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My portfolio is currently $10k invested in VWNFX. I also have a 401k (contributing about $13k/year) and an emergency fund. But for the purposes of this question I am just talking about my non-retirement and non-emergency accounts.

My ideal asset allocation seems to be about 50/50 stocks/bonds (based on Vanguard's questionnaire and my plans to use the money 5-7 years from now). To this end, I want to balance out my portfolio as I am now 100% stocks.

Next year I will contribute about $10k to this portfolio. Nothing this year as I am still working on getting my emergency fund up to 6 months time.

I had two ideas for how to rebalance:

1) Move all assets to a Vanguard LifeStrategy fund and just keep investing in that, e.g.: VSMGX (60/40 stocks/bonds, 0.16% expense ratio) or VSCGX (40/60 stocks/bonds, 0.15% expense ratio)

For comparison VWNFX's expense ratio is 0.35%.

2) Or, hold VWNFX and invest 2013's contributions in a bond fund like VBMFX (100% bonds, 0.22% expense ratio). Then make future investments (2014 and beyond) into both funds, effecting my desired stock/bond portfolio ratio.

My first thought is taxes - if I sell VWNFX and buy VSMGX I need to know if I will be taxed. I don't know how to find that out… my unrealized gain/loss for this fund is $-360, does that mean I would not get hit with a tax liability?

But if I can get a balanced portfolio out of a single low-cost fund, why wouldn't I go ahead and trade VWNFX for VSMGX, instead of to holding VWNFX and buying VBMFX?

On the other hand, I ran the numbers based on the FINRA fund analyzer (http://apps.finra.org/fundanalyzer/1/fa.aspx) and it looks like the amount of money that would be saved in fees by going (100% VSMGX) vs (50% VWNFX + 50% VBMFX) over 7 years (assume 5% return) is trivial - $205.

So is it really six or half a dozen? What am I missing? Please tell me what else to look at :)

Thanks!

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1 Answer 1

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Taxes

Based on the numbers you quoted (-$360) it doesn't appear that you would have a taxable event if you sell all the shares in the account.

If you only sell some of the shares, to fund the new account, you should specify which shares you want to sell. If you sell only the shares that you bought when share prices were high, then every share you sell could be considered a loss. This will increase your losses. These losses can be deducted from your taxes, though there are limits.

Fees

Make sure that you understand the fee structure. Some fund families look at the balance of all your accounts to determine your fee level, others treat each fund separately.

Procedure

If you were able to get the 10K into the new account in the next few months I would advise not selling the shares. Because it will be 6 to 18 months before you are able to contribute the new funds then rebalancing by selling shares makes more sense. It gets you to your goal quicker.

All the funds you mentioned have low expense ratios, I wouldn't move funds just to chase a the lowest expense ratio. I would look at the steps necessary to get the mix you want in the next few weeks, and then what will be needed moving forward. If the 60/40 or 40/60 split makes you comfortable pick one of them. If you want to be able to control the balance via rebalancing or changing your contribution percentage, then go with two funds.

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