How to invest only in a taxable account?

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etfan
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How to invest only in a taxable account?

Post by etfan »

Sorry if this has been answered before.

How can one implement the 3-fund portfolio in a purely taxable world? Manually implementing the 3-fund portfolio means a lot of taxable events due to rebalancing so this seems like a non-starter.

One way to avoid that seems to be a self-balancing fund. Among the self balancing funds, you would need to find one that is closest to your desired asset allocation, like Lifestyle or Target Date. Others (like Wellesley) have limited AA choices. Target Date Funds have the added benefit of changing their stock/bond allocations over time, so you could further approximate your desired AA over time by picking a TDF instead of a Lifestyle Fund.

The only problem with LS or TDF is they hold tax-inefficient bonds. But the Vanguard tax managed balanced fund is 50/50 so not much choice in asset allocation.
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Re: How to invest only in a taxable account?

Post by Marseille07 »

etfan wrote: Sun Aug 01, 2021 5:40 pm Sorry if this has been answered before.

How can one implement the 3-fund portfolio in a purely taxable world? Manually implementing the 3-fund portfolio means a lot of taxable events due to rebalancing so this seems like a non-starter.
Why? I simply nudge whichever fund that needs nudging. No taxable events.
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Re: How to invest only in a taxable account?

Post by imflyboy »

I agree. If you’re accumulating simply add more to the fund that’s lagging your target allocation.
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Re: How to invest only in a taxable account?

Post by grabiner »

If you do want to use an all-in-one fund, I prefer the target-date funds, as they will change allocation for you as you approach retirement. If you are young and invest in LifeStrategy Growth, you will need to sell this fund by the time you retire, as you probably don't want 80% stock in retirement.

The rebalancing rule for my taxable account is that I will only sell for a capital gain if I am outside the rebalancing limits, and I do not expect that normal inflows will fix this. I have never needed to do this, although I came close in 2007; one more year of rises in Emerging Markets Index would have taken me over the maximum I wanted to hold. Instead, I always direct inflows (and dividends, which I don't reinvest) to the most underweighted asset class. Thus, with US stocks outperforming foreign stocks recently, and my own foreign stock holding decreased because I have been donating a foreign ETF to charity and sold another foreign ETF to pay off my mortgage, my new taxable money and dividends go into foreign funds rather than Total Stock Market.
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Re: How to invest only in a taxable account?

Post by ResearchMed »

imflyboy wrote: Sun Aug 01, 2021 5:47 pm I agree. If you’re accumulating simply add more to the fund that’s lagging your target allocation.
And don't reinvest dividends, etc.
Invest those in whichever holdings need "more".

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Re: How to invest only in a taxable account?

Post by 123 »

To ease rebalancing transaction load in a taxable account do not automatically reinvest dividends. Apply any dividends toward the purchase of anything you need to achieve rebalancing. Note that with dividends held as cash until you manually rebalance you may incur some investment inefficiency. You only have to be as precise in rebalancing as you are comfortable with.

Some investors may automatically reinvest dividends and just not worry about rebalancing. Other investors may only rebalance to the extent that they use new investments toward achieving rebalancing.
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Re: How to invest only in a taxable account?

Post by livesoft »

Tax-loss harvesting helps to offset realized capital gains, but in the meantime, unrealized capital gains are not taxed.
https://www.bogleheads.org/wiki/Tax_loss_harvesting
We haven't had any net realized capital gains in our taxable accounts in quite a while, say 10 years or more.

And bond yields are so low that even if one gets taxable bond fund dividends, they might not add much to one's tax bill anyways -- especially if one applies $3,000 of net losses to against ordinary income
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etfan
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Re: How to invest only in a taxable account?

Post by etfan »

So what are examples of bond funds you fold? Exclusively muni?

Is relying on regular contributions sufficient to maintain the desired allocation?
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Re: How to invest only in a taxable account?

Post by etfan »

123 wrote: Sun Aug 01, 2021 6:01 pm Note that with dividends held as cash until you manually rebalance you may incur some investment inefficiency.
Yes. It requires manual intervention to avoid accumulating cash on the sidelines.
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Re: How to invest only in a taxable account?

Post by etfan »

livesoft wrote: Sun Aug 01, 2021 6:07 pm We haven't had any net realized capital gains in our taxable accounts in quite a while, say 10 years or more.
That sounds like it requires some careful planning. Does it involve intentional losses somehow? I'm having a hard time seeing how to do it with a simple total stock + total bond.
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Re: How to invest only in a taxable account?

