Taxable Account

Don't let the tax tail wag the investing dog. Long term gains are taxed at 15% and I don't suspect that will go away soon. Well chosen EFTs will save you as much as say 1% in fees each year. When investing for the long term, this savings will more than outweigh any benefit you may derive by investing with taxes in mind.

It pains me to recall how many times I heard one say "I should sell xyz stock, but I only have it 11 months, I need to wait till next month [to get the long term treatment]." Then some news drops the price to where any benefit is more than lost. "How's that long tern gain working out for you?" (I am not advocating 'trading short term,' just an example of how the focus on taxes is wrong.)

Joe

As usual, the answer is "it depends".

Obviously, in a taxable account, you want to keep an eye towards tax-efficiency and what is known as "asset location" (as opposed to "asset allocation")

For example, suppose you have $10000 split between a taxable account and an IRA. And you've already decided to have half the money in, say, a bond index fund and half the money in an equity index fund. You probably want to put the equity index in the taxable account and the bond fund in the IRA. (all the dividends from the bonds are normally taxable at your highest marginal income tax rate, while the equity index fund (a) will probably defer most gains as long-term capital gains and (b) will have most dividends thrown off as "qualified" dividends taxed currently at a lower rate and (c) have a lower dividend yield in the first place).

In general, with respect to mutual funds, index funds are more tax efficient (and lower cost) than non-index (actively managed) funds because they trade a lot less, so less gets distributed through taxable distributions to the investor. That doesn't help when the distributions are the results of simply holding what's in there (ie. the dividends thrown off by the investments inside the fun). That's why, say, a S&P500 index fund may be highly tax efficient while a BarCap Agg Bond Index fund would be highly tax inefficient even though both trade relatively little. Bond throw off taxable dividends, stocks less so.

ETFs are (mostly) index funds and may or may not be tax efficient for the same reasons. ETFs may have additional tax efficiency advantages due to the way the units get created and redeemed but so far, that theoretical advantage hasn't really been strongly demonstrated as far as I know.

Vanguard is also unique in that many of their ETFs are just additional share classes on their existing index funds, and they may let you swap one for the other.

The thing is that we here know nothing about your situation - anyone recommending specific funds at this point is treading on some dangerous water. My notes above assume that we've already determined what kinds of investments to make and are figuring out how best to deploy them.

With respect to liquidation, pretty much any large mutual fund can be liquidated within a day. That's not the issue. "whether we need the money" is messier - are you talking about access to the investment or are you talking about capital preservation? If your "need the money" means you need *all* of the money, then you need to look at low risk investments, almost certainly not equity funds. If you just mean "can I sell it off and spend whatever it's worth whenever I want?" that's different.

So what are you trying to do? What's the money for? How much risk are you comfortable taking? How does this money fit into the rest of your financial plans?

Thanks. This is the general answer I was looking for. Other articles I have read mentioned index funds and municipal bonds for taxable accounts. When the time comes I will look into those more. Looking for a conservative return of 6% - 7% or so and thinking maybe a

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