Lifestrategy Growth in Taxable Brokerage

[zen_invest]

Hey Bogleheads,

New investor here and appreciating this community.

Before I share my question, I've been reading other posts and I'm aware of the perspectives regarding the tax-inneficiency of holding Lifestrategy funds in taxable accounts. I am new to investing, looking for simplicity in passive investing and a 'good enough' situation

I opened a LifeStrategy Growth Fund (VASGX) [80/20] in a taxable account last Fall and funded it with a lumpsum and have been adding to it monthly to DCA.

I'm maxing out my 401k each year and my goal was to have something simple to fund for the next 15+ years.
I am mid-thirties, have an emergency fund and some savings for a deposit in a high-yield savings account.

When I researched the Lifestrategy funds, I really valued their simplicity and understood that I would only sell in the future if I a) needed the cash for a big purchase/goal or b) wanted to switch to another Lifestrategy fund to decrease risk.

I may want to move to a Lifestrategy Moderate Growth (or other, less risky or more tax efficient funds) in the distant future. I'm not sure when, hence the move to use the VASGX vs. a Target fund.

I understand that this will have some tax implications, but I value simplicity and may want to reduce risk from 80% stocks.

Is this an acceptable/'good enough' strategy and has anyone does this themselves and can share any advice on what I'm getting into?

I was feeling ready to 'stay the course' and fund this account, but I'm having a bit of a wobble now and want to be confident in my course.

Thank you in advance!

[southernlucky]

I love LifeStrategy funds and am a big fan even in taxable accounts despite the tax inefficiency as I feel the benefits of a set it and forget solution that automatically rebalances is worth it long term. I think you made a great choice. Treat your portfolio like a bar of soap—the more you touch it the smaller it gets.

Exchanging the entire position in your taxable account to reduce your stock % is not the best approach imo. If you wish to change your overall AA you could instead lighten up your stock % in your other tax deferred accounts like an IRA where there is no taxable consequence for changing funds. You could also just convert a portion of your taxable holding to fixed income such that the desired stock % is obtained. Here are examples of each approach.

1. If taxable is 50% of your portfolio and tax deferred is the remainder and both are 80% stocks today you could simply exchange your tax deferred funds from 80% to 40% stocks. So 50% at 80% plus 50% at 40% is now 60% stock overall.

2. If taxable is 100% of your portfolio and at 80% stock then you could convert just 25% of it to fixed income. So 75% at 80% plus 25% at 0% is now 60% stock overall.

With either approach simply check your overall AA every few years and tweak again as needed to maintain your desired AA. Good luck!

[retiredjg]

Welcome to the forum.

If you are in a lower tax bracket, your solution may be "good enough" for awhile since simplicity seems so high on your priority list. However, as you increase the bond allocation, the tax-inefficiency is just going to increase. And the balance of that account will increase over time which will also increase the problem.

I'm not sure the simplicity of a one fund solution is valuable enough in the long run to pay much in extra taxes. There may be other ways to set up the portfolio that would be more tax-efficient.

Consider a one fund solution such as Vanguards' Tax Managed Balanced Fund (which is about 50/50) if you are in a high enough tax bracket to need tax-exempt bond funds.

Or consider a two fund solution (maybe total stock index and a treasury bond fund or a tax-exempt bond fund or I Bonds).

Or just holding one fund such as total stock index in taxable and adjust the rest of your portfolio to account for that.

Whether what you are doing is just a little bit "bad" or something more significant depends on facts we don't know. Your tax bracket, the size of your taxable account in relation to the rest, whether you are filling all possible tax-advantaged accounts, filing status, etc.

My instinct is this may not be a good direction for you to take. This is based on your apparent younger age and the ability to have enough income to invest in taxable on a regular basis (in addition to filling a work plan and maybe an IRA and an HSA). If you have that much income, tax efficiency in your taxable account may be more important than you realize.

My instinct might be different if you were 70 years old and in the 12% tax bracket. That might be a case where simplicity really is more important than a little tax-inefficiency in the long run.