Post by KlangFool »

etfan wrote: Sun Aug 01, 2021 5:40 pm

The only problem with LS or TDF is they hold tax-inefficient bonds.
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Re: How to invest only in a taxable account?

Post by skierincolorado »

Don't forget contributions to a Roth IRA can be withdrawn tax and penalty free at any time. May not apply to OP, but to others reading.
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Re: How to invest only in a taxable account?

Post by livesoft »

etfan wrote: Sun Aug 01, 2021 6:42 pm
livesoft wrote: Sun Aug 01, 2021 6:07 pm We haven't had any net realized capital gains in our taxable accounts in quite a while, say 10 years or more.
That sounds like it requires some careful planning. Does it involve intentional losses somehow? I'm having a hard time seeing how to do it with a simple total stock + total bond.
It requires no planning at all. If you like, you can even have Vanguard (or many other places) send you an alert by e-mail or text when you have something to tax-loss harvest.

It certainly does not involve intentional losses. You may soon learn yourself that the prices of your total stock and total bond investments do not always go up from what you paid for them.

Furthermore, if you have no losses today to harvest and tomorrow the stock market goes up, then you will have no losses to harvest tomorrow as well -- and you don't even have to check your holdings. Basically, only on huge down days in the stock market should one expect to be able to tax-loss harvest. Those days are so infrequent AND well publicized that the process is rather trivial. For some reason I think a lot of people believe they have to keep a careful eye on things or they might miss something. Nevertheless, if one misses an opportunity, then so what? It is not the end of the world and there will be future opportunities anyways.
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Re: How to invest only in a taxable account?

Post by etfan »

KlangFool wrote: Sun Aug 01, 2021 6:43 pm
etfan wrote: Sun Aug 01, 2021 5:40 pm

The only problem with LS or TDF is they hold tax-inefficient bonds.
etfan,

Why is this a problem when your portfolio is very small? How much taxes are we talking about here? Is the portfolio at least 200K?

KlangFool
Wouldn't that be short-term thinking? I may have only $100K in a taxable TDF today but if the plan is grow it quickly over the next decade, then it makes sense to make sure i won't end up with a lot of taxes to pay every year then.
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Re: How to invest only in a taxable account?

Post by KlangFool »

etfan wrote: Sun Aug 01, 2021 7:18 pm
KlangFool wrote: Sun Aug 01, 2021 6:43 pm
etfan wrote: Sun Aug 01, 2021 5:40 pm

The only problem with LS or TDF is they hold tax-inefficient bonds.
etfan,

Why is this a problem when your portfolio is very small? How much taxes are we talking about here? Is the portfolio at least 200K?

KlangFool
Wouldn't that be short-term thinking? I may have only $100K in a taxable TDF today but if the plan is grow it quickly over the next decade, then it makes sense to make sure i won't end up with a lot of taxes to pay every year then.
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Re: How to invest only in a taxable account?

Post by etfan »

KlangFool wrote: Sun Aug 01, 2021 7:25 pm If and when you portfolio is 200K, then, you can sell your TDF and change into something else. It is unlikely that you would ONLY have taxable account in 10 years.

It is not short-term thinking of not spending time on a problem that you do not have.
The question was meant to constrain the investment within a taxable account indefinitely.
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Re: How to invest only in a taxable account?

Post by KlangFool »

etfan wrote: Sun Aug 01, 2021 7:45 pm
KlangFool wrote: Sun Aug 01, 2021 7:25 pm If and when you portfolio is 200K, then, you can sell your TDF and change into something else. It is unlikely that you would ONLY have taxable account in 10 years.

It is not short-term thinking of not spending time on a problem that you do not have.
The question was meant to constrain the investment within a taxable account indefinitely.
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Re: How to invest only in a taxable account?

Post by etfan »

KlangFool wrote: Sun Aug 01, 2021 8:05 pm
etfan wrote: Sun Aug 01, 2021 7:45 pm The question was meant to constrain the investment within a taxable account indefinitely.
And, why would you want to do that? How does this make any sense? If a person has more than one type of account, the person should use ALL of the accounts for one OVERALL portfolio. If the person choose not to do that, the person would pay more taxes.
Yes, the person would pay more taxes. But there are ways to minimize that.
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Re: How to invest only in a taxable account?

