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Trying to guide some “30 somethings” on appropriate holdings for a taxable account. I’m a little out of my element as almost all my personal investment experience has been in some type of qualified account where taxes don’t matter. Christine Benz recently did a piece that suggested 3 exhange-traded funds – Vanguard Total US Stock (VTI), the Total International (VXUS) and a Tax Free Municipal Bond (VTEB) in varying asset allocations depending on risk. I’m just wondering if this is “too simple” and adding a small cap ETF, a small cap value ETF or something I haven’t even considered adds some diversification away from the mega cap VTI. Looking for simple and tax efficient but don’t want to sacrifice performance if adding a bit more complexity is worth the effort. Or if someone wants to talk me into mutual funds, I’m open to suggestions though it seems the tax advantages of ETFs are fairly compelling.
Or any Vanguard target date fund. VLXVX (Target 2065) essentially holds the same funds plus a small Intl bond fund. Microscopic costs, and the firm automatically adjusts the allocations. It’s even simpler than the three-fund model. And likely to lead to success for minimalist investors.
But I think Target Date funds, asset allocation funds, and/or “all-in-one’ funds are better fits for tax deferred accounts as their constant tinkering and re-balancing tends to throw off income that one may not want in a taxable account. By choosing individual funds or ETFs, the accountholder has more control and can re-balance or adjust asset allocation through future contributions which will minimize taxable gains.
Agreed to some extent. But the Vanguard target funds don’t rotate that heavily or that often. I doubt that there are significant capital gains generated from the rebalance in the short run. For newbie investors, I wouldn’t let the tax tail wag the investment dog.
“Too simple” . I never worry about Too Simple, I worry when I’m not being simple
We are both 68 and we are 50% VT (Vanguard World, 40% VTI (Vanguard U.S.) , and 10% VUG (Vanguard Growth)
So, in effect, you wind up roughly 80% US Equities, 20% Int’l Equities, w a tilt towards growth.
Yes it is. Even though it doesn’t sound conservative for a 68 year old couple,it is for us. With enough income to well cover over 100% of our expenses I never plan on buying bonds. I have always planned on growth and believing what has been proven, that the markets take care of themselves as long as I don’t over think it
“Simplicity is the Art of Virtue.”
I am chuckling over your comment, “…almost all my personal investment experience has been in some type of qualified account where taxes don’t matter.” Hopefully you don’t realy believe there is any investment where, Taxes don’t matter.”
As far as the 30 somethings” go, owning VTI and VXUS from 18 to 60 would be a great portfolio. I only added age 60 in the event the person believed they needed a bond allocation, later in life. Were that the case, they could considering adding BND and BNDX.”
All the macinations people go through, by adding various segments or tilts are rarely fruitlful, but as long as people believe they are smarter than the average investor, they will continue to try and prove it.
Personally, I am happy with the World’s Markets averages contuing to beat 99% of advisors and investors. 100% of my investment portfilio is in VTI and VXUS, even though I am older (75 in October.). I can afford to do that because I have 15 months of retriement expenses in VFMXX (money market) and my wife and I have significant guaranteed income, through Social Security and Annuities. Our SS alone equals 113% of our retirement living expenses.
Life on Earth is Good…and OB3 made it even better!
Thanks. Good points re sticking w equities at that age depending on time horizon as Adam smartly pointed out below. And yes, I probably should have stated that the tax implications of a taxable account are “different” than those of a tax deferred or Roth account. And we’ll just have to disagree on the overall merits of OB3. 🙂
What works for me in my Vanguard taxable account is a mix of three mutual funds: Tax-Managed Capital Appreciation VTCLX (which is large and medium cap), Tax-Managed Small Cap VTMSX, and Federal Money Market VMFXX. If I hadn’t wanted a controllable tilt to small caps, I would have used Total US Stock Market VTSAX in place of the first two.
(My IRA has Treasury funds and Total US Stock Market VTSAX, and my Roth IRA has Total World Stock VTWAX and Real Estate VGSLX.)
Good options. Thanks!
It’s hard to give and answer without knowing what the timeframe and goal of the taxable account is. The first question I always ask is “What is the goal and the timeframe.” From that you can give pretty good advice.
My first thought is that they should have adequate emergency funds before worrying too much about non-qualified investments.
Having said that, I think Christine’s advice is adequate. I don’t disagree with comments suggesting a tilt toward small cap, but if you do that you may be complicating future rebalancing. Also, in my case, I can never recognize when a sector is about to go out of favor, so keeping it simple works better for me.
Yup. Already maxing 401(k), Roth, and has excess thus the foray into taxable.
And plenty of emergency cash.
I would say 100% stocks to start at that age. Nothing wrong with just VTI (and chill..) but international could be added for a bit of diversification.
There’s certainly nothing wrong with simple, especially if you are guiding others. Perhaps it would be worthwhile to consider their investments holistically rather than in isolation. What are they already holding in tax-advantaged accounts and elsewhere? Taking a total portfolio approach that looks at asset allocation across all accounts might enable them to have a single tax-efficient ETF/fund in taxable (perhaps a total stock market or total world fund) and further diversify/tilt in tax-advantaged accounts.
Good call. Need to do a little digging but I think the bulk of other assets are in employer sponsored long-term target date funds w heavy broad based equity exposure but with no opportunity to tweak. There’s one other account we might be able to manipulate a bit for diversification. Also, I’d prob lean towards using both a Total US and Total Int’l vs a Total World to get the foreign tax credit.
That is quite simple, and it’s intended to be. Of course one could add this or that. If it were me, I would indeed tilt a bit of small cap. Personal preference, not necessarily more “right.” So I wouldn’t say it’s too simple just because I personally would tilt it.
One place where I might take issue is with defaulting to municipal bonds just because it’s a taxable account. Since we’re talking about younger investors, presumably they’re not in their peak earning years so not in high tax brackets. Comparing the tax equivalent yield might show they’d be better off just investing in taxable bonds and paying the tax. Or even better, presuming they do have some qualified account(s), holding the bulk of their bonds there.
Thanks, M. Good points. I had the ticker wrong on the VG Tax Exempt. It’s actually VTEB. If my math is correct, I think its yield should beat the after tax yield on BND or similar at the 24% marginal rate.