Taxable account


D

David

My wife and I have a savings account with some money set aside for a rainy
day. While waiting for that day, I'd like for it to be working for us. I
thought about CDs but was hoping for something to cover inflation. Looked
at I-Bonds and is still a possibility. I also thought about index funds or
ETFs with 50% in municipal bonds to help with the volatility. If not bonds
then how do you offset the ups and down of the market? Are there other
options I have not thought of or am I way off in my thinking? Any insight
would be appreciated.

Thanks
 
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E

Elle

My wife and I have a savings account with some money set aside for a rainy
day.  While waiting for that day, I'd like for it to be working for us.  I
thought about CDs but was hoping for something to cover inflation.  Looked
at I-Bonds and is still a possibility.  I also thought about index funds or
ETFs with 50% in municipal bonds to help with the volatility.  If not bonds
then how do you offset the ups and down of the market?  Are there other
options I have not thought of or am I way off in my thinking?  Any insight
would be appreciated.
I think you're on the right track. Namely, diversify in "conservative"
investments to help reduce risk yet gain some return. Like you all,
and because CDs return so little, I have had to revise my strategy for
my rainy-day fund. For peace of mind, about half my rainy day fund is
now in cash paying money market rates (namely, about zero interest at
present). The other half (roughly) is in electric utility stocks and/
or "high rated" preferred stocks. I do not like taking more risk and
wonder if this may come back to bite the Fed, with its low interest
rates policy, at some point.
 
D

Don

My wife and I have a savings account with some money set aside for a rainy
day. While waiting for that day, I'd like for it to be working for us. I
thought about CDs but was hoping for something to cover inflation. Looked
at I-Bonds and is still a possibility. I also thought about index funds or
ETFs with 50% in municipal bonds to help with the volatility. If not bonds
then how do you offset the ups and down of the market? Are there other
options I have not thought of or am I way off in my thinking? Any insight
would be appreciated.

Thanks

Not too long ago knowledeable financial advisors were recommending investing in a good selection of mutual funds and holding them for the long term. They cautioned against selling too quickly because of a downturn in the market and made much of the market climbing steadily upward over the years despite the temporary setbacks. Some risk was considered prudent. Today, I hear little advice about investing in equity mutual funds and holding long term. The message that comes across is that "buy and hold" makes good sense when economic times are good, but that in bad times, that previous wisdom somehow disappears and nobody wants to assume any risk at all. If things improve again in a few years, will it be buy and hold and a search for the best equity mutiual funds with minimal risk all over again?
 
J

JoeTaxpayer

Not too long ago knowledgeable financial advisers were recommending investing in a good selection of mutual funds and holding them for the long term. They cautioned against selling too quickly because of a downturn in the market and made much of the market climbing steadily upward over the years despite the temporary setbacks. Some risk was considered prudent. Today, I hear little advice about investing in equity mutual funds and holding long term. The message that comes across is that "buy and hold" makes good sense when economic times are good, but that in bad times, that previous wisdom somehow disappears and nobody wants to assume any risk at all. If things improve again in a few years, will it be buy and hold and a search for the best equity mutiual funds with minimal risk all over again?
I don't have one at the ready, but I recall studies that showed how one
would have fared during the '00s with a proper mix, say 60/40 with
annual rebalancing had an acceptable return.

Nevermind. Found it.

http://www.assetplay.net/financial-tools/backtest/results.html
Unfortunately, it's only load to 2008.

1999-2008 with 60% S&P, 40% 5 year Tbill gives a CAGR of 2.53% vs pure
S&P with -1.47%.

On the other hand, the booming 80s/90's 20 years at 60/40 gave 14.59% vs
18.02 for pure S&P. My point (and I think I have one) is 'long-term'
doesn't mean 100% stocks.

Your point about the market sentiment shifting depending on the times
ultimately reflects the very reason why the typical investor lags so
badly. They pile on during the boom and exit during the bust, not
returning until the bottom is so far behind them they missed the
recovery. I am ahead of most investors (according to studies by Dalbar)
by simply doing the boring thing and investing in the S&P index in my
401(k) with a .05% expense. 30 years ago I thought success was to beat
the market. I quickly learned from Jack Bogle the S&P minus tiny
fraction will be enough for bragging rights.
 
D

Don

Your point about the market sentiment shifting depending on the times
ultimately reflects the very reason why the typical investor lags so
badly. They pile on during the boom and exit during the bust, not
returning until the bottom is so far behind them they missed the
recovery. I am ahead of most investors (according to studies by Dalbar)
by simply doing the boring thing and investing in the S&P index in my
401(k) with a .05% expense. 30 years ago I thought success was to beat
the market. I quickly learned from Jack Bogle the S&P minus tiny
fraction will be enough for bragging rights.

Quite true, and that mind-set usually is disastrous for small investors. But there is something else that I find even more troubling. A lot of the people whose business is to advise and educate investors are making the same mistake. Nowadays, the newspaper columns, investment books and magazines, TV shows, and even discussion on newsgroups such as this one, seem to be oriented toward finding no-risk financial products, the best bond funds or CDs, and the like, with not too much consideration of investment for the long haul in equities. All through the years when times are bad, there always seems to be an assumption, often on the part of people who should know better, that the latest economic crisis is worse than anything seen before and that tried-and-true investment wisdom needs to be completely revised or thrown out entirely.
 
