Non-retirement Taxable Investing

[atomicrc11]

Hi All, I've been trying to figure out what to hold in my non-retirement taxable investment account. It is sort of a backup EF for anything that may be beyond 4 months, but also to be used in the future with no particular use in mind. It has at least a 6 year horizon unless times should get so bad that I need the cash. Then again if that happened, I wouldn't care if it was sold at a loss.

Currently I've been thinking about the following allocation:

20% Schwab Total Stock Market (SWTSX) - Very Tax efficient
20% Schwab Tax Free Bond (SWNTX) - Federal Income Tax free, still subject to state tax at 5%
15% Schwab Inflation Protected Fund (SWRSX) - Hedge against inflation but not all that tax efficient
15% Schwab GNMA (SWGSX) - Just to diversify bond types
30% Schwab Investor Checking - with MMMF rates so low, I think this is the best option until Money Market rates start going up

I always hear and read to put bonds in tax advataged accounts, but this is money that I will want to use before retirement. The tax free bonds should help, but I didn't want to put all my eggs in the Muni-basket if you will. Any comments are appreciated!

[EEinNJ]

I suggest you read the prospectus' carefully, especially the bond funds. Schwab had a Total Bond High Yield fund that turned out to have a lot of sub-prime exposure and it got hammered. I have several Schwab funds, some are great, some just avg. I like SWINX (Int'l), SWLBX is ok (int. term bond). SNXFX, Schwab 1000 tends to do a little better than S&P 500

[atomicrc11]

Hi EE, I did read all of the prospectus, I went with the Schwab Total Market for the tax efficiency and that it performed very similarly to the Schwab 1000 index.

I guess what I really want to know is if it is that bad to hold things like TIPS in a taxable account when it fits the asset allocation. Since this money will be used before retirement I can't just put some into an IRA and pull it out when I need it as it would be an unqualified withdrawal. Plus I would then not be maxing out my Roth which is strictly retirement money.

The TIPS fund is mostly government bonds with up to 10% in Investment Grade Bonds with a lowest rating of B. I find that risk acceptable, so the question is the taxes. I don't really have a place to shelter it, so I guess I would rather pay the taxes than earn a lower interest rate.

[EEinNJ]

A bond fund is going to generate interest income (you want it to!), and since this is not in a retirement account you'll have to pay tax on it. There's a saying about not letting the tax tail wag the dog, though. One thing I'm reminded of every year is the tax bite due to the end of year distributions of equity funds- index funds seem to be a little better since there's less turnover.

Also, TIPS can be bought as an ETF- might be worth comparing against Schwab's offering.

[Broken Arrow]

You know, you actually have a pretty good setup here.

About the only thing I wonder about is SWGSX. That's certainly a good way to hedge, but... I am just wondering if that's truly necessary given your stated goal, which is simply to form a secondary EF, which presumably includes capital preservation.

For myself, I have found the answer right in my own credit union. Very simply, their savings account gives me a guaranteed 3.01% APY right now. That and with total liquidity and FDIC protection, I just don't see why I would need to go any further than this.

So, that's kind of the point for your consideration. What you've built here is a brilliant, self-contained portfolio, but considering that this is only a portion of your money, you don't really have to do that if you don't want to. So long as your total porfolio is properly diversified, you'll be fine, even if individual allocations exist in different accounts.

Either way, it's only a minor pick. I think you'll do just fine with what you have. Otherwise, and for the sake of tax filing, I believe you can simplify this a bit more if you want to.