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.
Deleted.
KlangFool
Last edited by KlangFool on Tue Aug 03, 2021 9:20 pm, edited 1 time in total.
Robert_007 wrote: ↑Mon Aug 02, 2021 8:15 pmBerkshire is the perfect stock for a taxable portfolio. No dividend getting taxed as ordinary income. Diversified solid holding.
Perfect? In what way?
It has underperformed the S&P 500 for the past 3 years, 5 years, 10 years, and even 13 years.
KlangFool wrote: ↑Mon Aug 02, 2021 9:11 pm
You are trolling now.
Why would anyone do that? Sorry it came across that way. I benefit quite a lot from your advice.
etfan wrote: ↑Mon Aug 02, 2021 8:45 pm
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.
Show me the numbers if you want to go down that route. It is obvious to me that you have not really calculate any of those numbers.
I didn't think I had to. The example has 100K in taxable VTI and 100K in tax advantages TDF. If you contribute a million dollars to the taxable account, then obviously the AA will change drastically.
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.
Can you explain what this means and why you would want to avoid it?
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.
Can you explain what this means and why you would want to avoid it?
It just means I believe it would be simpler to avoid it. I know it goes against the common advice here but I find bucketing/mental accounting to be useful.
grabiner wrote: ↑Sun Aug 01, 2021 5:52 pm
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.
grabiner wrote: ↑Sun Aug 01, 2021 5:52 pm
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.
Target Date Fund in taxable?
I prefer not to use target-date funds in taxable, because of the tax cost if you want to change your allocation. For example, if you hold a separate taxable bond fund and want to hold stock instead, or switch to NY munis because you moved to NY, you can do that for little or no capital gain; if your taxable bonds are part of a target-date fund, you will have a capital gain for doing that. But if you value the simplicty, the target-date index funds are reasonable choices for a taxable account.
grabiner wrote: ↑Sun Aug 01, 2021 5:52 pm
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.
Target Date Fund in taxable?
I prefer not to use target-date funds in taxable, because of the tax cost if you want to change your allocation. For example, if you hold a separate taxable bond fund and want to hold stock instead, or switch to NY munis because you moved to NY, you can do that for little or no capital gain; if your taxable bonds are part of a target-date fund, you will have a capital gain for doing that. But if you value the simplicty, the target-date index funds are reasonable choices for a taxable account.
Even if a person doesn't change the allocation, a target date fund might start off being relatively tax efficient when it's mostly stocks, but then will become less efficient over time as the bond portion increases. I agree that a TD fund comprised of index funds is best if a person decides to go with a TD fund because there is less trading. This makes it more tax efficient than the average actively-managed one that has a high turnover rate.
Last edited by OpenMinded1 on Tue Aug 03, 2021 8:59 am, edited 1 time in total.
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.
Can you explain what this means and why you would want to avoid it?
It just means I believe it would be simpler to avoid it. I know it goes against the common advice here but I find bucketing/mental accounting to be useful.
Avoid what? Different allocations in different accounts? I have never heard the term cross account rebalancing.
aristotelian wrote: ↑Tue Aug 03, 2021 6:47 am
Avoid what? Different allocations in different accounts? I have never heard the term cross account rebalancing.
Yes. Cross account rebalancing means using multiple accounts to maintain an
overall
asset allocation rather than mirroring the same asset allocation in each account. There is a thread on that: viewtopic.php?t=287967
Ideally, one can just buy a single target date fund in all accounts. But the target date fund is not tax efficient in a taxable account, so one might look for alternatives (just for the taxable account) that can be used to approximate the TDF. For instance, a total stock market fund plus a treasury fund or municipal fund.
KlangFool wrote: ↑Mon Aug 02, 2021 9:11 pm
You are trolling now.
Why would anyone do that? Sorry it came across that way. I benefit quite a lot from your advice.
etfan wrote: ↑Mon Aug 02, 2021 8:45 pm
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.
Show me the numbers if you want to go down that route. It is obvious to me that you have not really calculate any of those numbers.
I didn't think I had to. The example has 100K in taxable VTI and 100K in tax advantages TDF. If you contribute a million dollars to the taxable account, then obviously the AA will change drastically.
Deleted.
KlangFool
Last edited by KlangFool on Tue Aug 03, 2021 9:19 pm, edited 1 time in total.
etfan wrote: ↑Tue Aug 03, 2021 10:04 am
Yes. Cross account rebalancing means using multiple accounts to maintain an overall asset allocation rather than mirroring the same asset allocation in each account. There is a thread on that: viewtopic.php?t=287967
Ideally, one can just buy a single target date fund in all accounts. But the target date fund is not tax efficient in a taxable account, so one might look for alternatives (just for the taxable account) that can be used to approximate the TDF. For instance, a total stock market fund plus a treasury fund or municipal fund.
I don't know that a target date fund is any less tax efficient than maintaining multiple stock/bond funds and rebalancing between the two manually. Those are still taxable transactions so you will incur capital gains whereas the target date fund incurs capital gains distributions.
If you are OK with 60/40, you could do Vanguard Tax Managed Balanced Index (VTMFX) in taxable with Balanced Index in retirement accounts. Is that what you have in mind?
Using multiple accounts in taxable seems way more complicated than simply holding bonds in your traditional IRA and rebalancing as necessary.
aristotelian wrote: ↑Tue Aug 03, 2021 10:45 am
I don't know that a target date fund is any less tax efficient than maintaining multiple stock/bond funds and rebalancing between the two manually. Those are still taxable transactions so you will incur capital gains whereas the target date fund incurs capital gains distributions.
If you are OK with 60/40, you could do Vanguard Tax Managed Balanced Index (VTMFX) in taxable with Balanced Index in retirement accounts. Is that what you have in mind?
The balanced fund is less tax-efficient if you want to hold fewer bonds, or a different type of bonds, or bonds in a different account, because it forces you to sell stocks at the same time.
And if you want to increase your bond allocation in this account, a balanced fund forces you to either take a larger capital gain than necessary (selling all rather than a third of your stocks to switch from 60% to 40% stock) or lose the simplicity (selling 1/3 of the balanced fund to buy a bond fund).
KlangFool wrote: ↑Tue Aug 03, 2021 10:34 am
Someone had a portfolio of 200K with an AA of 80/20 or 90/10. The person has one million more now. Aka, a portfolio of 1.2 million. Why won't the person change his AA to something other than 80/20 or 90/10? In fact, 60/40 or 70/30 would be a lot more reasonable.
It is normal for someone to change his/her AA when the portfolio is significantly bigger. So, why would the AA change drastically to be a problem? It is normal for someone to do that.
How should this person with the 1.2 million portfolio change their AA to 60/40, given that their current position is $200K TDF in tax-advantaged and $1M in VTI in taxable?
aristotelian wrote: ↑Tue Aug 03, 2021 10:45 am
If you are OK with 60/40, you could do Vanguard Tax Managed Balanced Index (VTMFX) in taxable with Balanced Index in retirement accounts. Is that what you have in mind?
My requirements are:
1- Different AA depending on how close to retirement (glide path).
2- Hands-off as possible, to reduce behavioral pitfalls and also in case of death.
3- Least number of funds and least cross-account planning. Ideally each account could function as a standalone unit, for further simplicity.