Finally Close....Need Final Push & Opinions Please!

[hrux]

First I would like to pass my sincere thanks to Craig, Med Tex, Paul B and many, many others that have been so kind to provide their insight...Well finally after 18 plus months of meeting with numerous financial advisors, ranging from active mutual funds, hedge funds, passive index, dfa, etc. I have finally narrowed my choice to three versions of the Permanent Portfolio. 

All three options will consist of 25% Gold (GTU), 25% LT Treasuries (TLT) and 25% ST Treasuries (SHY), however they differ in the 25% stock component. Please note that I have ruled out the equal split of Small Cap Value and Emerging and have narrowed the options down as follows:

Disclosure:  Will be investing in mostly taxable account so after tax return is important.  In addition, my family is in the wealth accumulation mode so would like to try and maximize our return even if it means slightly greater risk.

Option 1
20%- VTI
5%- VEU

Option 2
6.25% VV- US Large Blend
6.25% IJS- US Small Cap Value
3.75% EFV- International Large Value (has some Emerging Large Value)
2.5% VWO- Emerging Large
6.25% VSS- International Small Cap (developed and emerging)

If there were better options out there for ILV (including EM) or ISV including EM would consider them. IMO this mix would be extremely well diversified and the cost reasonable (M* shows .30), and it should also be tax efficient.  However the downside is that it does add complexity.

Option 3- simplified version of the ultimate buy hold fund suggested by Trev H at bogleheads.
6.25% VV- US Large Blend
6.25% IJS- US Small Cap Value
6.25% EFV- International Large Value (has some Emerging Large Value)
6.25% VSS- International Small Cap (developed and emerging)

Any final thoughts are greatly appreciated!
Regards,
Heather

[Snowman9000]

I believe simpler is better.  And also that anything less than 5% is too insignificant to make a difference.  More like 10%, but 5% for sure.  Just my opinions.

Also, I suspect Option 1 will be more tax-efficient than the other two.

[Austen Heller]

Hi Heather,

Back when I read William Bernstein's book "The 4 Pillars of Investing" about 6 years ago, I invested my stock portion as he recommended.  I used about 10 different stock indexes, so that I was fully "diversified" into every market-cap, sector, country, etc.  But as the years have gone by, I realized that owning all those different stock indexes wasn't really diversified at all, and they just added a  bunch of unnecessary complexity to my portfolio.  Now my only stock holding is the US Total Stock Market.  That said, of your available choices, I vote for option #1.  But you probably could omit the VEU and just go all VTI.  You are already getting plenty of non-US dollar exposure by owning gold.  Plus, by only holding VTI, you will never have any rebalancing within your stock allocation, which will minimize your capital gains taxes.

Austen

[Maestro G]

First I would like to pass my sincere thanks to Craig, Med Tex, Paul B and many, many others that have been so kind to provide their insight...Well finally after 18 plus months of meeting with numerous financial advisors, ranging from active mutual funds, hedge funds, passive index, dfa, etc. I have finally narrowed my choice to three versions of the Permanent Portfolio. 

All three options will consist of 25% Gold (GTU), 25% LT Treasuries (TLT) and 25% ST Treasuries (SHY), however they differ in the 25% stock component. Please note that I have ruled out the equal split of Small Cap Value and Emerging and have narrowed the options down as follows:

Disclosure:  Will be investing in mostly taxable account so after tax return is important.  In addition, my family is in the wealth accumulation mode so would like to try and maximize our return even if it means slightly greater risk.

Option 1
20%- VTI
5%- VEU

Option 2
6.25% VV- US Large Blend
6.25% IJS- US Small Cap Value
3.75% EFV- International Large Value (has some Emerging Large Value)
2.5% VWO- Emerging Large
6.25% VSS- International Small Cap (developed and emerging)

If there were better options out there for ILV (including EM) or ISV including EM would consider them. IMO this mix would be extremely well diversified and the cost reasonable (M* shows .30), and it should also be tax efficient.  However the downside is that it does add complexity.

