starting to invest in taxable

[joehospitalist]

This is my first ever post so I hope I its a good one!

My wife and I are both newish attendingsand I think we're doing a good job of our finances so far. Right now I want to begin investing in a taxable account.

We both max out our 403b, just started contributing the max to a backdoor Roth IRA, and bought a great house well within our budget.

I want to start investing 60k a year to a taxable account to make so our total saving rate will be about 33%

I have it saved up in cash and want to do index funds at a bout an 80/20 ratio. would you just dump it in, do 5000 a month, or a combination of half and half.  I have 3 months emergency fund already.  My problem is i'm a big saver and tend to keep money in my savings/checking account and need to stop doing that so much.

In regards to the nuts and bolts of this, I was thinking of doing this through vanguard where we have our other accounts.

Thanks!!

[scott]

Vanguard is great. It sounds like you are doing a great job of saving and I assume you are aggressively paying down the student loan debt (or have already paid it off). An 80/20 ratio is a fine allocation, but be careful of bonds. If they are taxable, you'll want to put them in your retirement account to avoid the tax implications  - otherwise look at municipal bonds.  Remember you asset allocation goes across all of you accounts - retirement and non-retirement. To see where everything is, make a simple spreadsheet - mine has Asset Allocation across the top and all the different accounts down the side. Best of luck!

[PhysicianOnFIRE]

With $60,000 on the sidelines, and the market up 10% to 15% since November 8th, it's a bummer you didn't dollar cost average it in while you were building up cash. The best time to plant a tree is 20 years ago. The second best time is now.

In general, you're more likely to come out ahead by investing the lump sum, but of course it's easy to be uneasy given current valuations. Of course, people were saying that in November and the November before that. If it helps you sleep at night, I like the half & half option. I've done something similar (invest half now and DCA the rest over several months). You'll get a hybrid of the results from lump sum and DCA investing.

I have my taxable account and the vast majority of my money either with Vanguard or invested in Vanguard funds via my 401(k) & 457(b)with another company. For simplicity's sake, I would stick with Vanguard for the taxable account. If you want diversity in companies, Fidelity currently has slightly lower expense ratios for its big passive index funds, and they're a reputable company.

My personal preference is to have 100% domestic and international stock funds in taxable, with bonds in tax deferred accounts, but others prefer to hold muni bonds in taxable. Be sure to determine your overall asset allocation across multiple accounts, rather than within each account.

Cheers, and welcome to the the forum!

-PoF

[Gas_Doc]

Vanguard is great, especially if you have other accounts. I'd just put it all in the market (VTSAX and VTIAX, leave bonds for your retirement acounts) and let it start earning you money. There is theoretically an advantage to Dollar-Cost Averaging (which you described in the $5k/month scenario) if you anticipate volatility and a flat market over the next 12 months. But in a given year, its far more likely for the stock market to up over a 12 month period than to go down. In truth, none of us can predict the future, and throwing it all into a few well-diversified index funds all at once is just easier.

 

As far as keeping too much in your savings/checking account, set up automatic transfers each month from those accounts to your taxable account. Then set up automatic index fund "buy" orders for a couple days after that each month. Set it and forget it!

[Joseph]

You win the game!

Congrats, it sounds like you are definitely on the right path.

You made no mention of student loan debt, though... Does that exist?

Still, I would go with Vanguard and dump in a solid sum with VTSAX to get it going.  It can be nervous at the start so you may want to hold some back, but experience says that now is the best time.

[DMFA]

Welcome.  You seem like you're off to a great start and are beginning with a decent knowledge/familiarity level.

In my opinion, VG is a good choice for taxable owing to their large selection of tax-managed accounts, meaning low-dividend, low-turnover equity funds and municipal (tax-free) bond funds.

US equity index funds like VTSAX (13.31% 5-yr tax-adj return, tax cost ratio 0.59, 8th %ile for US large blend funds) are already inherently quite tax-efficient given their low dividend and turnover rates.  However, Vanguard goes a bit further to model funds to minimize tax drag with their "tax-managed" funds.  Here's some 5-year stats on the equity funds:

• VTCLX (77/21/2 large/mid/small): tax cost ratio 0.53, tax-adj return 13.42% (4th %ile for US large blend funds)


• VTMSX (1/4/95 L/m/s): tax cost ratio 0.35, tax-adj return 14.38% (2nd %ile for US small blend funds)


• VTMFX (50/50 stock/bond): tax cost ratio 0.67, tax-adj return 7.38% (top 1 %ile for US 30-50% equity funds)

They've also got long-, intermediate-, and limited-term tax-exempt municipal bond funds, if you choose to hold some bonds in your taxable.

I'd start with $10,000 in VTCLX and add small cap as you want, once you get the $10K to do it.  Alternately, you can just use whichever passive stock index fund that Vanguard has, like VTSAX or VSMAX for small caps, since they're naturally tax-efficient.  For your bonds, since VWIUX has a $50,000 buy-in, you can just use VWITX (investor class with slightly higher fee but $3k buy-in) or you *might* consider using VTMFX and just realizing that it's half bonds.

As for emergency funds, the 1% online savings acct is commonly done, but imo that's a straddle between immediate liquidity (would it work in a true emergency?) and a low-earning muni fund in a standard brokerage acct.  That being said, I don't oppose the 1% online savings or think it's a bad idea, I just choose not to do it.  I personally keep a cash emergency fund in my savings at my local bank of anything I might need immediately (about 1 month's worth that I can access in a few seconds) and keep the rest in taxable.  I like to keep every dollar earning as much as possible and usually drain my everyday checking down to a couple hundred before paychecks hit, ferreting away the rest for investing/savings.