Consider if/when you are interested in posting more information. See the link at the bottom of this message for how to do that.

[8foot7]

One item for consideration is the much-publicized surprise distribution (and resulting tax bill) from a LifeStrategy fund last year. Perhaps Vanguard have learned their lesson. Perhaps not.

[Mike Scott]

There is a tax cost to this choice made for simplicity. You can figure out what that is for yourself in your tax bracket and decide if it is OK. There is a section in the wiki on tax efficient placement of funds. I do hold a life strategy fund in one account but I would not hold it in taxable, My goals and perspective on simplicity are probably different than yours.

[Chadnudj]

I opened a LifeStrategy Growth Fund (VASGX) [80/20] in a taxable account last Fall and funded it with a lumpsum and have been adding to it monthly to DCA.

I may want to move to a Lifestrategy Moderate Growth (or other, less risky or more tax efficient funds) in the distant future. I'm not sure when, hence the move to use the VASGX vs. a Target fund.

I understand that this will have some tax implications, but I value simplicity and may want to reduce risk from 80% stocks.

If just buying/DCAing into LifeStrategy Growth makes it easier for you and is something you can stick with, it's worth doing. Is there a bit of tax drag? Sure. But almost surely not enough to worry about versus the benefits to you overall in having something that is easy that you will stick with (the last part is important) without getting panicky and trading in and out of stuff.

However, I'd caution down the line AGAINST moving from LifeStrategy Growth to LifeStrategy Moderate Growth by selling the former and putting the lump sum into the latter, simply because of the capital gains tax implications for what is, in reality, not a change to your investments (still the same underlying funds in both in terms of VTSAX, etc., but at different allocations). What you could do instead at the point you want to move to a less risky fund is stop new contributions to LifeStrategy Moderate Growth (and/or stop reinvesting dividends/realized capital gains there) and instead contribute to more conservative LifeStrategy funds (Moderate Growth, Conservative Growth, whatever) and let them gradually build up and reduce your stock AA naturally/gradually.

For instance, LifeStrategy Growh is 80/20, LifeStrategy Moderate Growth is 60/40. If you have a 50/50 portfolio of each, you're at roughly 70/30 stocks/bonds overall.

[BrooklynInvest]

Wasn't it the Lifecycle Funds (ie target dates) that had the big cap gains distributions, not Lifestrategy?

I use a Lifestrategy 60-40 in taxable for my "bridge to 401k" money. My 401k's 60-40 as well but I need money to get me from 56 to 59 1/2, hence the 60-40 in taxable. Set it and forget it is a beautiful thing.

[backpacker61]

Something that you can stick with psychologically is very important.

I would call it well good enough. You're already light years beyond the people with accounts at Edward Jones and Ameriprise.

[retiringwhen]

If you want to be a bit more tax efficient and not really complicate things much, I suggest instead of LS Growth, you buy Total Stock Market Funds that will not throw off a lot of dividends or CG distributions over time

You could start buying VTSAX/VTI (US Total Stock) or VTWAX/VT (Total World Stock Market) every month based upon your choice for world stock AA. It will be more tax efficient. This may matter a lot depending upon your long-term income and asset levels. Maxing your retirement accounts suggest tome that you will have significant assets in the long run.

The only rub is that eventually, the size of this account vs. your possibly become large enough vs. your Retirement Accounts that you become stock heavy. If you are using Target Date funds in you 401K/IRA, you just transfer them to a close retirement date to lower your stock allocation. This can be done simply and without any tax implications. This can also help keep the efficiency of your taxable account as you don't rebalance there!

The nice thing about DCA into a stock fund is that in the future, if you desire to sell some, there are lots of options for low-cost vs. high-cost funds and you can easily optimize your taxes at time of sale as appropriate. This is less true with LS Funds as they distribute much of their income instead of deferring them as unrealized gains, reinvesting helps, but already paid all the taxes and that cash has to come from somewhere!

I would strongly discourage selling in taxable to rebalance though unless absolutely necessary. This is a major weakness in your LS Growth -> LS Moderate Growth plan. This will likely be a very expensive decision that should be avoided.

