Bond Fund Vs Stocks & Taxes

[firehawkocean]

Hello everyone,

I am trying to decide which funds I should be focused on, and whether I should be diversified with bond funds. I am in a 33% tax rate (federally) and live in a no income tax state. I have about 10% of my worth in this tax-exempt fund (I pay zero taxes on it’s dividends).

VWIUX
Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares

I don’t really need to be diversified in the sense of worrying about the future. I have two houses paid for, good cash flow, plenty of cash in the bank, etc.

So, I’m wondering if the tax-exempt fund is better than my Vanguard Total Stock Index fund. With the Total Stock Index Fund, I am paying 15% on qualified dividends. And, I don’t see that big of a difference with the yields. Or, maybe I should just quit bond funds and put it all into stocks. I have no problem being more aggressive.

Thoughts?

[sv2007]

If you are looking strictly from a current return view point, then it is very easy, and sure, it makes sense to move to the highest returning investment (and seems your stock ROI is better than bond+tax savings, so why not).

But, to most people, tax planning and current return are only part of the equation; they also look at asset classes and bonds offer a different risk profile than stocks, for example. And many other issues, and this aspect is much more difficult to figure out; anyway just FYI in case you also want to consider it.

[firehawkocean]

If you are looking strictly from a current return view point, then it is very easy, and sure, it makes sense to move to the highest returning investment (and seems your stock ROI is better than bond+tax savings, so why not).

But, to most people, tax planning and current return are only part of the equation; they also look at asset classes and bonds offer a different risk profile than stocks, for example. And many other issues, and this aspect is much more difficult to figure out; anyway just FYI in case you also want to consider it.

Thanks. Do I compare the stocks vs. bonds by the yield?

[feh]

Hello everyone,

I am trying to decide which funds I should be focused on, and whether I should be diversified with bond funds. I am in a 33% tax rate (federally) and live in a no income tax state. I have about 10% of my worth in this tax-exempt fund (I pay zero taxes on it’s dividends).

VWIUX
Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares

I don’t really need to be diversified in the sense of worrying about the future. I have two houses paid for, good cash flow, plenty of cash in the bank, etc.

So, I’m wondering if the tax-exempt fund is better than my Vanguard Total Stock Index fund. With the Total Stock Index Fund, I am paying 15% on qualified dividends. And, I don’t see that big of a difference with the yields. Or, maybe I should just quit bond funds and put it all into stocks. I have no problem being more aggressive.

Thoughts?

If you think there is virtually no difference between a bond fund and an equity fund, I strongly suggest you learn the basics of investing.

Take the time to read this page; it will likely lead to other reading:

https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit

[firehawkocean]

If you think there is virtually no difference between a bond fund and an equity fund, I strongly suggest you learn the basics of investing.

Take the time to read this page; it will likely lead to other reading:

https://www.bogleheads.org/wiki/Bogl...g_start-up_kit

Thanks. I'll take a look at it. I know there is a difference between the two. The question I had was related to taxation. If I'm paying 15% on dividends for qualified stocks versus zero taxes on dividends for my bond fund, it seems a pretty big difference.

[feh]

Thanks. I'll take a look at it. I know there is a difference between the two. The question I had was related to taxation. If I'm paying 15% on dividends for qualified stocks versus zero taxes on dividends for my bond fund, it seems a pretty big difference.

So, this is a taxable account? If not, it really doesn't matter.

You are correct that most (if not all) of the dividends on the equity fund will be taxed at your capital gains rate. While you will not pay federal taxes on your municipal bond fund dividends, you will probably still pay state tax (unless the fund is specific to the state in which you live). So, yes, taxes is something to consider.

But, don't let taxes be the tail that wags the dog. The risk/reward of the fund you choose is certainly more important.

[james.hendrickson]

Guys,

One small additional point to consider is the timing of payments in the stock and bonds funds.

Some funds, such as the Vanguard Total Bond Market Index (VBMFX), pay monthly distributions. Since a dollar today is more valuable than a dollar tomorrow - you need to factor in the timing of payments when you look at a fund's total return - most published figures in mutual fund prospectus don't factor this in.