[jfoxcpacfp]

It appears to me that you are doing a heck of a lot right and you should pat yourselves on the backs. Otherwise, I won't reiterate the comments of others. This post may be helpful although you have already made your decision (I guess I'm reinforcing that you've made a good decision   )

Since you are just now starting a taxable account and you and your wife are new attendings, I will be nauseatingly presumpteous and guess that you are below age 40. If so, why do you need to own bonds? Please don't tell yourself that it's because 80 + 20 = 100 or some other nonsense but, seriously, what good will bonds do you in a long term portfolio that you don't need to touch for, say, 20 years or so? Do you really need to smooth out and accept lower returns if you're going to be able to control your emotions during corrections and bear markets (yes, they are two different events)? And, if you do need to settle for the emotional pacifier that bonds yield, would you be financially better off hiring a fee-only financial planner who can stand between you and emotional oopsies and prevent the mistakes that could cost you tens if not hundreds of thousands of dollars over your career?

Of course, anyone reading this who is paying their hard-earned money to a financial advisor who is actually "investing" their long-term savings in bonds (which you are not) has my sincere sympathy.

[VagabondMD]

My opinion is likely going to be in the minority, but I am going to say that if I were you, and 80% equity was my target allocation, I would drop $5k per month in the equity allocation of your choice (I might do something like 35% IVV (S&P 500), 30% IJS (US small value), 25% IEFA (dev market international), and 10% (emerging market) IEMG in my Fido account), until you have deployed 80% of the $60k, or $48k, and with the rest, drop it in a muni bond fund (short/intermediate term). ETFs are very tax efficient, and free ishares trades on Fidelity or free Vanguard ETF trades on the Vanguard platform (if you prefer) allow you to invest smaller dollar amounts and get among the lowest ERs.

Here is my reasoning for not plopping it all into the market at once. I will start by acknowledging that about 65% of the time, the market is going up, so that a majority of the time, you are mathematically better off in the long run to lump sum invest. However, I am somewhat risk averse and would kick myself more for an ill-timed lump sum investment than I would for not capturing all of the gains on the way up over the next 6-12 months. I would also add that equity valuations are stretched, and while the market may continue to rise over the next six to twelve months, we are historically overdue for a correction. This is "low key" market timing (as my 18 year old son might say), but I would just say that it is erring on the side of caution.

I had a similar issue when my wife received a bonus last year and similarly invested the proceeds in my allocation over the next 10 months. Once again, she just recently received another distribution, and I will be dollar cost averaging the money of the next 10 months. My strategy is not to take the most risk and net the most gains in the long run. If that were the case, I could use options and margins to juice my returns. My objective is to take the most amount of risk that I can tolerate and get myself to where I want to be. Some of the people who enjoy chatting about stock markets have forgotten about drawdowns and others have never lived through one.

I generally agree with Ms. Turner, but I disagree that an advisor can stand between you and your nature. If 80:20 feels right, it's right.

[mitochondria]

Agree with Johanna, if you a 20 year time horizon, then I would be comfortable in 100% well diversifed equity portfolio (80% in Vanguard 500 Index or Total Stock Market Index and 20% in International Index Fund; 15% developed, 5% emerging).  Given the current valuations, I don't see a problem with simply dollar cost averaging ($5K/month as your suggesting to reach $60K/year).

[Kamban]

jfoxcpacfp wrote:

and guess that you are below age 40. If so, why do you need to own bonds? Please don’t tell yourself that it’s because 80 + 20 = 100 or some other nonsense but, seriously, what good will bonds do you in a long term portfolio that you don’t need to touch for, say, 20 years or so?

Click to expand...

I have agreed with Johanna in this aspect of investing in the past and I will do so once again. There are studies that Stocks have outperformed bonds over a 20 year period or more when invested at the same time. If you will not need the money for 20 years or more then why do you need bonds and settle for lower return.

 

[PhysicianOnFIRE]

Since we're bashing bonds for the long-term investor, it seems appropriate to share Johanna's guest post(s) in which she explains her position more completely.

Bonds: What Are They Good For? Part I & Part II

[joehospitalist]

Thank you all for the replies. And I am 35 ?

A little more about us. I'm 4 years out of residency, wife is 6 months in as a new attending. All our loans were paid off 2 years ago through saving. But then i got the bad habit of sitting on too much cash.

I read that some posters will lump sum contribute to their taxable every year. Does that mean you sit on that cash the rest of the time?

[canadianoutlaw]

joehospitalist wrote:

This is my first ever post so I hope I its a good one!

My wife and I are both newish attendingsand I think we’re doing a good job of our finances so far. Right now I want to begin investing in a taxable account.

We both max out our 403b, just started contributing the max to a backdoor Roth IRA, and bought a great house well within our budget.

I want to start investing 60k a year to a taxable account to make so our total saving rate will be about 33%

I have it saved up in cash and want to do index funds at a bout an 80/20 ratio. would you just dump it in, do 5000 a month, or a combination of half and half.  I have 3 months emergency fund already.  My problem is i’m a big saver and tend to keep money in my savings/checking account and need to stop doing that so much.

In regards to the nuts and bolts of this, I was thinking of doing this through vanguard where we have our other accounts.

Thanks!!

Click to expand...

great work. you've already got the behavioral component locked down, which can be the hardest part.

 

 

[childay]

I would lump sum it in.  If it goes down you can always harvest the losses anyway.

[joehospitalist]

@childay you make that sound as if it's easy! Can you do TLH with a vanguard account?