Simplicity is good, but tax efficiency is good too. You always must choose between those two constraints if even implicitly. My bias is toward tax optimization where it is straight forward.

As an aside, unrealized capital gains on assets in taxable are also a good estate planning tool as per current US law. They are treated arguably better than Roth funds for beneficiaries due to the basis reset and no requirement to take RMDs. This argues for putting the funds with the highest expected growth in taxable accounts. This cannot be fully quantified though as tax laws have and will change.

[retiringwhen]

Wasn't it the Lifecycle Funds (ie target dates) that had the big cap gains distributions, not Lifestrategy?

I use a Lifestrategy 60-40 in taxable for my "bridge to 401k" money. My 401k's 60-40 as well but I need money to get me from 56 to 59 1/2, hence the 60-40 in taxable. Set it and forget it is a beautiful thing.

Yes, the TD funds had the recent debacle, but the structure of LifeStrategy Funds make them susceptible as well. Any restructuring of the underlying funds would have expensive consequences. This is a common problem with all Balanced Funds from Vanguard or any fund provider.

At the time of the TD mess, I did an analysis aided by a series of Morningstar articles that proved to me that large unexpected CG distributions from Retirement focused Balanced funds are not actually unexpected, you can expect on one event about every 10 years per fund! The reason? 90% or more of all these funds' assets sit in tax-deferred accounts and there is little or no incentive for the fund provider to focus on tax efficiency, so they don't. They have no fiduciary responsibility to be tax efficient either!

Regardless, they all throw off CG distributions just about every year that should be considered undesirable in a taxable account.


BTW, there has been significant underlying fund AA changes in the LifeStrategy funds in their lifetime including the addition, then removal of the Asset Allocation fund (a debacle in its own right) as well as significant changes in the ex-US portions of both bonds and stocks. None of those changes had any tax ripple for tax-deferred investors, but cost all the taxable investors over time in higher immediate taxes.

[zen_invest]

First, thank you for the prompt responses here and you all for sharing some insight on this.

I'm hearing that overall, an alternative strategy to selling the Lifestrategy fund in the future for a lower/different asset allocation Lifestrategy/fund, is to keep this fund as is (VASGX in this case) and then tweaking my asset allocation in other (tax deferred accounts; like my 401k) to be more bond heavy when I am ready to decrease risk.

This would leave me with one account (taxable) with higher stocks and the other (tax deferred) with higher bonds?

Overall between these accounts it would shake out to be more bond heavy, even though one account (the VASGX) would be higher in stocks/risker? I suppose I'd want enough in my 401k for income (in addition to social security) in case the taxable took a hit; but I could pull from the Taxable/VASGX to supplement income/expenses when needed.

Is this thinking along the right lines?

Thank you all again.

[retiredjg]

I think if you don't take this fund out of taxable now, later on you will wish you had. Fixing it now is easier and probably cheaper than fixing it later.

However, there is not nearly enough information in your posts to make anything other than a guess. That's my guess.

[wetgear]

I think if you don't take this fund out of taxable now, later on you will wish you had. Fixing it now is easier and probably cheaper than fixing it later.

However, there is not nearly enough information in your posts to make anything other than a guess. That's my guess.

+1 give us the full picture and you’ll get better advice. Could be a good plan or have some big flaws we just don’t know with the available information.

[retiringwhen]

First, thank you for the prompt responses here and you all for sharing some insight on this.

I'm hearing that overall, an alternative strategy to selling the Lifestrategy fund in the future for a lower/different asset allocation Lifestrategy/fund, is to keep this fund as is (VASGX in this case) and then tweaking my asset allocation in other (tax deferred accounts; like my 401k) to be more bond heavy when I am ready to decrease risk.

I think you are taking the wrong lesson here. Pick a fund you can hold forever. You are picking on that is sub-optimal and then you are stuck with it.

This would leave me with one account (taxable) with higher stocks and the other (tax deferred) with higher bonds?

