Taxable Investing

Tax-deferred investing is awesome for getting used to the crazy world of investing. I don’t know about you, but I didn’t learn much of anything about investing from my parents, in high school, or in college. I developed some pretty good savings habits and frugal ideas, but not about what vehicles to put that money I saved in.

My first retirement accounts (that I opened while in college) are in 5-year certificates that, when they mature, will roll into more 5-year certificates. I include those in my cash asset allocation and just leave them be.

I started putting money into my employer’s 401(k) pretty soon after I started working full-time a few years ago. I started maxing it out in 2011, which was a great decision. It is now valued at over $30,000 and is a good chunk of my investment portfolio!

1. I have had some interesting adventures with investing in my first few years post-college:

2. I invested my 401(k) in NINE different funds.

3. I opened my Roth IRA with $5,000. I had no idea that you could contribute any less! I thought it had to be $5,000 exactly.

4. I eventually learned the difference between index funds and actively managed funds and why I should stick with index funds.

5. I experimented with ETFs and decided to stick with index funds.

6. I started to learn about asset allocation. I eventually learned that it isn’t really an exact science and it’s really hard to gauge my interest/acceptance of risk without experiencing a significant downturn.

Starting out investing in tax-deferred accounts has been a really great blessing. I have a pretty reasonable sum of money in my 401(k) and Roth IRA at this point. I was able to make strange decisions, mistakes, and good decisions without any tax consequences whatsoever.

One of the “problems” with having reasonable sums of money is figuring out exactly what to do with it. Where to put it. Whether to keep it or to give it away. Having this problem when you’re young and haven’t really had any education in these matters is worse. I’m starting to figure out that for a lot of these decisions, there is no one “right” decision, but many “good” ones and I just have to pick one.

Since I sold off some stock and ETF shares in the fall to improve my down payment, I’ve replaced the dollar amount that I “borrowed” from myself, but I haven’t invested it in anything. I’ve just left it all in a money market fund in my taxable account at Vanguard. With the raise last month, I’m now putting some money in there monthly in addition to with my quarterly RSU vests. But I’m still waiting. I’ve decided that after the July RSU vest, I will finally invest the money into stocks and re-balance my Roth IRA and 401(k) accordingly. At that point, I will have over $10,000 sitting in my taxable account, waiting. Hopefully, at that point I will be a bit more confident in my decision.

My taxable account will not be an insignificant portion of my overall investment portfolio. I estimate that it will be valued around $13,000 by the end of 2012 and that I will add another $10,000 – $15,000 to it in 2013, almost as much as I will put into my 401(k) that year. I’m trying to tread cautiously in trying to decide what to do with this money.

I’ve decided that a cash/bonds allocation of only 13% is more risk than I am comfortable with. My portfolio is currently sitting at about 28-29% cash, so I’m going to instead up the target cash/bonds allocation to 24%. I still want to split international/US stocks 50/50.

This is what my ideal portfolio would look like with the forecasted overall amount at the end of 2012:

Taxable

  • 17% Vanguard Total Stock Market Index Fund (Admiral Shares!)

Roth IRA

  • 13% Vanguard Total Stock Market Index Fund (Investor Shares)

Other

  • 11% 5-year certificates

401(k)

  • 13% Vanguard Retirement Savings Trust
  • 38% Vanguard Total International Stock Market Index Fund
  •  8% Vanguard 500 Index Fund

(Percentages are of the overall portfolio, not within each individual account.)

Readers, how did you get your feet wet with investing? Did you start in tax-deferred accounts or taxable accounts? What was the silliest investing move you made when you first started out investing?

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16 thoughts on “Taxable Investing

  1. We actually did start with CDs, because #2 on the blog had worked for a bank and said it was ridiculous not to get more interest if we were going to only get paid 2-3x per year (our graduate stipends). I knew that doing something was better than nothing, and a cd bought time to figure out what to do both with short-term cash and later with our first IRA Roths.

    When I got some time to figure out what to do with the Roths, I decided to put them in ETF QQQ (technology) because I didn’t know about index funds yet, but I did know about exchange traded funds and I knew I didn’t want to try to beat the market, but I had a high tolerance for risk for something I wouldn’t be tapping into for 40 odd years. Later we added some diversification with blue-chips using DIA. Then I learned about index funds and added a cheap S&P 500 fund (etrade no longer offers theirs, so we switched to a vanguard fund).

    My 403(b) only has Fidelity (and 4 not as good options), so it’s invested in Spartan Funds and I try to diversify the things they don’t do Spartan using Vanguard and our Roths. Here’s our breakdown: http://nicoleandmaggie.wordpress.com/2010/09/06/adventures-in-retirement-saving-part-4/

    It is set to auto-rebalance once a year. Or at least it should be.

    Biggest mistake was using Ing here when I first got here– they are waaaay overpriced, but I was busy and pregnant and knew I was paying for having the guy come by and do everything for me, but I didn’t realize quite how much. They still won’t let go of my old account (I’ve tried twice) so I’m losing about $200/year in fees. (They let go of my husband’s– it was smaller!) Over sabbatical I switched what I could into Fidelity, so that’s where all new money is going.

