Taxable account - mutual fund choice?

[lem1955]

I'm consolidating a few small taxable accounts at Vanguard. I like VWINX for its allocation and performance but I'm thinking VTMFX might be better since the expense ratio is about half of VWINX and it is designed to be tax efficient, even though it's heavier in equities. I would appreciate your thoughts.

 

[nun]

I'm consolidating a few small taxable accounts at Vanguard. I like VWINX for its allocation and performance but I'm thinking VTMFX might be better since the expense ratio is about half of VWINX and it is designed to be tax efficient, even though it's heavier in equities. I would appreciate your thoughts.

VTFMX specializes in municipal bonds for tax efficiency and VWINX doesn't so the funds aren't very similar. Have you thought about avoiding bonds in taxable accounts.

 

[lem1955]

VTFMX specializes in municipal bonds for tax efficiency and VWINX doesn't so the funds aren't very similar. Have you thought about avoiding bonds in taxable accounts.

I may need those taxable funds this year or next, so 100% equities isn't an option. A CD would be my alternative. We're talking about $10K.

 

[ziggy29]

I have my mom's taxable investments in VTMFX. What is your tax bracket? That might determine whether a muni bond allocation would be appropriate. VTMFX is approximately a 50/50 allocation and Wellesley is about 35/65. If you are attracted to the 35% allocation but want a more tax-efficient fund, you could put about 70% of your portfolio into VTMFX and the other 30% into other non-equities, which would give you an overall allocation to equities as 35%. For tax efficiency, you'd want to avoid taxable bond funds with the other 30%.

Of course, I believe the minimum investment in VTMFX is $10,000.

 

[Another Reader]

Does Fidelity or someone else offer a comparable tax managed balanced fund that is low cost? The concentration of the usual tech suspects in VTMFX is a little disconcerting. The equities in Fidelity's balanced fund (FBALX) are more diversified, but the fund is not tax managed.

 

[Rustic23]

Not to hijack this thread, but the classic advice is if you think you will need the funds in a year or so look elsewhere than stocks. What is you have say, $50,000, and you only four-see needing only $25,000. Do you take the risk that the market will not drop more than 50% and keep all in stocks and earn extra, or split it 50/50 or some other ratio. Say, I know the risk, I think it is small, so I'll go 70/30 stocks to bonds? Just a curiosity for me.

 

[panacea]

I don't have a specific recommendation for a mutual fund for you but I thought I'd share something on tax-efficiency as you are trying to decide on a strategy.

I recently attended a really good seminar where Michael Kitces spoke about tax-efficiency and ideal "asset location." In other words, what is the best asset class for taxable accounts and what is the best asset class for tax-sheltered accounts.

The prevailing strategy has been to put your bonds in the IRAs (because the income is taxed at ordinary income tax rates) and equities in your taxable account (because qualified dividends and long-term capital gains get better tax treatment), but he prepared some interesting analysis that shows that this may not always be the best approach. With bond yields as low as they are, he concluded that its neutral right now whether they should be put in a taxable account or an IRA. Who cares what the taxes are on almost no income? On the other hand, putting the growth-oriented asset classes in Roth IRAs makes a lot of sense because you'll theoretically get the most bang for your buck because the growth will never be taxed.

There are two other important factors that went into his analysis: dividends and turnover. I wish had one of his slides to share with you- it was really helpful. Anyway, the summary was that holding an equity investment in a taxable account isn't necessarily a good thing if you hold a mutual fund with turnover. I used to think turnover of less than 30% was pretty tax-efficient but his analysis showed that with anything over 10% turnover, you are better off putting that fund in your IRA. And if the fund pays dividends, the inefficiency is further exacerbated.

In the final analysis, he suggested the following (I'm cutting out much of the detail here):
-S&P 500 Index fund in a taxable account
-Fixed income in taxable or IRAs (but not Roth IRAs)
-Actively managed equity funds in IRAs (aggressive growth in Roth)
-International / EM mostly in IRAs or Roth IRAs

Of course you have to work with what you have. For example, if 95% of your savings is in a Rollover IRA, then you would theoretically fill your 5% taxable bucket with S&P 500 and then fill in everything else within the IRA whether it's ideal or not.

I think I captured his point here. I don't think he posted any of this on his BLOG but it wouldn't surprise me if he covered the material there in the near future.

Oh, maybe I do have a specific recommendation for a mutual fund after all. Based on the above, the best choice would be Vanguard S&P 500 Index.

 

[Another Reader]

Kitces' work is interesting and he makes some good points. Turnover is unpleasant in taxable funds, as my legacy T Rowe Price funds proved the last couple of years. Taxable bond yields are so low, they might as well be tax exempt.

The problem with the Vanguard tax managed balanced fund is its dependence on tech - Google, Facebook, Microsoft, Apple, Amazon, etc. Same with the S&P 500 fund. My question was if there was a tax managed balanced fund that did not depend so heavily on tech. Managers focused on taxes like tech because historically it has provide growth without those pesky taxable dividends. However, tech is very cyclical and prone to overvaluation when times are good, as they are now.

I suppose I could buy a municipal bond fund or ETF and look for an equity fund that happens to be tax efficient but not overweighted in tech and accomplish the objective. A lot of work I would rather not do.

I don't own bonds or bond funds, in part because I was taught that bond risk is misunderstood and underestimated by most people. In addition, in a market where everything is overpriced and everyone is chasing yield, bonds and equities may be correlated and bonds more dangerous. I have to take my bond medicine hidden in places like Vanguard's Wellington (in an IRA), where I can hope the managers are more astute at analyzing bond risk than most people.

 

[lem1955]

I don't own bonds or bond funds, in part because I was taught that bond risk is misunderstood and underestimated by most people. In addition, in a market where everything is overpriced and everyone is chasing yield, bonds and equities may be correlated and bonds more dangerous. I have to take my bond medicine hidden in places like Vanguard's Wellington (in an IRA), where I can hope the managers are more astute at analyzing bond risk than most people.

Another Reader: Does this mean your allocation strategy is x% equities/y% cash? And do you keep cash in laddered CD's?