This desirable in the long-run. The Bogleheads Wiki is quite clear on the analysis that stocks in Taxable, Bonds in Tax Deferred, and usually Stocks in Roth. This would be a feature not a bug.

I will reiterate, you are better off in almost all future scenarios if you start with equities only in taxable.

[smooth_rough]

For taxable account maybe Vanguard Tax Managed Balanced Fund.

[retiringwhen]

For taxable account maybe Vanguard Tax Managed Balanced Fund.

This fund has a 50/50 AA, so much more conservative than their stated object for now.

Plus it invests in Muni's and their tax-equivalent returns only make sense for investors in the absolutely highest tax brackets. Really, this only makes sense for folks with VERY large portfolios (8 digits or more) or or annual taxable income greater than $700,000/year. In those cases, the investor is likely to be better served by buying a state-specific Muni fund instead. This is really not a fund with a large target audience. In fact, I can't think of any use case where is the is the preferred choice.

[zen_invest]

Thank you all for your continued responses and insight.

I may look into moving my VASGX (sooner than later) to a 2-3-fund portfolio, which will give me more control longer-term (and I'll learn about re-balancing myself).

If I do go this way, I suppose it makes sense to wait a year from funding the VASGX with the lump sum I did (so to trigger LT capital gains)?

Thanks again.

[retiredjg]

Maybe. Maybe not.

Depending on when you put the money in, you may not have any gains. Or you may have a mix of gains and losses. Or the gains may not be enough to worry about.

Look up the unrealized gains and losses to see.

[azphx1972]

OP, have you read "The Simple Path To Wealth"? When I started learning about index funds, I also chose LifeStrategy funds as I was lured by their seemingly simplicity. However the more I learned, the more I leaned away from them and now only hold VTSAX in my taxable brokerage.

[zen_invest]

Thank you for the above replies and shares, I will check that book out too.

''I think you are taking the wrong lesson here. Pick a fund you can hold forever. You are picking on that is sub-optimal and then you are stuck with it.''

Is this in relation to Lifestrategy accounts or Taxable accounts? I believe Lifestrategy (as their AA is fixed?)

Can you help me understand please, if I have 100% equities in taxable, what strategies can we pull over time to reduce portfolio risk? E.g Can a taxable account (with a 3-fund portfolio for example) be re-balanced over time to be less equity heavy? Or as suggested in other posts, you keep the taxable account equity heavy (which is tax optimal) and then make a tax-deferred account more bond heavy over time (e.g. using a target date fund or my own AA).

Thanks again.

[retiredjg]

''I think you are taking the wrong lesson here. Pick a fund you can hold forever. You are picking on that is sub-optimal and then you are stuck with it.''

Is this in relation to Lifestrategy accounts or Taxable accounts? I believe Lifestrategy (as their AA is fixed?)

Not my post, but to me it meant you are picking a sub-optimal fund to hold in your taxable account and that you will be stuck with it as the account grows because of capital gains taxes that occur when you sell it. Of course, you will not really be stuck with it - you can always sell and pay tax, but very few people want to do that, especially after a lot of growth.

Can you help me understand please, if I have 100% equities in taxable, what strategies can we pull over time to reduce portfolio risk?

You can add more bonds to your other accounts. Or, if needed, add a bond fund to taxable. When putting bonds in taxable, you will have to decide if your income is high enough to choose tax-exempt bonds or not.

E.g Can a taxable account (with a 3-fund portfolio for example) be re-balanced over time to be less equity heavy? Or as suggested in other posts, you keep the taxable account equity heavy (which is tax optimal) and then make a tax-deferred account more bond heavy over time (e.g. using a target date fund or my own AA).

You can do either of those things (usually adding more bonds to other accounts first), and maybe both as time goes along. It depends on your situation.

[tashnewbie]

OP: I agree with others who've said you need to provide more information for members to offer better advice.

One thing that stood out to me is that you didn't mention maxing a Roth IRA. I would do that (via direct contributions or the backdoor, if possible) before any taxable investing.