Post by CyclingDuo »

etfan wrote: Sun Aug 01, 2021 5:40 pm Sorry if this has been answered before.

How can one implement the 3-fund portfolio in a purely taxable world? Manually implementing the 3-fund portfolio means a lot of taxable events due to rebalancing so this seems like a non-starter.

One way to avoid that seems to be a self-balancing fund. Among the self balancing funds, you would need to find one that is closest to your desired asset allocation, like Lifestyle or Target Date. Others (like Wellesley) have limited AA choices. Target Date Funds have the added benefit of changing their stock/bond allocations over time, so you could further approximate your desired AA over time by picking a TDF instead of a Lifestyle Fund.

The only problem with LS or TDF is they hold tax-inefficient bonds. But the Vanguard tax managed balanced fund is 50/50 so not much choice in asset allocation.
You could use a combination of muni bonds and treasuries (short and intermediate term) to keep taxes low. Did I miss the reasoning why there is no pre-tax retirement investing involved (401k/403b/457b/tIRA)? Offsetting LTCG and qualified dividends with some of your pre-tax income going into a tax deferred traditional account is one way to mitigate the taxable account taxes.

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Re: How to invest only in a taxable account?

Post by reln »

etfan wrote: Sun Aug 01, 2021 5:40 pm Sorry if this has been answered before.

How can one implement the 3-fund portfolio in a purely taxable world? Manually implementing the 3-fund portfolio means a lot of taxable events due to rebalancing so this seems like a non-starter.

One way to avoid that seems to be a self-balancing fund. Among the self balancing funds, you would need to find one that is closest to your desired asset allocation, like Lifestyle or Target Date. Others (like Wellesley) have limited AA choices. Target Date Funds have the added benefit of changing their stock/bond allocations over time, so you could further approximate your desired AA over time by picking a TDF instead of a Lifestyle Fund.

The only problem with LS or TDF is they hold tax-inefficient bonds. But the Vanguard tax managed balanced fund is 50/50 so not much choice in asset allocation.
Rebalance only with:
1) new contributions
2) dividends
3) cap gains

In extreme drift...
4) choose the least tax costly lots to sell in high tax years and choose highest tax cost lots to sell in low tax years
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Re: How to invest only in a taxable account?

Post by etfan »

CyclingDuo wrote: Sun Aug 01, 2021 8:38 pm You could use a combination of muni bonds and treasuries (short and intermediate term) to keep taxes low. Did I miss the reasoning why there is no pre-tax retirement investing involved (401k/403b/457b/tIRA)?
You didn't miss anything. I just figured this thread is under "investment theory" so it's a theoretical question :)

Essentially I'm trying to understand the real cost of simplifying a portfolio by avoiding any cross-account rebalancing.

The "set it and forget it" nature of a single target date fund in retirement accounts is great. A similar situation in taxable would also be nice so I'm wondering what the most tax efficient way to do it.
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Re: How to invest only in a taxable account?

Post by etfan »

reln wrote: Sun Aug 01, 2021 8:41 pm Rebalance only with:
1) new contributions
2) dividends
3) cap gains
So a very simple example would be the taxable account could consist solely of VTI (total stock market) WITHOUT auto-reinvesting dividends, and VTEB (muni bonds), and rebalance using those 3 steps. Is that the most tax-efficient AA?
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Re: How to invest only in a taxable account?

Post by etfan »

KlangFool wrote: Sun Aug 01, 2021 8:05 pm ... the person should use ALL of the accounts for one OVERALL portfolio.
Just to explain this point better because I may be missing something.

1- It is possible to consider all your accounts a single portfolio while still avoiding cross-account rebalancing. Mirroring would be one way to do it, using identical or equivalent funds.

2- The problem with cross-account rebalancing is it renders things like target date funds kind of pointless. If my rebalancing activities cause me to end up with a bunch of bonds and stocks in my tax advantaged accounts, then why bother with TDF's? It would be simpler at that point to only have the 3-fund portfolio.
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Re: How to invest only in a taxable account?