Option 3- simplified version of the ultimate buy hold fund suggested by Trev H at bogleheads.
6.25% VV- US Large Blend
6.25% IJS- US Small Cap Value
6.25% EFV- International Large Value (has some Emerging Large Value)
6.25% VSS- International Small Cap (developed and emerging)

Any final thoughts are greatly appreciated!
Regards,
Heather

Hi Heather,

I believe there is one more international option worth considering for the sake of simplicity and greater diversification: your proposed option 1 but substitute the newly reconstituted Vanguard Total International that will also eventually have an etf version for VEU. Here is the link: https://personal.vanguard.com/us/insigh ... t-09242010 with more complete information from the "horses mouth." This should be happening fairly soon. I'm waiting for it myself.

I believe this will be the most diversified and least expensive international index fund/etf available to date! Of course, you will not have the value tilt, but there will be more smallcap it seems.

Best of luck with your decision and the PP!

Happy Holidays!

Maestro G

[craigr]

Stay with simple. You can always add complexity later but it is hard to get rid of if you don't want it. And by hard to get rid of, I mean tax wise. I've been there and it took me years to undo a complex portfolio in a tax efficient way. The only good side to 2008 is it finally gave me losses in the older positions that I could sell them for tax loss harvesting reasons.

If you really want the international exposure in one single simple fund then you could consider buying Vanguards VT fund which is a total world index. I am uncertain of the tax efficiency of this fund as it is relatively new, but it probably will be acceptable.

[moda0306]

Agreed with Craig... you can fight and toil all day for that last 1% of average return out of your stocks, and still be left chasing your tail at the end of the day, and with a higher tax-bill to boot.

Keep the PP simple, and with the rest of your money (VP), dig into emerging markets, options, individual stocks, junk bonds, rental property, a ZOMBIE fund (canned food & guns in your basement), etc.

The nice thing about it, is you can take some pretty fun risks when you know that everything you can't afford to lose is in such an iron clad portfolio.  Playing poker with your pocket change is fun... playing poker with your kid's college money... not so much.

[Wonk]

Hi Heather,

I'm option #3.  First, I'll say this: I believe in simple whenever possible.  I agree with everyone in that most of the time simple is best.  But for my taste, I'll take the added complexity on this one.

The simplified buy and hold (SUBH) adds a very reliable 95bp/yr to a permanent portfolio going back to 1972.  I can't speak for anyone else, but for me, I'll take the added complexity for the expected returns.  The argument and data behind SUBH is compelling enough for me.  Of course, no guarantees except death and taxes, but...

Another point I'll make is that given the available data, I'm convinced there is a small and value premium.  So I do believe a Paul Boyer-type PP (SV/EM, also called "Harry/Larry" in the "permanent portfolio redux" thread on diehards) will provide even greater returns long term.  That said, I feel like I could be tempted to style drift over the 5-10 year periods where SV is out of favor.  So I opted for the middle of the road in expected returns with a bit of added complexity.

What drove my decision was sizing up how complex it was going to be.  The final verdict: not much.  I buy 4 stock funds instead of 1.  I rebalance the aggregate at 15% or 35%.  Done.

I believe your decision should be made by how much you value simplicity.  If it is of utmost importance, an orthodox PP is an excellent choice.  If you are looking for higher expected returns in exchange for a few more mouse clicks, you may want to consider SUBH or a Paul Boyer type PP.  Either way, the bulk of your ROI is derived from the 4 x 25, so take solace that you are in good hands regardless.

Finally, I should disclose that 20% of my assets are in a SUBH-PP and the remaining 80% are in a VP of gold/silver & PM equities.

Good luck!
Wonk

[hrux]

Hi Heather,

I'm option #3.  First, I'll say this: I believe in simple whenever possible.  I agree with everyone in that most of the time simple is best.  But for my taste, I'll take the added complexity on this one.

