Investing $300,000 needed in 2023 in Wellesley taxable?

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Tiresias1
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Investing $300,000 needed in 2023 in Wellesley taxable?

Post by Tiresias1 »

Prudent people generally avoid investing money needed in the short term in volatile assets, such as equities. But as repeated posts on this forum confirm, there is no safe place to park money that will keep pace with inflation (beyond the $10k i Bond limit).

I can’t stand the lack of yield anymore, so I'm starting to consider something rash. How crazy am I to invest $300,000 taxable in Wellesley? I would need these funds in January 2023 - it would not be the end of the world if I took a 10% hit.

Please talk me out of it, even if it's just suggesting a less crazy alternative.

Thank you.
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Wiggums
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by Wiggums »

If you need the money in 2023, then it should not be in equities. I would not sell in 2023 at a hypothetical 10% loss as my strategy. What if the market drops 20% and stays around that level for years?
Last edited by Wiggums on Sat Sep 25, 2021 4:33 pm, edited 1 time in total.
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ivgrivchuck
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by ivgrivchuck »

Tiresias1 wrote: Sat Sep 25, 2021 4:21 pm I can’t stand the lack of yield anymore, so I'm starting to consider something rash. How crazy am I to invest $300,000 taxable in Wellesley? I would need these funds in January 2023 - it would not be the end of the world if I took a 10% hit.
If you are okay with taking a 10% hit, then it roughly means that you can put 20% of that money into equities.

So you could do:
- $60k into a broadly diversified index fund
- $240k into savings account
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retiredjg
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by retiredjg »

Wellesley is not very tax-efficient. For those years you hold Wellesley in taxable, you will be paying taxes on dividends and capital gains distributions. Of course, when you sell, those things will not be taxed a second time.
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Wiggums
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by Wiggums »

retiredjg wrote: Sat Sep 25, 2021 4:33 pm Wellesley is not very tax-efficient. For those years you hold Wellesley in taxable, you will be paying taxes on dividends and capital gains distributions. Of course, when you sell, those things will not be taxed a second time.
Very good point!
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Grt2bOutdoors
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by Grt2bOutdoors »

From November 2007 to February 2009, the fund lost 18.82 percent. You want to hold it for a year, but there is nothing to say that you won’t lose 20 percent if things were to go terribly wrong in the markets. When you quote being down 10 percent you are looking at the one year worse decline, what you aren’t accounting for is there are 14-15 months remaining before 2023, just about the same amount of months as the worse drawdown period. You need to decide, which is worse, losing 4-5 percent to inflation or losing 19-20 percent.
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Topic Author
Tiresias1
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by Tiresias1 »

If you are okay with taking a 10% hit, then it roughly means that you can put 20% of that money into equities.

So you could do:
- $60k into a broadly diversified index fund
- $240k into savings account
This is a good idea; by which I mean, this is a more sensible bad idea than my original plan. Thank you.
tomsense76
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by tomsense76 »

Sorry for the longish reply in advance, but hopefully the analysis/information below is useful. Think this is worth digging into a bit in part because you have acknowledged you are willing to take some risk and so it is worth considering how one would take that risk and how that might work in practice.

Generally folks here are going to advise anything you absolutely need in nominal terms stays in cash or something cash-like (money market, CDs, short-term treasuries, etc.). There is something to this as the money is definitely there when you need it. Though while this is very safe in nominal terms, it is not necessarily safe in real terms (inflation is running a bit elevated atm) so it is not strictly risk free. Especially if this is going towards something like a house where we have seen prices go up (and inflation data doesn't directly track it). That said, any investment in risky assets does risk having some of the money not be there when you need it. So this really boils down to how much risk you can handle and what kinds. Based on what you have said above it sounds like you do want your money to at least keep its real value and can stomach a 10% loss.

Have you read this thread ( viewtopic.php?t=309472 )? Basically the OP there makes the argument that a slightly overfunded emergency fund could reasonably be constructed with a 20/80 fund ( VASIX (Vanguard LifeStrategy Income Fund) ) along with a month of cash to float one between selling. The cash portion seems less relevant in your case. However the idea is very similar to what you are asking about here.

Wellesley is similar to VASIX, but takes on a bit more stock market risk. ATM it is roughly 40/60 (though this can vary would look at the prospectus for details). Another fund is similar to Wellesley is Wellington, which picks a 33/67 asset allocation. These are both popular for low risk income generating allocations.

So the question then is what asset allocation does the best job of fitting your risk tolerance. If we look at the historic data, the worst annual return for the 20/80 portfolio was -10% and 40/60 portfolio was -20% loss. Based on your ability to risk losing 10%, it sounds like a 20/80 portfolio would be a better fit for you.