Post by CyclingDuo »

etfan wrote: Sun Aug 01, 2021 8:45 pm
CyclingDuo wrote: Sun Aug 01, 2021 8:38 pm You could use a combination of muni bonds and treasuries (short and intermediate term) to keep taxes low. Did I miss the reasoning why there is no pre-tax retirement investing involved (401k/403b/457b/tIRA)?
You didn't miss anything. I just figured this thread is under "investment theory" so it's a theoretical question :)

Essentially I'm trying to understand the real cost of simplifying a portfolio by avoiding any cross-account rebalancing.

The "set it and forget it" nature of a single target date fund in retirement accounts is great. A similar situation in taxable would also be nice so I'm wondering what the most tax efficient way to do it.
Ah!

Well we lived the theory for quite a number of years as we lived and worked outside of the US for more than a decade. We did not qualify during the majority of time to contribute to traditional tax deferred accounts since our income was foreign, so the taxable account was our main vehicle. Before that, we were self-employed and after maxing out tIRA's poured a lot into our taxable account. And as you pointed out in earlier posts in this thread, over time the taxable account grows. And grows. And grows. So mitigating the taxes becomes a strategy - of which utilizing maxing out pre-tax retirement accounts to end up in the sweet spot of paying no to minimum tax on all the dividends being thrown off in the taxable account is one part of the theory. It's taken the last 18 years of contributions into our tax deferred accounts, but our tax deferred accounts have finally caught up (balance wise) to the taxable account we have had for 32 years.

As others have pointed out above, funding the underperforming assets in the taxable account with subsequent investments and reinvestments to rebalance in a non-taxable fashion is standard. Doing that in a DIY fashion is one way, in spite of it requiring a hands on approach to keep your AA balanced. Having a taxable account where rebalancing is automatically done with subsequent investments and the reinvestment of dividends and interest is also available for a hands off/automatic approach (M1 Finance, Acorns, etc...). Having done both the DIY and using the robo firms since they came out - I much prefer the latter as it is all automatic and easy-peasy.

Paul Merriman's Ultimate Buy & Hold Portfolios are all set up at M1 Finance, and he has versions for a taxable account. You can see what bond ETFs he uses in the taxable account version to keep tax drag low. As explained above, M1 Finance uses all subsequent investments, dividends, and bond interest to fund the underperforming assets to keep the AA in balance in a non-taxable event way. You might want to study his bond mix to get ideas for the taxable version. All links to the M1 Finance pies with his Ultimate B&H Portfolio are here:

https://paulmerriman.com/m1-finance/

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Re: How to invest only in a taxable account?

Post by KlangFool »

etfan wrote: Sun Aug 01, 2021 9:03 pm
KlangFool wrote: Sun Aug 01, 2021 8:05 pm ... the person should use ALL of the accounts for one OVERALL portfolio.
Just to explain this point better because I may be missing something.

1- It is possible to consider all your accounts a single portfolio while still avoiding cross-account rebalancing. Mirroring would be one way to do it, using identical or equivalent funds.

2- The problem with cross-account rebalancing is it renders things like target date funds kind of pointless. If my rebalancing activities cause me to end up with a bunch of bonds and stocks in my tax advantaged accounts, then why bother with TDF's? It would be simpler at that point to only have the 3-fund portfolio.

Deleted.

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Re: How to invest only in a taxable account?

Post by etfan »

CyclingDuo wrote: Sun Aug 01, 2021 9:27 pm
Well we lived the theory for quite a number of years as we lived and worked outside of the US for more than a decade.
Seems like you had a good reason. Maybe I'm just lazy :(

Having done both the DIY and using the robo firms since they came out - I much prefer the latter as it is all automatic and easy-peasy.
I'll check it out, though I'm reluctant to have even more accounts.
You might want to study his bond mix to get ideas for the taxable version. All links to the M1 Finance pies with his Ultimate B&H Portfolio are here:

https://paulmerriman.com/m1-finance/
Seems like it's a mix of intermediate muni with intermediate treasuries.
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Re: How to invest only in a taxable account?

Post by etfan »

KlangFool wrote: Sun Aug 01, 2021 9:30 pm
1) Why mirroring is necessary and/or beneficial?
Easier and simpler. It doesn't take an Excel spreadsheet to maintain a mirrored portfolio.
4) What is wrong with bond funds and stock funds in tax-advantaged accounts?

<<It would be simpler at that point to only have the 3-fund portfolio.>>

5) Why do you think so?
Because I'd rather just have the 3-funds alone instead of the 3-funds PLUS the TDF.
Let's start with something simple: 2 accounts: 1 x Trad 401K and 1 X Taxable account.