The simplified buy and hold (SUBH) adds a very reliable 95bp/yr to a permanent portfolio going back to 1972.  I can't speak for anyone else, but for me, I'll take the added complexity for the expected returns.  The argument and data behind SUBH is compelling enough for me.  Of course, no guarantees except death and taxes, but...

Another point I'll make is that given the available data, I'm convinced there is a small and value premium.  So I do believe a Paul Boyer-type PP (SV/EM, also called "Harry/Larry" in the "permanent portfolio redux" thread on diehards) will provide even greater returns long term.  That said, I feel like I could be tempted to style drift over the 5-10 year periods where SV is out of favor.  So I opted for the middle of the road in expected returns with a bit of added complexity.

What drove my decision was sizing up how complex it was going to be.  The final verdict: not much.  I buy 4 stock funds instead of 1.  I rebalance the aggregate at 15% or 35%.  Done.

I believe your decision should be made by how much you value simplicity.  If it is of utmost importance, an orthodox PP is an excellent choice.  If you are looking for higher expected returns in exchange for a few more mouse clicks, you may want to consider SUBH or a Paul Boyer type PP.  Either way, the bulk of your ROI is derived from the 4 x 25, so take solace that you are in good hands regardless.

Finally, I should disclose that 20% of my assets are in a SUBH-PP and the remaining 80% are in a VP of gold/silver & PM equities.

Good luck!
Wonk

Wonk- can you please disclose what the four stock funds that you own are?  Thanks

[Wonk]

Wonk- can you please disclose what the four stock funds that you own are?  Thanks

Sure:

VFINX (LB)
VISVX (SV)
VSS    (ISB)
VTRIX (ILV)

I should note that this blend adds 18bp ER over an all orthodox 4 x 25 PP.  That said, there is a persistent 95bp additional gain annually over the last 40 years using SUBH over TSM.  So you're talking a net gain of 75bp/annually over the last 40 years.  There are tax considerations and I apologize I don't have data to back it up, but I believe the tax drag would be minimal. Maybe another 10bp/yr in my estimation as a worst case scenario.  So after everything, perhaps 65-70bp gain for SUBH over TSM annually. 

It's always good to remember nothing is guaranteed, but for me I like the odds. 

[Wonk]

One more note: if you are interested in seeing a visual of the SUBH versus TSM, pg 21 on the big Permanent Portfolio thread has it:

http://www.bogleheads.org/forum/viewtop ... start=1000

Look for TrevH's posts that are #6 & #7 down from the top of that page.

[craigr]

Please keep in mind that if this is a taxable portfolio the more funds you add the higher your tax bill. The specialty/value funds as a general rule all have much lower tax efficiency than broad based index funds. Some small value funds can lose over 1% a year in CAGR just due tax impacts. Translated in layman's terms: You are taking on additional risk in these small value plays but Uncle Sam is getting the reward in higher taxes.

I looked at this issue forwards and backwards many years ago. I even designed a spreadsheet that would apply historical tax rates to model portfolios to estimate after-tax performance. The takeaway was this: A broad based index fund produced nearly identical returns vs. a more complicated portfolio if you subtract likely tax loads. If tax rates went up above historical averages then the simpler portfolio beat the complicated portfolios just by avoiding the higher taxes.

With the tax rates about to go back up I suspect the gap may definitely narrow enough to benefit broad based index funds in almost every case.

Again, you can always add more funds later if you feel like doing it. But if you are running a taxable portfolio I *implore* you to keep it very simple and watch your tax efficiency. It is very expensive with capital gains, etc. to undo a taxable portfolio allocation you don't like. So tread very carefully before you add in a bunch of funds that you may later wish weren't there due to their tax loads.

Voice of experience here. Take it for what it's worth. I think all portfolios should be as simple as possible. But taxable portfolios should be especially careful about keeping things simple.

[moda0306]

Completely agreed with Craig.

Craig, you maybe should think of doing a podcast on tax efficiency.  There are more intricacies to tax deferred plans that can make them more flexible than most people think (ie, being able to withdraw Roth contributions after 5 years... it significantly increases the flexibility of that account).

