yrs and + 25% more in your pocket in 9 yrs or less..
I use a 1.5% dif to justify owning a More Aggressive Fund vs the comaprable Index.. If it doesn't? I pass on it..

Doubles in 48 yrs, +50% in 24 and +25% more in 12..
As just a Gen. and simple guide.. for starters..
It's more like +25% in about 11.2 yrs when you compound it out, that more attuned T/A & Math types can tell you, better than I can..I was never good on Fractions and % in HS.. Was too busy being a "Fonz" type and chasing the Girls..

;-)

[ziggy29]

Quote:

Originally Posted by friar1610 My situation is as you describe - secure COLA pension and early SS for both me and my wife. I really vacillate on whether that means I can take more risk by increasing my equity allocation OR that I don't have to take more risk. (I'm 64 and have been retired for almost 7 years.)

It probably means both, and that's the seeming contradiction that really isn't. A repeat of 2008-09 wouldn't kill you even with a high allocation in stocks, and having a steady and COLA'd income stream eliminates the need to take excessive risk unless you're comfortable doing so.

What it does mean is that you are in an enviable position to dial up as much (or as little) risk as you are comfortable with, and a situation many of us can only dream about.

[Dennis]

"when have more than enough..do you take on more risk or go conservative?"

I was fortunate enough to Be In a similar Positon.. Was made an "offer I couldn't refuse" to sell my Small Business and the same for my Home and took Early retirement..at age 55..

Now having 2-3 x as much as figured for my Retirement needs, was tempted to " Go for the Gold" and get even "richer", seeing as I'm more a gambler ... But, I figured Let's Compromise

I Set up whatever $ needed into a Conservative Port that would more than Provide enough $ to me to "infinty and beyond" at needing only 3% from it a yr ( forcing me to put about 25% more into it)

then whatever $ is left over? Go have some fun and do some Gambling into More Aggressive Investments, like Balanced and Equity Funds..that I always wanted to do..

and if those make more? great, more to leave to My Estate and Add some Charities..

If they end up loosing and having Less? No loss on that end either... It was better than playing Crossword Puzzles and help keep my feble mind sharp and instead of 'Watching the Corn/grass grow "....

and maybe help my Kids and others learn from my Mistakes and If lucky enough, from my Doing well on investing..and pass that experience and knowledge onto them ..

Since 2002..it's been very rewarding for both My Pocket book and to help better Educate my Family and Others..Moreso than just making More $ than I needed..

Already has allowed me to Bail out one omy Nephews and his family to keep their Home and tie them over until the the Over Priced-Too Big a Home they bought, gets back to Being Worth what they paid for it and then some & can sell it in a few yrs..and pay me back as well or it will come out of their Inheritance..( My Dad did that for me when My Wife got Cancer and paid my Mortgage for over a yr )

and I hope it gains me some sorely needed, Gold Stars with St. Peter too!

;-)