What is wrong with TDF in the 401K and 100% stock in the taxable account? Why do you need rebalancing?
I would have to keep exchanging one TDF for another in order to get more or less bonds depending on the stocks performance. Right? Otherwise, if the stocks in taxable grow too fast, the percentage of bonds on the overall portfolio would go down unless I switch to a different TDF that has a higher bond allocation.
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Re: How to invest only in a taxable account?

Post by KlangFool »

etfan wrote: Sun Aug 01, 2021 10:47 pm
KlangFool wrote: Sun Aug 01, 2021 9:30 pm
1) Why mirroring is necessary and/or beneficial?
Easier and simpler. It doesn't take an Excel spreadsheet to maintain a mirrored portfolio.
4) What is wrong with bond funds and stock funds in tax-advantaged accounts?

<<It would be simpler at that point to only have the 3-fund portfolio.>>

5) Why do you think so?
Because I'd rather just have the 3-funds alone instead of the 3-funds PLUS the TDF.
Let's start with something simple: 2 accounts: 1 x Trad 401K and 1 X Taxable account.

What is wrong with TDF in the 401K and 100% stock in the taxable account? Why do you need rebalancing?
I would have to keep exchanging one TDF for another in order to get more or less bonds depending on the stocks performance. Right? Otherwise, if the stocks in taxable grow too fast, the percentage of bonds on the overall portfolio would go down unless I switch to a different TDF that has a higher bond allocation.
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Re: How to invest only in a taxable account?

Post by CyclingDuo »

etfan wrote: Sun Aug 01, 2021 10:42 pm
CyclingDuo wrote: Sun Aug 01, 2021 9:27 pm
Well we lived the theory for quite a number of years as we lived and worked outside of the US for more than a decade.
Seems like you had a good reason. Maybe I'm just lazy :(

Having done both the DIY and using the robo firms since they came out - I much prefer the latter as it is all automatic and easy-peasy.
I'll check it out, though I'm reluctant to have even more accounts.
You might want to study his bond mix to get ideas for the taxable version. All links to the M1 Finance pies with his Ultimate B&H Portfolio are here:

https://paulmerriman.com/m1-finance/
Seems like it's a mix of intermediate muni with intermediate treasuries.
Yup.

Regarding the benefits of a taxable account compared to traditional and Roth tax deferred accounts, Jake Broe put up a good video about a week ago...

https://youtu.be/bDSEghOx-K8

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Re: How to invest only in a taxable account?

Post by OpenMinded1 »

etfan wrote: Sun Aug 01, 2021 5:40 pm
The only problem with LS or TDF is they hold tax-inefficient bonds. But the Vanguard tax managed balanced fund is 50/50 so not much choice in asset allocation.
The Vanguard Tax-managed Balanced Fund contains roughly 50% municipal bonds and 50% stocks that generally don't pay dividends. Also, it's managed to offset taxable gains with losses. This makes it tax efficient. In addition, its expense ratio is relatively low at about 0.18%, and according to Morningstar it has performed near the top of the 30% - 50% stock category over a fairly long period.

Keeping the above in mind, it might not be a bad choice for a hands-off fund to hold in a taxable account from say 10 to 15 years before retirement to death, especially for people in higher tax brackets.

So no, you don't have much choice in asset allocation, but 50/50 is reasonable for a large portion of the lifetime of many investors.
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Re: How to invest only in a taxable account?

Post by etfan »

KlangFool wrote: Mon Aug 02, 2021 6:47 am 1) Why do you think that you don't need a spreadsheet to keep mirroring working?
If all I have is a single TDF in all accounts including taxable, then there's no math involved.
2) Why do you think you need to keep changing TDF? What is the rebalancing rule?
I'm not great at math so this may be all wrong:

For simplicity, the TDF has $100K total with 80/20 AA, and there is $100K US stocks in taxable. That means the overall bond allocation is 10%. If stocks go up, the TDF will rebalance, but it's obviously not aware of the taxable account so the bond allocation will go down slightly.

Aside from changing stock prices, suppose that in the scenario above, I don't want the bond allocation to be 10%. I would have to increase the bonds in taxable to fix that. So the taxable account can't be 100% stocks.

