lexor wrote: ↑Wed Feb 26, 2020 10:48 am
international001 wrote: ↑Wed Feb 26, 2020 10:02 am
anon_investor wrote: ↑Tue Jan 28, 2020 6:27 pm
Why not in a taxable account? Because the annual cap gain distributions generated by the fund add to the unnecessary tax drag (which is even worse if you are subject to NII taxes have high state income taxes)...
Thanks for pointing this out. I never noticed
Each of the 4 individual funds give 0 capital gains. But I guess the rebalancing between them is when capital gains must be distributed
VBIAX seems a better option then, but w/o international
Taking my
similar post and updating for VBIAX:
Assuming 100k invested with a 30 year timeframe and 7% returns after inflation you'd lose about
37k to expenses compared to a more tax efficient fund in a taxable account.
Other fund's effective expense ratio including taxes .382 ( based on VTI)
Tax rate .27
Yield .0188
Expense ratio .07
Returns 1.07
Starting balance 100000
100000*(1.07-.00382)^30-100000*(1.07-.27*.0188-.0007)^30
Your tax exempt would also suffer from higher expenses. Note that I did not include VBIAX annual cap gain distributions (from re-balancing), but I also didn't include taxes on sale. Someone double check my math because I was winging.
See
Cost Matters 2020 (which assumes 5% returns) for more info.
The above post is
misleading, comparing
apples and oranges for a
lump sum invested for 30 years.
Let's fix this by doing a proper comparison of
similar portfolios for an
accumulating portfolio over a 30-year period.
The Vanguard Balanced Index Fund Admiral Shares (VBIAX) is a balanced index fund with a 60/40 US domestic stock/bond allocation. It is best compared to a similar 60/40 US domestic stock/bond portfolio that uses the low-cost Vanguard Total Stock Market ETF (VTI) and Vanguard Total Bond Market ETF (BND).
Over the
last 10 years, as of 12/31/2019, here are the pre- and after-tax (on distributions) returns of these fund and ETFs:
- VBIAX: 9.68% pre-tax, 8.97% after-tax
- VTI: 13.42% pre-tax, 12.95% after-tax
- BND: 3.66% pre-tax, 2.48% after-tax
Let's use these numbers reported by Vanguard to make a 30-year projection for an accumulating investor who starts with $0 and invests $625 per month. To simplify calculations, I'll use constant monthly returns derived from the above 10-year after-tax returns and a financial calculator.
First, here are the monthly after-tax returns:
- VBIAX: (((1 + 8.97%)^(1 / 12)) - 1) = 0.718421931%
- 60/40 VTI/BND: ((60% X (((1 + 12.95%)^(1 / 12)) - 1)) + (40% X (((1 + 2.48%)^(1 / 12)) - 1))) = 0.693716815%
Second, we use a financial calculator to get the final portfolio balances after
(30 X 12) = 360 months:
- VBIAX portfolio: n = 360, i = 0.718421931, PV = 0, PMT = -625 ⇒ FV = 1065348.42
- 60/40 VTI/BND portfolio: n = 360, i = 0.693716815, PV = 0, PMT = -625 ⇒ FV = 1002114.20
So, after 30 years of accumulation, the VBIAX investor ends up with
$1,065,348.42 while the separate 60/40 VTI/BND investor ends up with
$1,002,114.20.
That's a penalty of -63,234,22 after tax for using separate ETFs instead of using a balanced fund which rebalances (in part) using other people's cash flows, in a taxable account. But, to be fair, while the absolute amount might seem big, it only represets a cumulative
-6% penalty after 30 years of accumulation. This
won't make a difference between success or failure for a retirement plan.
I've ignored, in my post, the complex issue of asset location. But, again, many investors do improper calculations, forgetting to take into account many
important issues into their calculations, and the high level of uncertainty of their assumptions, leading them to
misleading conclusions. Instead of repeating my detailed arguments, I suggest reading them in the
One-Fund Portfolio thread linked below (including
this post and previous ones).
Note that I wouldn't concentrate my portfolio into a domestic-only portfolio. Instead, I would invest my portfolio into a globally-diversified
One-Fund Portfolio. I think that using an all-in-one fund like
VSMGX as a single identical investment across all of the investor's accounts (Traditional, Roth, ..., and even taxable) is a very good idea for many investors of all ages and all wealth levels. The use of a single identical automatically-rebalanced all-in-one index fund in all accounts greatly simplifies a portfolio (especially for a surviving spouse),
eliminates the need to rebalance, and sidesteps a long list of potential
behavioral pitfalls.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)