    So I have an Ing account a Fidelity account an etrade account and a vanguard account. Eventually we’ll move etrade to Vanguard and Ing to Fidelity. But these things take time and effort.

    I also have some PG&E taxable stocks that drip nice amounts of dividends. Apparently back in the 1980s Reagan put in a lot of nice ways to hide money by putting a child’s name on the stock and my father took advantage. PG&E he gave me when it went bankrupt (probably because after getting married I was no longer legally a minor) so I got to pay taxes on dividends I didn’t see that year on a stock I couldn’t sell when I was only making 18K total for the year and I had to pay to step-up the basis (from before the bankruptcy), which led to a somewhat tense family situation that year (eventually he did give me that year’s dividends so I could cover taxes… and then it didn’t spit out any more dividends for quite some time because of the bankruptcy). But all is forgiven now as they’ve increased dramatically in value and provide a comfy income stream. So that’s my one single stock.

    • I loved CDs when I was a kid! I actually put a good portion of my money into them when I was a teenager since the interest rates on savings accounts at my credit union then were useless.

      I really wish that someone had educated me on investing. What if my 401(k) had been at a crappy company and not Vanguard? Then my Roth IRA money would quite likely be in their hands too.

      Wow… I always hate to hear stories about parents who did stuff like that and then never tell their kids. I’m glad you got married young and then your finances were your own earlier! I know friends whose parents had tens of thousands of dollars socked away in accounts in their kids’ names. That makes more sense how you acquired that one single stock amongst all of the index funds and ETFs :)

      • It’s hard to be that mad because it’s like, a trust fund in my name subject to trust fund rules until I hit my majority… so it’s not like there was a loss (it wasn’t my money to begin with). Except, that transition year and the bankruptcy were a pretty bad combination. If it hadn’t gone bankrupt I could have sold shares and been sitting pretty!

        But yes, there’s a reason I want to control my own finances and to keep things simple!

  2. I started out with CDs too when interest rates were still high. When my parents turn over my gift trust to me, they recommended that I stick in the SP500 index fund with Vanguard. I didn’t know what a Roth IRA was at the time and even if I did, I wouldn’t qualify since I didn’t have any earned income. Eventually I used the money to start my Roth IRA since it had a $1000 minimum. I just recently cashed out the rest to pay for my grad school tuition. I’m probably going to stick with tax sheltered accounts for the time being, since I have not maxed them out yet.

  3. I think the silliest moves I made were 1) investing in the stock market without really having the funds for it. I think I would buy 5 shares of a company! and 2) not looking at expense ratios for mutual funds. Now I buy fewer funds, mostly index, always no-load, and always look at fees!

  4. @oilandgarlic– my FIL is an accountant and a really smart guy and he’d never thought about expense ratios on mutual funds until last year when DH and I got him the Bogleheads book on investing. (He kept asking us about individual stocks and mutual funds in our industry areas based on what the awful Edward Jones guy kept recommending– HUGE loads!)

    My father, otoh, understands the concept and minimizes fees but he’s sure that he can beat the market. Over his investing career he has been somewhat better than the market on average, but I think the main thing is he gets enjoyment out of pouring over morningstar reports and making big wins (and writing off losses at tax time). I really do not have that kind of time or lack of loss-aversion. I <3 low-fee index funds. I love vanguard target date funds most of all and wish I'd gotten into them earlier!

    • I could have that time, but I don’t want to. I don’t want to worry about the upswings and downswings of the market. I tend to overworry about things and I think I would be a terrible stock investor, but with index funds, it’s far easier to be hands off.

      • Given that on average people who try to beat the stock market by investing in individual stocks do worse than they would have if they hadn’t tried… I can’t think of any reason not to do index funds unless you view playing the stock market as entertainment (thus a consumption good).

        • If I wanted to see it as entertainment, I think that doing a mock portfolio would probably suffice for my entertainment. Planning is far more interesting to me than doing, so I don’t think I would actually need to do the investing to get entertainment out of it. I will definitely not make a spreadsheet of how things would look if I hadn’t sold all of my RSUs immediately though because I do believe in selling them immediately, regardless of the price. Watching my employer’s stock price go up and down and learn more about that process is kind of interesting though.

  5. I started with term deposits, then jumped right into mutual funds from big banks with huge loads. From there, the gambling bug bit me and I started buying double inverse ETFs, which are super complicated and was a TERRIBLE decision. Now its slow and steady with market-based index ETFs. It would have been nice to get to this a little bit earlier as I burned quite a bit of money in the process, but it was a learning experience, right? Right? :)

    • Double inverse ETFs? That sounds incredibly confusing. It was totally a valuable learning experience since it helped you to get to the market-based index ETFs approach that you have now :)

  6. We hold VEMAX and VTSAX in our taxable accounts. Well, and CD’s and I-bonds. Our taxable money has become so much, there is a rather large grey area between taxable accounts and the emergency fund.

    • That’s pretty much my plan – VTSAX in taxable investment accounts, with the emergency fund and down payment in cash savings. I definitely do feel like the taxable investments are a lower level emergency fund that can be touched if necessary, but most likely won’t be.

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