5) 40% of my portfolio is in the Wellington 60/40 fund. The stock has to change by 30% or more before I need to rebalance.
Is this a personal rule or are you saying the change needs to reach 30% before it is significant enough to warrant a manual rebalance?
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Re: How to invest only in a taxable account?

Post by etfan »

CyclingDuo wrote: Mon Aug 02, 2021 7:26 am Regarding the benefits of a taxable account compared to traditional and Roth tax deferred accounts, Jake Broe put up a good video about a week ago...

https://youtu.be/bDSEghOx-K8
Thanks for the link. Yet another video that overturned a few of things I took for granted. I can't wait for the government to add even more laws and brackets and percentages and choices!
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Re: How to invest only in a taxable account?

Post by reln »

etfan wrote: Sun Aug 01, 2021 8:51 pm
reln wrote: Sun Aug 01, 2021 8:41 pm Rebalance only with:
1) new contributions
2) dividends
3) cap gains
So a very simple example would be the taxable account could consist solely of VTI (total stock market) WITHOUT auto-reinvesting dividends, and VTEB (muni bonds), and rebalance using those 3 steps. Is that the most tax-efficient AA?
Right, since you already pay taxes on divs and cap gain distributions.
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Re: How to invest only in a taxable account?

Post by ad2007 »

etfan wrote: Sun Aug 01, 2021 8:51 pm
reln wrote: Sun Aug 01, 2021 8:41 pm Rebalance only with:
1) new contributions
2) dividends
3) cap gains
So a very simple example would be the taxable account could consist solely of VTI (total stock market) WITHOUT auto-reinvesting dividends, and VTEB (muni bonds), and rebalance using those 3 steps. Is that the most tax-efficient AA?
We're retired, most of our money is in taxable, and due to less travel (Covid), we spend less than the div income from our taxable account. Rebalancing with left lover div does not move the needle, selling stocks since the run up to rebalance costs money (taxes) and I've decided against it. Consequently our AA has drifted and is riskier in the past year.

I'm not sure what the most tax-efficient AA is or really mean in the long run. How would you define that?
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etfan
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Re: How to invest only in a taxable account?

Post by etfan »

OpenMinded1 wrote: Mon Aug 02, 2021 8:25 am The Vanguard Tax-managed Balanced Fund contains roughly 50% municipal bonds and 50% stocks that generally don't pay dividends. Also, it's managed to offset taxable gains with losses. This makes it tax efficient. In addition, its expense ratio is relatively low at about 0.18%, and according to Morningstar it has performed near the top of the 30% - 50% stock category over a fairly long period.

Keeping the above in mind, it might not be a bad choice for a hands-off fund to hold in a taxable account from say 10 to 15 years before retirement to death, especially for people in higher tax brackets.

So no, you don't have much choice in asset allocation, but 50/50 is reasonable for a large portion of the lifetime of many investors.
Actually, I wonder if the 50/50 allocation works out well as a neutral factor. In other words, since it always adds an equal amount of bonds and stocks to the TDF allocation, it won't affect the ratio. :?
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etfan
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Re: How to invest only in a taxable account?

Post by etfan »

ad2007 wrote: Mon Aug 02, 2021 9:44 am I'm not sure what the most tax-efficient AA is or really mean in the long run. How would you define that?
I misspoke. I meant I didn't want to end up with a collection of funds that are too costly to maintain and rebalance due to tax costs.

Ideally the taxable account would contain a combination of funds that are few in number, tax efficient and have a neutral effect on the TDF AA to make maintaining the desired AA simpler.

Based on this thread, the options seem to be:
1- Buy the same TDF that you have in retirement accounts in the taxable account
2- Keep a 50/50 AA of VTI / muni+treasuries in taxable
3- Just buy a single fund (Vanguard Tax Managed Balanced Fund) in taxable (VTMFX)
OpenMinded1
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Re: How to invest only in a taxable account?

Post by OpenMinded1 »

etfan wrote: Mon Aug 02, 2021 9:47 am
OpenMinded1 wrote: Mon Aug 02, 2021 8:25 am The Vanguard Tax-managed Balanced Fund contains roughly 50% municipal bonds and 50% stocks that generally don't pay dividends. Also, it's managed to offset taxable gains with losses. This makes it tax efficient. In addition, its expense ratio is relatively low at about 0.18%, and according to Morningstar it has performed near the top of the 30% - 50% stock category over a fairly long period.