[retiringwhen]

@retiredjg did a pretty good job of reading my mind

[retiringwhen]

Can you help me understand please, if I have 100% equities in taxable, what strategies can we pull over time to reduce portfolio risk?

You can add more bonds to your other accounts. Or, if needed, add a bond fund to taxable. When putting bonds in taxable, you will have to decide if your income is high enough to choose tax-exempt bonds or not.

This point about bonds is key. Using a general purpose balanced fund seriously limits future options for bond holding in taxable. Muni's, Treasuries, Corporate or Total Bond market funds may be more appropriate in a taxable account in the future purely based upon you future income levels and assets held. Estimating those now is normally very hard, besides, what is good now and 10, 20 or 30 years in the future is likely to be quite different.

For example, I held Munis back in days long ago, but tax rates changed and they became less attractive. But, for a couple years recently my income made them sensible, but now I am back to Treasuries. All that was pretty easy to do with stand alone bond funds with little tax consequence. BTW, I hold a very small amount of bonds in taxable as a percentage. 85% of all bond holdings are in our pre-tax 401K/IRAs even though I hold a 65/35 AA.

[zen_invest]

Thanks so much.

My tax rate is 24% and I'm in California. If I did want to start with some bonds in my taxable for 'sleep well at night' reasons, any guidance which types to include?

My 401k is 100% diversified stocks right now, and given my income I am on the border for a Roth IRA/Backdoor; so will also need to look into that (wondering if I can fund either once I have more details from my '22 W2/ '22 MAGI).

Thanks again all for your input.

[retiredjg]

California is a high tax state and yes, there definitely are bonds for you to use in taxable. (California high state taxes is also a good reason to get that LS Growth out of your taxable account.)

A good choice for bonds in taxable in CA at your tax rate is half Vanguard Long Term CA Tax Exempt Bond Fund and half Vanguard Limited Term Tax Exempt Bond Fund. This will "average" out to something like an intermediate term tax-exempt bond but make more than half of the income exempt from the high CA state taxes.

Note that I'm not saying you should use a lot of bonds in taxable. I'm saying that the bonds that are in taxable could be allocated like this. If the percentage of bonds in taxable is small and will stay small, just using the Vanguard California intermediate term tax except bond fund might do just as well.

[zen_invest]

Thank you retiredjg!

Follow-up question. If I were to move out of CA in the future, would I just change the CA exempt bonds to another bond fund? Or if there's a chance I might move state in the future, is there a bond fund that would be 'good enough' to reduce any headache of selling the CA bond fund for another?

[Mike Scott]

Exchange some stocks for bonds in that 401k and then do all stocks using a tax efficient fund in taxable.

[retiringwhen]

Exchange some stocks for bonds in that 401k and then do all stocks using a tax efficient fund in taxable.

Actually, the OP should really do a forum style portfolio review request. We have been getting info in dibs and drabs and I am not sure just what the portfolio looks like and what the goals are.

[sycamore]

... Lifestrategy (as their AA is fixed?)

It is "fixed" in the usual sense, though note that Vanguard uses rebalancing bands of maybe +/- 2 percent, if memory serves.

In another sense the AA is not "fixed" -- Vanguard previously changed the AA several times over the course of five years. See
https://www.bogleheads.org/wiki/Vanguar ... ds#History

[retiredjg]

Follow-up question. If I were to move out of CA in the future, would I just change the CA exempt bonds to another bond fund? Or if there's a chance I might move state in the future, is there a bond fund that would be 'good enough' to reduce any headache of selling the CA bond fund for another?

There is usually not a headache for selling bond funds in taxable because they do not accumulate a lot of capital gains.

If you move out of CA, what you use will depend on where you move. But yes, there are good choices.

[Mike Scott]

Exchange some stocks for bonds in that 401k and then do all stocks using a tax efficient fund in taxable.

Actually, the OP should really do a forum style portfolio review request. We have been getting info in dibs and drabs and I am not sure just what the portfolio looks like and what the goals are.

You are correct.

OP, a full portfolio posting would make all of this more helpful to you.