Folks on this thread have pointed out tax efficiency. There are a number of ways one can address this. For example holding the bond portion in one's tax advantaged accounts and holding stocks in taxable, in which case this becomes a form of bucketing for different savings goals. Though this does mean a bit more maintenance to make sure one isn't straying from their target asset allocation. Another option is just to go ahead and hold something like VASIX in a tax-advantaged account (like a 401k or IRA or if necessary Roth). Some particular target date funds or target income funds could be appropriate if one has access to those and not VASIX.

If one needs to hold this in taxable, an ETF or pair of ETFs can help minimize (and possibly avoid) capital gains distributions (though getting taxed on ordinary income distributed by bonds is unavoidable here). For example iShares provides a variety of asset allocation ETFs. There is not exactly a 20/80 fund, but iShares does provide AOK (iShares Core Conservative Allocation ETF), which is 30/70 fund (so closer to Wellesley). The ER is a bit higher than some might like, but maybe worth it for a single relatively efficient holding. One would also need to hold additional bonds on the side, holding 1/3 in a bond fund (like AGG) and 2/3 in AOK would be 20/80. Another option would be just to hold the bond and stock funds separately in taxable and rebalance between them or hold them in an M1 finance pie. If one held two separate holdings in taxable, it might be worth using a treasury only bond fund like GOVT, which would at least avoid state income taxes (though not Federal).

Something we haven't explored here is using municipal bonds in taxable. These are Federally tax-exempt and can be state tax-exempt depending on the fund and state laws. Though municipal bonds don't behave the same way as taxable bonds. So one would have to more carefully evaluate the risks of these and see to what extent they make sense as part of this savings goal. Since we are already talking about a 20/80 fund, going to 90/10 or adding even more bonds raises the question of whether one should just hold the full balance in munis and skip stocks altogether for simplicity. One would need to evaluate, which municipal bond fund makes sense. Likely this will trail holding at least some stocks, but the after-tax difference needs to be compared more closely.
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retiredflyboy
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by retiredflyboy »

Money needed within that time frame needs to be in on-line high yield savings type accounts like Ally. Take your .5% yield and sleep well. Yes, inflation is going to outpace the return, but over that period of time this could pale in comparison to a 15% to %20 drop in share price. Good luck with whatever you decide to do.
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DarkHelmetII
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by DarkHelmetII »

Tiresias1 wrote: Sat Sep 25, 2021 4:21 pm Prudent people generally avoid investing money needed in the short term in volatile assets, such as equities. But as repeated posts on this forum confirm, there is no safe place to park money that will keep pace with inflation (beyond the $10k i Bond limit).

I can’t stand the lack of yield anymore, so I'm starting to consider something rash. How crazy am I to invest $300,000 taxable in Wellesley? I would need these funds in January 2023 - it would not be the end of the world if I took a 10% hit.

Please talk me out of it, even if it's just suggesting a less crazy alternative.

Thank you.
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UpperNwGuy
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by UpperNwGuy »

Tiresias1 wrote: Sat Sep 25, 2021 4:21 pm I can’t stand the lack of yield anymore, so I'm starting to consider something rash.
Many of us are living with the reality of reduced yield. Why are you different?
whereskyle
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by whereskyle »

Tiresias1 wrote: Sat Sep 25, 2021 4:21 pm Prudent people generally avoid investing money needed in the short term in volatile assets, such as equities. But as repeated posts on this forum confirm, there is no safe place to park money that will keep pace with inflation (beyond the $10k i Bond limit).

I can’t stand the lack of yield anymore, so I'm starting to consider something rash. How crazy am I to invest $300,000 taxable in Wellesley? I would need these funds in January 2023 - it would not be the end of the world if I took a 10% hit.

Please talk me out of it, even if it's just suggesting a less crazy alternative.

Thank you.
I agree with the general rule that money needed in two years should not be in equities. Have you considered what the upside really is over your extremely short, two-year timeframe? Assuming you invest in something like Wellesley, or perhaps more prudently, Vanguard's Target Retirement Income Fund (VTINX), you can expect the upside for your total returns to be something like 18% cumulative, unless you take a lot more risk. That means your $300,000 will become about $350,000. Let's assume on the downside that you might also lose 18%. Your cash will become $250,000. Is that an appealing risk/reward trade off for you? Is that extra $50k really worth the risk of losing $50k?