Further, aside from tax-deferred accounts and using property index funds, you can individually track your "shares" or bullion, or LT bond purchases.  When most people sell, the use the easiest first-in-first-out approach... I believe their broker sends it to them in this method for their own ease of calculation.  It doesn't need to be done this way.  You can calculate your gains based on individual purchase prices, so as to eliminate any gain.

Even further than that, lets say you've got $10,000 of gold gain at 28% federal and 5% state (After using individual security cost method as I described above, of course... so you've already limited your tax hit).  That's 1/3 of your gain, gone to government.  If you happened to have a sharp decline in your TSM, you could sell the most expensive shares, and put that same money into the Vanguard S&P index (as it is close enough in allocation type) to avoid the wash-sale rule (doesn't let you sell then immediately buy the exact same security to capture losses on your tax return).

If you can find $10,000 in losses through your stocks, you can offset any gain you would have recognized, and keep your $3,333.  You could do the same with LT bonds and sell your Vanguard LT treasury fund and buy the Vanguard LT treasury ETF.

I'm not sure, but I think Vanguard wouldn't soak you for fees if you're simply moving in and out of a few of their funds.  This could prove extremely tax-efficient, especially when you have to sell all that gold at a 28% gain in a year.  Think about it.  At the end of 2010 (lets pretend taxes aren't probably going up), if people are to be rebalancing gold back down, if they use the "shares" or "coins" they most recently purchased as their basis, they're minimizing their gain... then they swap out some of their TSM for the S&P fund to capture a bunch of those losses from shares they were buying in 2006.  Very easy way of eliminating the huge tax that they probably would have had to pay on the gold they sold in 2010 to rebalance.

I think it would definitely be worth a podcast.  I'm a tax accountant, and I'd be willing to send you an outline of these ideas or whatever you'd like me to do to help you illustrate these issues.  I just wish I made enough money and had enough to invest to be able to play the game myself, as opposed to just talking about it.

[craigr]

I think it would definitely be worth a podcast.  I'm a tax accountant, and I'd be willing to send you an outline of these ideas or whatever you'd like me to do to help you illustrate these issues.  I just wish I made enough money and had enough to invest to be able to play the game myself, as opposed to just talking about it.

These are all good points, but many I have no direct experience with myself so I'm cautious about commenting on them. I do however run a portfolio that is perhaps 95% taxable and I am very careful about doing anything that gives more money to Uncle Sam above the base tax rates.

I will definitely have to talk about this issue of tax efficiency (would be nice to have a tax accountant on for an interview ). Most actively managed funds pay no attention to this aspect of tax management. The specialty index funds have higher turnover and this almost always means higher taxes. Not just this, but the extra rebalancing between the stock asset classes means you pay more capital gains taxes when keeping things in adjustment. Broad based index funds have much lower costs by comparison.

The other thing that is interesting is during a bull market in stocks the tax efficiencies in these specialty funds get worse. So you can look back the past 10 years and think: "That isn't so bad." but if we get another bull market in stocks the tax costs go way up because the funds cannot internally harvest losses and will be dumping the gains onto the shareholders.

I look at tax efficiency as really low hanging fruit that benefits taxable investors. It's far more of a sure thing going for lower taxes vs. slice and dice in a taxable account. With the very high likelihood that taxes are going to continue going up you want to get your ducks in a row now for your portfolio in terms of managing the almost certainly higher costs. I encourage taxable investors to take a very long term view of asset class ownership. Not just years, but decades. It is very expensive to correct a portfolio with funds you no longer want. If you keep it simple it is likely you'll have less regrets.

You just can't go in like you can in a tax-deferred account and re-swizzle things if you hate your funds. There are costs associated with it. Imagine getting into a fund that is lagging the market for years and you don't want it. But it has capital gains in it. It hasn't matched the market, but it's come close. But it's also throwing a lot of dividends in your lap and generating capital gains taxes from internal turnover. Now you have to decide whether you just hang onto the thing because of the capital gains taxes you pay or dump it now and limit the damage going forward. It puts investors in a bad situation, what is sometimes called Morton's Fork:

The expression originates from a policy of tax collection devised by John Morton, Lord Chancellor of England in 1487, under the rule of Henry VII.

