Strategies for investing 25k in a taxable account?

Question

I have ~ 20-25k I would like to invest long term in addition to what I'm putting in my IRA and 401k this year. By long term I mean I shouldn't need the money (hopefully) for 20 years or so. So, I plan on opening a brokerage account somewhere (right now I'm considering ScottTrade and Vanguard) and setting up an automatic investment schedule. My thinking was it would be better to invest the money slowly throughout the year (or even longer) to avoid any accidental bad market timing.

Does this sound reasonable? Vanguard has no fees on all it's ETF's so I thought of going with them to avoid transaction fees, but I guess I need to look at their ETF's and also figure out if ETF's are a good investment for a taxable account.

I'm curious what sort of investments would be best for a taxable account? Which online discount broker would you recommend? Any other strategies for moving this cash into investments?

Thanks.

Answer 1

You are suggesting something called dollar cost averaging (or its cousin, dollar value averaging) - http://www.investopedia.com/articles/stocks/07/dcavsva.asp

This is certainly a valid investment strategy, although personally, I feel that for long term investment, it is not necessary unless you plan on being an active trader. I still strongly encourage you to research these two methods and see if they would work well for your personal investment strategy and goals.

As far as what sorts of investments for a taxable account, I have three general recommendations:

1. Find funds with low expense ratios (compared to similar funds in the same class).
2. Stay away from equity mutual funds with high turnover rates. This is basically to avoid capital gains distributions that will be taxed. Equity ETFs are generally much smarter about managing their capital gains distributions, and thus a better choice for taxable accounts.
3. Diversify, but only across investments which you have researched and feel that you have a decent understanding of (ie, don't invest in shipping futures or precious metals just to have them in your portfolio).

As far as which company to use for your brokerage, I personally have accounts at Voya, TRowe Price and Fidelity. I would strongly recommend Fidelity out of those three, mostly due to customer service and quality and ease of use of their website. Vanguard is a great brokerage, but you don't have to choose them just because you plan to mostly invest in Vanguard funds.

I also recommend you research how capital gains and dividend taxing works (and things like lost harvesting), so that you can structure your investments with taxes in mind. Do this ahead of time, don't wait until April of 2016 because it will be too late to save on taxes by then.