J

JoeTaxpayer

Quite true, and that mind-set usually is disastrous for small investors. But there is something else that I find even more troubling. A lot of the people whose business is to advise and educate investors are making the same mistake. Nowadays, the newspaper columns, investment books and magazines, TV shows, and even discussion on newsgroups such as this one, seem to be oriented toward finding no-risk financial products, the best bond funds or CDs, and the like, with not too much consideration of investment for the long haul in equities. All through the years when times are bad, there always seems to be an assumption, often on the part of people who should know better, that the latest economic crisis is worse than anything seen before and that tried-and-true investment wisdom needs to be completely revised or thrown out entirely.
Another thought on this topic - rates are at record lows. I am reading
more articles, both in mainstream magazines as well as blogs promoting
the goal of fast payoffs, zero debt. Where were these people when rates
were 10%+? Fine to avoid credit card debt, car loans, etc. But a 3-4%
mortgage is just about zero after taxes and inflation. It's an
interesting part of the cycle we're in.

We are also in a time period where any graduate since 2000 has seen low
(or negative) returns and high volatility, 2 crashes in 12 years. Enough
to scare them from the market for life.
 
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D

DanielleOM

I don't have one at the ready, but I recall studies that showed how
one would have fared during the '00s with a proper mix, say 60/40 with
annual rebalancing had an acceptable return.

Nevermind. Found it.

http://www.assetplay.net/financial-tools/backtest/results.html
Unfortunately, it's only load to 2008.

1999-2008 with 60% S&P, 40% 5 year Tbill gives a CAGR of 2.53% vs pure
S&P with -1.47%.

On the other hand, the booming 80s/90's 20 years at 60/40 gave 14.59%
vs 18.02 for pure S&P. My point (and I think I have one) is
'long-term' doesn't mean 100% stocks.

Your point about the market sentiment shifting depending on the times
ultimately reflects the very reason why the typical investor lags so
badly. They pile on during the boom and exit during the bust, not
returning until the bottom is so far behind them they missed the
recovery. I am ahead of most investors (according to studies by
Dalbar) by simply doing the boring thing and investing in the S&P
index in my 401(k) with a .05% expense. 30 years ago I thought success
was to beat the market. I quickly learned from Jack Bogle the S&P
minus tiny fraction will be enough for bragging rights.
Keeping a constant allocation, for a 401K or Roth account, always made
sense to me with the inherent buy low sell high built in mechanism.
However I find myself at a loss as to what to do with my taxable
account. With my taxable account I find myself creating a rather broad
based approach using buy and hold individual stocks from different
industries and countries, with a few closed end preferred funds, however
I do not see any reasonable way of re-balancing all of this without
incurring sales and taxes.

Danielle
 
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H

honda.lioness

Keeping a constant allocation, for a 401K or Roth account, always made
sense to me with the inherent buy low sell high built in mechanism.
However I find myself at a loss as to what to do with my taxable
account. With my taxable account I find myself creating a rather broad
based approach using buy and hold individual stocks from different
industries and countries, with a few closed end preferred funds, however
I do not see any reasonable way of re-balancing all of this without
incurring sales and taxes.
I agree one must be mindful of transaction costs and capital gains taxes when re-balancing in one's taxable account. I use the following as a guide:

1.
I try not to let any one stock position become more than about three percent of my entire (taxable and Roth) brokerage portfolio. If any one stock position exceeds this, then I do not have peace of mind. This is especially so after getting stuck with huge losses on my bank stocks in the last few years. I think the conventional wisdom is 5%. Maybe common sense should set the number though: What fraction of one's portfolio can one stand to lose all of overnight (or over a few months) because of some previously undetected irregularity in the stock's business? By setting such a number, and assuming appropriate diversity, one won't be re-balancing so often that transaction costs are high. For funds (mutual or ETF) I set a higher maximum of around 7%, because the funds are already diversified. Typically when selling I cut the stock position in half, so it is about 1.5% of my portfolio.

2.
For tax year 2012, the maximum capital gains tax is 15%. Many in the lower tax brackets are paying 0% on capital gains. These rates are historically low. These low rates may not be renewed for 2013 and subsequent years. I think capital gains taxes are going to go up at some point in the next few years to pay the massive debt the U.S. has incurred. The point is that taking on more capital gains this year, to re-balance or for whatever purpose, may be a good bet. I have been taking quite a few gains in the last few months, to get several positions beneath about 3%. At the same time, I have been buying some new positions. (Not Facebook. Speaking of poor fundamentals and not wanting to gamble.)

3.
If a stock that is now more than 3% of my portfolio seems, by its fundamentals, more overvalued than others, I prioritize selling a part of its position first.

4.
If you have some stocks that are beaten down. offset some of the capital gains with capital losses as needed. If you like the beaten down stock, buy it back subsequently. I sold one of my bank stocks, to take the capital loss. I may buy it back after more study of its fundamentals.
 

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