His approach was that if the subject lived in luxury and had clearly spent a lot of money on himself, he obviously had sufficient income to spare for the king. Alternatively, if the subject lived frugally, and showed no sign of being wealthy, he must have substantial savings and could therefore afford to give it to the king. These arguments were the two prongs of the fork and regardless of whether the subject was rich or poor, he did not have a favorable choice.

[moda0306]

Craig,

Yeah, your focus on the TSM fund really hit home.  I never looked at tax-efficiency from that point of view before.  The main areas that would maybe be hit are:

1) As you mentioned, how to find tax efficient funds (low turnover) to place in your portfolio for each sector, PP or not.

2) Using the flexibility of tax-deferred accounts: IRA, Roth, HSA, 529 Plans, Educational IRAs, etc

3) Which parts of the PP to allocate to taxable vs non-taxable accounts, given their current tax treatment.

4) If you do have to rebalance, how to eliminate the taxable gain, especially when 28% gold rates are at stake... especially since gold often resides outside tax-deferred accounts.

I'm sure there are other accountants with some more experience out there, but it doesn't seem to me that there are many vocal ones on this board.  I have a pretty intense interest in tax planning, and my love for macro-economics and the permanent portfolio (and hatred for taxes) have really got me thinking in more detail about investment tax planning, in particular.  I don't know how you bring guests onto the show, but I'd be glad to join you for an episode.  I know how to discuss these issues in a clear way, and I've never been afraid of public speaking.  As I said, and it's obvious you agree, when the state and federal governments are taking 40%, in many cases, of your income, smart tax planning can have a huge affect on your long-term returns.


Let me know if you want to pound this out.  I'm more than interested, and I won't really be busy at work until mid-January.

[Wonk]

Heather,

Craig makes very valid points about potential tax considerations.  It's an area I haven't thoroughly dissected as half of my stock allocation is in tax deferred accounts.  Obviously if the tax drag is high enough to chew up 60-70bp/yr, it alters the risk/reward equation.

But I'm not sure there is a way to go back to 1970 and accurately account for the drag on the portfolio as a whole since low-cost slice and dice is a relatively recent phenomenon.  I might be missing something though.  One point I'd like to make is that I do not rebalance each year to 6.25% each--which would cut down on potentially taxable events.  Instead I allow each quadrant to drift until one asset class in the portfolio hits a rebalancing band.

Craig, can you elaborate more on how you projected tax drag with a tilted portfolio?

Thanks.

[craigr]

Craig, can you elaborate more on how you projected tax drag with a tilted portfolio?

I have a dataset which goes back to 1926. The data reflects the range of CRSP indices for total market, small cap, etc. I am somewhat suspicious of index data rendered from historical data when no index existed, but it's the best I've got. I then applied the tax loads Morningstar had for those sector funds with 10+ years of data as a "likely" historical tax cost. I then applied a table of historical US tax rates on capital gains to the rebalancing operations that happened each year.

The result could be debated somewhat, but the overall outcome I think reflects the reality of tax losses in very complicated portfolios. Just by avoiding paying additional taxes on things like rebalancing and owning funds with high turnover you keep more of your money. It's not that groundbreaking really, but I hadn't seen anyone else looking at the issue.

It is interesting to me because it's just not something most people considered in these complicated portfolios. Many of them assume the investor is working in 100% tax-deferred space. But if you're not then these approaches are likely going to be very expensive to implement over time and any theoretical advantage is likely going to be eaten up by Uncle Sam (or awfully close).

I had made similar changes to Simba's spreadsheet but didn't want to release it as it altered things too much in his code. I think however if Simba made those changes it would be interesting to many people. My estimate is a slice and dice portfolio could lose anywhere in the 1-1.5% a year range in taxes due to fund turnover and rebalancing.