Keeping the above in mind, it might not be a bad choice for a hands-off fund to hold in a taxable account from say 10 to 15 years before retirement to death, especially for people in higher tax brackets.

So no, you don't have much choice in asset allocation, but 50/50 is reasonable for a large portion of the lifetime of many investors.
Actually, I wonder if the 50/50 allocation works out well as a neutral factor. In other words, since it always adds an equal amount of bonds and stocks to the TDF allocation, it won't affect the ratio. :?
Each time it auto rebalances, which is probably fairly often, it would just add the amount of bonds or stocks necessary to bring the allocation back to 50/50. It wouldn't always add equal amounts of bonds and stocks. Maybe I'm not understanding your question, or the point you are trying to make?
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MrBobcat
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Re: How to invest only in a taxable account?

Post by MrBobcat »

etfan wrote: Sun Aug 01, 2021 8:45 pm
Essentially I'm trying to understand the real cost of simplifying a portfolio by avoiding any cross-account rebalancing.
I'm trying to understand why you think a per account type rebalancing is more simple than cross-account rebalancing.

Anyway, if you want to avoid having to rebalance then just get a target date or lifestyle fund and put the same fund in all accounts. Then take a look at the amount and type of taxable distributions the funds kicks off and apply it to your tax situation if you want to get a handle on the tax costs.
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Re: How to invest only in a taxable account?

Post by etfan »

OpenMinded1 wrote: Mon Aug 02, 2021 10:04 am Each time it auto rebalances, which is probably fairly often, it would just add the amount of bonds or stocks necessary to bring the allocation back to 50/50. It wouldn't always add equal amounts of bonds and stocks.
It would always maintain an equal amount of bonds and stocks in dollar value. Which means that it won't affect your overall AA.

For example, if your TDF AA is 70/30, and you have a balanced fund in taxable of 50/50, then your overall AA across all accounts would be 70/30, since your balanced fund will never add or remove stocks without also adding/removing bonds of an equal value.

Either that or my math is wrong :)
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Re: How to invest only in a taxable account?

Post by etfan »

MrBobcat wrote: Mon Aug 02, 2021 10:15 am I'm trying to understand why you think a per account type rebalancing is more simple than cross-account rebalancing.
Suppose that you have a single TDF across all accounts, taxable and tax-advantaged.

How is that not simpler than distributing bonds and stocks all over the accounts and having to sell here and buy there in order to maintain an overall AA? You practically never have to touch anything other than to add money, and you never have to wonder where to add the money. Nothing you do would mess up your AA in any way.
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Re: How to invest only in a taxable account?

Post by Hyperchicken »

etfan wrote: Mon Aug 02, 2021 10:36 am For example, if your TDF AA is 70/30, and you have a balanced fund in taxable of 50/50, then your overall AA across all accounts would be 70/30, since your balanced fund will never add or remove stocks without also adding/removing bonds of an equal value.

Either that or my math is wrong :)
Your math is wrong. :wink:

Your overall AA across all accounts would be somewhere between 70/30 and 50/50 depending on the value of each account.

It would probably help you to make a simple spreadsheet with the value of each account, the value of stock and bonds portion per account, and then the total line and its AA.
Last edited by Hyperchicken on Mon Aug 02, 2021 11:19 am, edited 1 time in total.
aristotelian
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Re: How to invest only in a taxable account?

Post by aristotelian »

May I ask why one would want to do this? I can't imagine a scenario where you would not want any kind of tax advantaged/retirement account.
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Re: How to invest only in a taxable account?

Post by KlangFool »

etfan wrote: Mon Aug 02, 2021 9:08 am
I'm not great at math so this may be all wrong:

For simplicity, the TDF has $100K total with 80/20 AA, and there is $100K US stocks in taxable. That means the overall bond allocation is 10%. If stocks go up, the TDF will rebalance, but it's obviously not aware of the taxable account so the bond allocation will go down slightly.
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Re: How to invest only in a taxable account?

