I’m looking at purchasing one fund in my taxable account and never selling until I retire. For this purpose, I was wondering if Vanguard’s Tax-Managed Balanced Fund (VTMFX) could work as a one-stop-shop for a taxable account. I do not see myself tax-loss harvesting or redeeming shares within five years. The simplicity of this balanced fund appeals to me, and I think I could rebalance within my current retirement accounts to achieve my bond/domestic/foreign allocation.

The only downside I see is possibly losing some domestic returns. VTMFX is not a pure index fund, and it has a slight growth tilt. However, I’m wondering if its tax management might be worth it.

Do you have any data showing that holding value stocks in tax-deferred generates better after-tax return, even under the proposed higher tax rates?

I hold nominal UST b/c I value their modern portfolio benefit. Muni funds likely, but not always, will yield more on a tax equivalent basis than UST, though at current levels, depending on your state and duration, that may not be the case. Regardless, 2008-9 thankfully does not happen often. The point is simply that it can, and it did. My fixed income functions like portfolio insurance. I won’t chase the yield, but I will chase the quality. When I need the quality, I want it to be there. If I lose a few basis points yearly, or even in the long run, perhaps it will balance out with the flight to quality bonus, perhaps it won’t, but at all times, my fixed income will be not be subject to any credit risk. I’ll take my term risk and inflation risks at the level that I choose them. I don’t want the other risks. That’s hat my Equities, REITs, and CCFs are for.

2.) I only hold US Treasury instruments in my bond/fixed income portfolio (cash/cd’s money markets are not part of my portfolio, just part of my emergency/daily needs funds). I do so because of their presumed safety. I switched to all US Nominals and US TIPS in 2006. It treated me very well during the recent financial meltdown, and allowed me to rebalance when needed and benefit strongly from keeping a proper asset allocation due to the negative correlation that was expected, and ocurred (I hold intwermediate term US Treasuries through the Spartan INt Term US Treasury fund). MUNI funds, depending on their duration, did not fare as well. Fixed income should be for volatility reduction, safety, and as a source from which rebalancing funds can be taken. I like your premise but it would force me to abandon my core belief as stated in this paragraph.
What are your thoughts on this matter?
Full disclosure – I purchased 1% of my net worh in CA GO bonds when they were yielding 5.75% in 2009. I don’t count that in my fixed incme allocation – it was the only ‘play money’ I’ve ever ‘gambled’ with since I went strictly passive low cost index/broad asset class ETF in 2005-6.

I’m 75% equities/25% bonds. About 35% of my equity portfolio is in small and/or value (incl international via VSS).

Appreciate your thoughts on this mater

(I am a MFJ wage slave with >250K income).

If you did not hold any value stock funds in your taxable account, but rather only, say, a total stock market index fund, would you still make the investment changes?

I ask because, at some point, most people only have so much space in their tax deferred accounts, and legally avoiding all taxation on their investments while maintaining their desired asset allocation is–as far as I can tell–pretty close to an impossible task.

(1) Without the actual law or even a bill that spells it out, it’s impossible to know exactly how it’s going to work.

(2) The 3.8% surtax would be on top of the regular tax, regardless how the regular tax is figured out. Previous post is here.

(3) The preferential treatment on dividends only existed in the last ten years. I would say it’s more of an exception than a rule. One can reasonably argue that such preferential treatment benefits the rich more than the middle class and the poor and therefore must be reversed. Especially if it’s taken away from only the upper income taxpayers, it only affects a small % of investors. The majority will go for it in a heartbeat.

(4) I agree. When you have value stock funds in a taxable account with sizable unrealized capital gains, you will find yourself in a bind — either pay a high tax rate on dividends or sell and pay the capital gains tax. That’s why I’m making the changes now before capital gains build up.

Finally, AMT might absorb some of the additional tax, depending on how exactly it’s implemented.