EDIT: Forgot to add, I also subtracted average fund expense costs for each sector. Those glowing returns people see in small value, etc. historically do not have fund fees included. Many small value, etc. funds are much more expensive than a broad index fund. Costs matter.

[Wonk]

Without a doubt the tax consequences of implementing some form of tilted portfolio represent the murkiest part of the debate--primarily because we don't have access to totally reliable historical information. 

A few points I'd like to make:

1. From an expense ratio standpoint alone, the added costs of tilting are minimal.  Vanguard's Small Value Index (.28) can be purchased for only 10bp over the S&P 500 Index (.18).  As a whole, a SUBH PP can be implemented for a total of 18bp over TSM.  While this isn't nothing, it's certainly closer to minimal given added historical risk-adjusted returns.

2. For 100% taxable investors, tilted portfolios present more of a conundrum than for mostly tax-deferred investors.  The issues of turnover and rebalancing events are non-existent in the latter camp and I think the added premiums stand a good chance of persisting.  For those who reside in the former, special attention to tax liability is certainly needed.

3. Although it can't be completely relied upon, I did a "quick and dirty" calculation of tax-adjusted returns for S&P (LB) vs SUBH funds.  I only used the 1-year returns, hence the "quick and dirty" part.  What's noted below are the spreads in yield between total return and tax-adjusted return.  Here are the results:

LB: .33
SV: .45
ISB: .45 (as an etf, no data present, although estimating at small value levels)
ILV: .44

SUBH avg: .42

By comparison, the SUBH would appear to add roughly 9bp in tax costs to the portfolio as compared with LB.  Of course I can't make the case over 40 years of data, but I would imagine added tax costs are closer to 10bp than 150bp.

4. I believe rebalancing events average about 3 years using 15/35 bands.  I would imagine this would alter tax liability versus <12 month rebalancing.

Overall, my estimation would be about 25-30bp additional annual costs to implement a SUBH PP in all taxable, given ER and tax drag considerations.  As mentioned, it's much harder to estimate because I don't have entirely reliable historical information from which to make a case.

[craigr]

Without a doubt the tax consequences of implementing some form of tilted portfolio represent the murkiest part of the debate--primarily because we don't have access to totally reliable historical information. 

A few points I'd like to make:

1. From an expense ratio standpoint alone, the added costs of tilting are minimal.  Vanguard's Small Value Index (.28) can be purchased for only 10bp over the S&P 500 Index (.18).  As a whole, a SUBH PP can be implemented for a total of 18bp over TSM.  While this isn't nothing, it's certainly closer to minimal given added historical risk-adjusted returns.

It's only recently that costs on many of these funds have come down. The benchmark Small Cap Value fund IMO is DFA's US Small Cap Value (Ticker: DFSVX). The expense ratio on that fund is 0.54% a year for instance. Other funds tend to be towards that range. The typical broad based market ETF is 0.20% a year or less. So there is 0.30% being skimmed off in extra expenses.

But the interesting part is the after tax performance. Looking at the DFA fund we have a 10 year tax cost ratio of 1.61%. Pretax returns the past 10 years have been 10.99% but after tax is 9.21%

Now you say that's better than the S&P 500 isn't it? I agree it is. But when the tide turns and large caps come back into favor that tax load is still there.

The past five years had a pretax return of 1.97% and after tax returns of 0.85%. The past three years had returns of 0.02% and after tax -0.75%. So the tax load does eat into returns.

By comparison, the SUBH would appear to add roughly 9bp in tax costs to the portfolio as compared with LB.  Of course I can't make the case over 40 years of data, but I would imagine added tax costs are closer to 10bp than 150bp.

I think this estimate is low. For the stock portion the tax load is best estimated with Morningstar's results. Best to only look at funds with more than 10+ years of data. This means the fund has been through good and bad years.

4. I believe rebalancing events average about 3 years using 15/35 bands.  I would imagine this would alter tax liability versus <12 month rebalancing.

