How to Invest

[wabmester]

Quote:

I have calculated that a 2 million dollar portfolio, 10% of it in IRAs, invested a-la Bernstein's Gap Portfolio, could end up with taxes for a normal guy with normal deductions at something like 0.3% of the portfolio value each year, without any munibonds whatsoever.

Bob, could you walk me through this (without cap loss carry-forwards)?

If I want income of $80K, are you saying to keep the interest income below $14K (taxed at 10%) and the rest of the income as cap gains (taxed at 5%)? That seems hard to do with a reasonable asset allocation.

BTW, you don't need an S-Corp or LLC to take business deductions -- all you need is a legitimate business.

[wabmester]

Quote:

Bernstein is a "splitter" rather than a "lumper"

Somebody over at M* put forth a pretty good argument against slice + dice. * Basically, the fundamental assumption of this MPT stuff is the Efficient Market Hypothesis. * If you believe that the market is efficient, then it follows that you should have a stock allocation that mirrors the global market's cap weighting.

Basically, this means 50% TSM + 50% total international. *Anything else is an attempt to "beat the market," which we all know is a Bad Thing.

[unclemick]

Amen, amen,amen

Low investment expense, infrequent turnover/trading, 'reasonable' diversification and a disciplined plan/methodology that fits 'you' emotion and sleep wise will probably work. Whether Ben Graham, Bogle, Bernstein, Phil Fisher, Swedroe or whomevever.

[db]

Quote:

Basically, this means 50% TSM + 50% total international. *Anything else is an attempt to "beat the market," which we all know is a Bad Thing. *

Really? I've been using 2/3 TSM 1/3 TIS for my 60% equity allocation.

db

[wabmester]

According to one reference, the US stock market represented 48% of the world's total stock market capitalization in 2002.

So, you might be underweighted in international if you believe that the world is smart enough to correctly allocate capital.

Keep in mind however, this is the same world that brought you the Yugo, Tamogachis, Michael Jackson, and France. How smart can it be?

[ESRBob]

[quote]
Bob, could you walk me through this (without cap loss carry-forwards)?

If I want income of $80K, are you saying to keep the interest income below $14K (taxed at 10%) and the rest of the income as cap gains (taxed at 5%)? * That seems hard to do with a reasonable asset allocation.

quote]

Wabmester,
basically you can have more interst income than 14k if your allocation leads to that, but that interest would be sheltered by either putting the higher yieldig Fixed income in the Roth, or more importantly, by all the various deductions and exemptions that a normal family with charitable donations, some business expenses, exemptions etc would have as they go through their 1040, which shelters the highest taxrate interest income first. Then you get some other help:
a) Dividends and cap gains @ 5%
and here is the key one,
b) sell appreciated assets with long term capital gains, and only get taxed on the gains themselves, again at 5%. Leave the bulk of the income you make each year in the portfolio as untaxed capital gains.

I think you got this, because your question was about having a reasonable asset allocation and not having too much (more than 14k) interest or nonqual dividend income, but just in case: the Portfolio itself may have made 10% gains that year, but you only want to draw out 80k. You might get some of that cash out from interest and dividends (or you might leave it in reinvested and just get taxed on it). The point is you need 80k of cash and you want to minimize the tax on it. You can sell some of a fund that has gotten out of balance, sell 80k worth of the fund in the extreme example. If is has appreciated by 100% and you thus have half the value of the sale as a realized capital gain, you'd pay tax at 5% on just that 40k. (it would be less because of your deductions and exemptions, but whatever). So your Federal tax on that would be just 5% of 40k or $800. You got 80k of income out of the portfolio and paid just 1% tax.

Now the portfolio made plenty more than that (we hope!) and that is going to have capgains tax paid on it some day, but not this year and maybe never. But all you needed was your cash, in the most tax advantaged way possible. THis does it for you.

IWabmester, I have a few pages I'l;l email you that show all the calculations for a model portfolio, but it won't come out right in a posting here. If anyone else wants to see it let me know.

Bob

[unclemick]

Good posting Bob

State taxes nick me. But my hobby stocks allow some of the ideas you mentioned - low that lo cap gains tax AND the new lower div tax. Standard deduction and no business expenses but have been working the cap gains/loss thing for years. Replenish the 'stock pot' with my non cola pension on a regular basis. And at age 60 in the low bracket - trying to convince myself to move some reg. IRA to Roth periodically ' for old age'.