Post by celia »

etfan wrote: Sun Aug 01, 2021 10:42 pm I'll check it out, though I'm reluctant to have even more accounts.
What’s the problem in having more than one account? In particular, you should have some retirement accounts besides the assets in taxable. But your desired Asset Allocation should be spread out over ALL your accounts, not to each account. For example your bonds should be in tax-deferred accounts because interest does not qualify for lower tax brackets like LTCG and Qualified Dividends do. Interest in taxable is taxed in full, just as your wages are.
etfan wrote: Sun Aug 01, 2021 8:45 pm Essentially I'm trying to understand the real cost of simplifying a portfolio by avoiding any cross-account rebalancing.
You can rebalance by only making changes in one account. But it is best if that account is tax-deferred or Roth, since activity within those accounts don’t have any tax implications.
etfan wrote: Mon Aug 02, 2021 9:08 am I'm not great at math so this may be all wrong:

For simplicity, the TDF has $100K total with 80/20 AA, and there is $100K US stocks in taxable. That means the overall bond allocation is 10%. If stocks go up, the TDF will rebalance, but it's obviously not aware of the taxable account so the bond allocation will go down slightly.

Aside from changing stock prices, suppose that in the scenario above, I don't want the bond allocation to be 10%. I would have to increase the bonds in taxable to fix that. So the taxable account can't be 100% stocks.
Or you can add a bond-only fund to the account with the Target Date fund.
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Re: How to invest only in a taxable account?

Post by OpenMinded1 »

etfan wrote: Mon Aug 02, 2021 10:36 am
OpenMinded1 wrote: Mon Aug 02, 2021 10:04 am Each time it auto rebalances, which is probably fairly often, it would just add the amount of bonds or stocks necessary to bring the allocation back to 50/50. It wouldn't always add equal amounts of bonds and stocks.
It would always maintain an equal amount of bonds and stocks in dollar value. Which means that it won't affect your overall AA.

For example, if your TDF AA is 70/30, and you have a balanced fund in taxable of 50/50, then your overall AA across all accounts would be 70/30, since your balanced fund will never add or remove stocks without also adding/removing bonds of an equal value.

Either that or my math is wrong :)
Okay. Without knowing your particulars like age and time to retirement, I was just suggesting that the Tax-managed Balanced Fund might fit the bill by itself if you want a hands-off investment that is pretty tax efficient and has fairly low management expenses. It seems like you are looking for a higher percentage in stocks at least in the near future.
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etfan
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Re: How to invest only in a taxable account?

Post by etfan »

Hyperchicken wrote: Mon Aug 02, 2021 10:45 am
etfan wrote: Mon Aug 02, 2021 10:36 am For example, if your TDF AA is 70/30, and you have a balanced fund in taxable of 50/50, then your overall AA across all accounts would be 70/30, since your balanced fund will never add or remove stocks without also adding/removing bonds of an equal value.

Either that or my math is wrong :)
Your math is wrong. :wink:

Your overall AA across all accounts would be somewhere between 70/30 and 50/50 depending on the value of each account.
Oops. :oops:

You're obviously right. And it doesn't take a spreadsheet to prove it.
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Re: How to invest only in a taxable account?

Post by UpperNwGuy »

It seems to me that what you want to do is to hold:

Taxable Account: VTI

Retirement Account: VTI, VXUS, and BND

Do all your rebalancing in your retirement account.

Why would this not work for you?
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etfan
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Re: How to invest only in a taxable account?

Post by etfan »

aristotelian wrote: Mon Aug 02, 2021 10:57 am May I ask why one would want to do this? I can't imagine a scenario where you would not want any kind of tax advantaged/retirement account.
This has to do with avoiding cross-account rebalancing, not avoiding tax advantaged accounts altogether.
Robert_007
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Re: How to invest only in a taxable account?

Post by Robert_007 »

Berkshire is the perfect stock for a taxable portfolio. No dividend getting taxed as ordinary income. Diversified solid holding.
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etfan
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Re: How to invest only in a taxable account?

Post by etfan »

KlangFool wrote: Mon Aug 02, 2021 11:14 am 1) Overall AA = 90/10

2) If stock drops 20%, the 100% stock = 80K. The 80/20 TDF fund loses 16% = 84K.

3) 80/20 TDF = 67.2K of stock and 16.8K of bond

4) Overall AA = (67.2+ 80)/(80+84) = 147.2 /164 = 89.8% of stock. Aka, 90/10.

5) Why do you need to rebalance even if the stock drops 20%?
I see. So you're saying the difference is insignificant. Using my example, even a 50% drop in stocks still seems insignificant.

But that only works for those amounts. If I contribute too much money to the taxable account, the AA will change. That's why adding munis in taxable would help.
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