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I'm currently maxing my 401(k) and a Roth IRA. I have emergency savings, savings for a house down payment, and savings for vehicle maintenance. I'm looking for advice on how to properly build a taxable portfolio of Vanguard ETFs to supplement my retirement savings.

I've read that total market ETFs are the most tax efficient investment for a taxable portfolio, so I plan to buy 1 share each of VTI and VXUS every two weeks. I chose these ETFS because the Boglehead's wiki's Lazy Portfolio page recommended them, but also because I do not have the required cash to invest in fractional shares of their equivalent mutual funds.

I am 30 years old. When I begin shifting my allocation to include more fixed income products, I will include them in my 401(k) and IRA accounts. Please assume that I will re-balance all of my investments as I build my taxable portfolio (i.e., I will buy fewer equity mutual funds in my tax-protected accounts as I accrue more equity ETFs in my taxable account until I reach the desired allocation across all portfolios).

Please critique this strategy for building a taxable portfolio (e.g., unanticipated tax implications, making purchases too often, etc).

  • "I also do not have the required cash to invest in fractional shares of their equivalent mutual funds." VTI has a NAV of about $111$ these days. So what does it mean when you say that you do not have enough money to invest in fractional shares of the near-equivalent mutual fund while you do have enough money to invest in one share on VTI? – Dilip Sarwate Aug 2 '16 at 18:01
  • Remember that for most purposes, ETFs and mutual funds are available in all the same flavors and are equivalent to each other. Yes, index funds tend to be more tax-efficient than actively managed funds – keshlam Aug 2 '16 at 18:01
  • @DilipSarwate: The mutual funds likely have minimum investments. – BrenBarn Aug 2 '16 at 18:13
  • @DilipSarwate: BrenBarn is right. The minimum investment for the mutual fund equivalent of VTI is $3000. When I say that I do not have enough money to invest in fractional shares of the near-equivalent mutual fund, I mean that I do not have $3000 and that mutual funds can be purchased in fractions of shares while ETFs must be purchased as whole shares. – AwfulPersimmon Aug 2 '16 at 18:31
  • What is your purpose of building this portfolio? What time frame are you looking at? – Pete B. Aug 2 '16 at 19:01
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Not a bad strategy. However:

  • Target a % allocation instead of buying 1 share of each. Most efficient frontier portfolios (portfolio with highest expected return per unit of risk) and long term strategic allocations with the highest sharp ratio are ~60-70% U.S. domestic, 20-30% Int'l Developed, and 5-10% Emerging Markets (ticker VWO)
  • Vanguard index ETFs are exactly what you want to use
  • Personally I would do 70% VTI, 20% VEA (not VXUS), and 10% VWO. At times, due to its excessive risk, i would go to 0% in Emerging Markets, which you wouldn't be able to do with VXUS.

If you REALLY want tax efficiency you can buy stocks that don't pay a dividend, usually growth stocks like FB, GOOGL, and others. This way you will never have to pay any dividend tax - all your tax will be paid when you retire at a theoretically lower tax rate (<--- really a grey tax area here).

*Also, check out Robin Hood. They offer commission free stock trading.

  • Thanks for the advice. I hadn't thought to break down International Developed and Emerging markets, but I guess more diversification couldn't hurt. – AwfulPersimmon Aug 11 '16 at 12:52

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