I much prefer the prospects of equities over a longer time frame.
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000
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by 000 »

That would be pretty crazy to do. What's the average duration of Wellesley's bonds like 7 years?
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Harry Livermore
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by Harry Livermore »

retiredjg wrote: Sat Sep 25, 2021 4:33 pm
Wellesley is not very tax-efficient. For those years you hold Wellesley in taxable, you will be paying taxes on dividends and capital gains distributions. Of course, when you sell, those things will not be taxed a second time.
Correct. Expanding on Ivgrivchuck's idea, why not put a (very) small amount (10%?) into VTSAX which is all-equities and relatively tax-efficient, and keep the majority in a high yield savings account?
But I agree wholeheartedly with the group that if you need the money in 2 years, it should all be in a "riskless" asset, and the loss of purchasing power should be accepted and made up for with new money, if need be. The "loss" via inflation COULD be much less than the loss as a result of trying to be too clever.
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dbr
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by dbr »

Tiresias1 wrote: Sat Sep 25, 2021 4:21 pm Prudent people generally avoid investing money needed in the short term in volatile assets, such as equities. But as repeated posts on this forum confirm, there is no safe place to park money that will keep pace with inflation (beyond the $10k i Bond limit).
There are plenty of places to park money that are safe except not quite keeping up with inflation. How on earth do you think the risk in Wellesley is ok if you can't even stand inflation for two years?
Dottie57
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by Dottie57 »

Wiggums wrote: Sat Sep 25, 2021 4:29 pm If you need the money in 2023, then it should not be in equities. I would not sell in 2023 at a hypothetical 10% loss as my strategy. What if the market drops 20% and stays around that level for years?
+1.
stupidkid
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by stupidkid »

Couldn't the strategy of placing cash needs in a tax advantaged account work? Following the appropriate asset allocation, or slightly modifying the allocation for less risk.

I consider putting even 1-2 month money into this strategy in my 401k bond allocation. I haven't mostly because it's just slightly more effort than leaving it in my online savings before it goes out again shortly. But for 2 years it could make sense.

Otherwise it seems leaving $300k in savings could just skew your desired allocation towards cash/"bonds".
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Mullins
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by Mullins »

Tiresias1 wrote: Sat Sep 25, 2021 4:21 pm Prudent people generally avoid investing money needed in the short term in volatile assets, such as equities. But as repeated posts on this forum confirm, there is no safe place to park money that will keep pace with inflation (beyond the $10k i Bond limit).

I can’t stand the lack of yield anymore, so I'm starting to consider something rash. How crazy am I to invest $300,000 taxable in Wellesley? I would need these funds in January 2023 - it would not be the end of the world if I took a 10% hit.

Please talk me out of it, even if it's just suggesting a less crazy alternative.

Thank you.
Based on what you wrote, if you know it's prudent to avoid investing money in volatile assets which will be needed for the short term, and there is no safe place to park money that will keep pace with inflation, where thinking on this gets you to where you I can’t stand the lack of yield anymore, to the point where you're considering doing something rash, such as actually placing $300,000 into a volatile asset, then the answer isn't in trying to get feedback on whether the idea is crazy or where to put the money...

The answer is:

Stop thinking about it.
You already know what's best to do.
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H-Town
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Re: Investing $300,000 needed in 2023 in Wellesley taxable?

Post by H-Town »

Tiresias1 wrote: Sat Sep 25, 2021 4:21 pm Prudent people generally avoid investing money needed in the short term in volatile assets, such as equities. But as repeated posts on this forum confirm, there is no safe place to park money that will keep pace with inflation (beyond the $10k i Bond limit).

I can’t stand the lack of yield anymore, so I'm starting to consider something rash. How crazy am I to invest $300,000 taxable in Wellesley? I would need these funds in January 2023 - it would not be the end of the world if I took a 10% hit.

Please talk me out of it, even if it's just suggesting a less crazy alternative.

Thank you.
If you consider it as a standalone transaction:
If a recession happens right before you need to sell, 10% loss = $30,000.

If market remains calm, you may get around 5% for 2 years, 4% gain = $15,000. If you're in 32% tax bracket, your net gain after federal income tax is approx. $10,200. This doesn't count the income tax on the dividends and capital gain distribution in 2021, 2022, and 2023.

But in reality, money is fungible:
- If you continue to make money from now until 2023, there's your net cash flow that could help fund the $300k that you need in 2023.
- If there is a recession, just sell it and recognize the loss for tax purposes and buy replacement shares with other funds. Remember money is fungible.
- If your current taxable portfolio is > 300k, there is no reason why you would deviate from your AA.
Time is the ultimate currency.
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