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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 72  
Subject: Re: Taxable account asset allocation Date: 4/21/2004 3:30 AM
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I am in the process of restructuring my Roth IRA and taxable investments--moving them from Oppenheimer Funds to Vanguard.

I am currently 50, which is important to know because that means I won't feel comfortable with 100% equities. In fact, according to the "age in bonds" rule, I am over aggressive.

This is my target allocation:

55% Vanguard Total Stock Market Fund - taxable
15% Vanguard Tax-Managed International - taxable
20% Vanguard Total Bond Market Fund - taxable & Roth IRA
10% Vanguard REIT Index Fund - Roth IRA

Generally, one should view all of one's investments for the same investment horizon as one portfolio, and then make decisions on where to hold those assets. For example, REITs generate a lot of taxable dividends, so they make sense in a "tax favored" account unless one is currently using them for income. Likewise for bond funds. However, I don't have enough money in my Roth IRA to hold my target amount of both bonds and REITs, so a portion of my bond ends up being in taxable.

Tax-efficient funds, such as the Vanguard Total Stock Market Fund, and tax-managed funds generally are ok for taxable accounts because they tend to have smaller taxable distributions.

Vanguard has a series of articles on their web site, and at least one of them deals with "fund placement" and talks about holding tax-inefficient assets in "tax favored" accounts and, if part of the portfolio includes taxable investments, trying to have the tax-efficient investments in taxable.

The use of stocks is for maximum long-term growth. The International exposure is to provide some diversification because domestic stocks and international stocks might not always have such a high correlation they have today, especially if the dollar experiences devaluations. REITs serve as an added diversifier. Bonds help reduce the volatility (coushin the bears but probably not eliminate portfolio losses, but at the cost of also reducing the expected growth by a lesser amount). I have looked at a national "tax-free" fund, but with my high state tax (Vanguard doesn't offer an Oregon-specific municipal bond fund) and the low yields of bond funds at this time, and my concern about the financial shape of many municipalities, I decided to go with the Total Bond Market in taxable instead of a "tax-free" bond fund.

Rebalancing can be tricky because one wants to minimize unnecessary taxes. Since I am getting close to the point where new money may be insufficient, my plans once I get my taxable investments moved to Vanguard is to have the distributions from taxable investments direct deposited to my checking account, and then I can direct those distributions, along with new money to invest, into the fund(s) most lacking according to my asset allocation plan. Only if the divergence of my portfolio from the asset allocation plan is great enough (e.g., over 5% different from the target amount) would I consider actually selling the over-achieving fund, but would do so in reluctance because of tax impacts. For the Roth IRA, I plan to rely primarily upon the annual contribution to help bring things closer to my target percentages but, since there are no tax impacts, I would consider actually "exchanging" funds in the Roth IRA to bring that part of the portfolio back to balance.
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