Certainly tinkering with the portfolio less often is a good thing. Annual rebalancing was used because that was kind of standard practice. But yes not rebalancing as often saves on taxes.

I think the best we can do is make estimations based on the taxes of the funds and rebalancing. But I'm still on the side that for a taxable investor it's probably not worth the trouble and in some cases of a return of very high taxes it will be a liability going forward.

[KevinW]

For what it's worth, I have a theory that the lion's share of the "small-value premium" is actually the market's reward for holding tax-inefficient assets.  If the big money prioritizes tax-efficient stocks and avoids tax-inefficient stocks, then tax-inefficient stocks are habitually underpriced, provided your analysis ignores tax efficiency.  Due to dividends and turnover, small-value is highly correlated with tax-inefficient.

Thus, small-value appears to outperform when you have tax blinders on.  The good news is that tax-deferred investors can take advantage of this.  The bad news is that tilting becomes a wash in taxable portfolios.  craigr's empirical results seem to support this.

Also, I will note that most of the small-value datasets include years before tax-deferred accounts existed, when almost all assets were taxable and the "tax-inefficient premium" would have been larger.  With a growing portion of assets in tax-deferred accounts, I expect the "tax-inefficient premium" to become less substantial going forward.

[hrux]

Craig,
I have two questions that I was hoping you could share your thoughts on.

1)  What is your opinion on investing 100% in VT versus 80% VTI and 20% in VEU?  Do you think VT represents too much currency risk and exposure to emerging markets?

2)  If your stock allocation is 80% VTI and 20% VEU, why do you bother to split this as 20% seems like a minor allocation and creates more complexity and potential tax burden?

Please advise.
Thanks,
Heather

[craigr]

Craig,
I have two questions that I was hoping you could share your thoughts on.

1)  What is your opinion on investing 100% in VT versus 80% VTI and 20% in VEU?  Do you think VT represents too much currency risk and exposure to emerging markets?

Jury is still out. It's a relatively new fund. But clearly there is more currency risk. Whether it will matter in the long run is anyone's guess. But historically the developed markets and US markets have been pretty equal returns-wise.

2)  If your stock allocation is 80% VTI and 20% VEU, why do you bother to split this as 20% seems like a minor allocation and creates more complexity and potential tax burden?

Probably an old habit I just couldn't break. If I could do it over today and really wanted the intl. exposure I may consider using VT as you list above. But even if I was 100% VTI I'd still feel OK just because US Companies all have significant exposure to international operations.

[Wonk]

I believe our debate centers on are two separate topics:

1. Expense costs to own funds
2. Tax costs of the funds

It's only recently that costs on many of these funds have come down. The benchmark Small Cap Value fund IMO is DFA's US Small Cap Value (Ticker: DFSVX). The expense ratio on that fund is 0.54% a year for instance. Other funds tend to be towards that range. The typical broad based market ETF is 0.20% a year or less. So there is 0.30% being skimmed off in extra expenses.

That's fine, we can use the higher ER of DFSVX.  On the surface, an extra 30bp ER sounds like a lot, right?  It does, until we put it into context.  The added 34bp only represents 18% of the total portfolio, not 100%, so the added expense drag is only 1/5th what it appears at first glance.

For instance, a TSM-PP total ER could look like this:

TSM: .20
TLT: .15
SHY: .15
IAU: .25

Total ER: .75
Blended ER: .1875

By comparison, a SUBH-PP using DFA (or similar) funds with higher ER's along with an S&P would look like this:

LB, SV, ISB, ILV: .18 + .54 + .54 + .54 = .45 (blended ER)
TLT: .15
SHY: .15
IAU: .25

Total ER: 1.00
Blended ER: .25

So what is the real expense drag we are considering here?  About 6-7bp across the entire portfolio, not just the 18% that represents the equity position.  That's the expense side, now let's move to tax drag:

But the interesting part is the after tax performance. Looking at the DFA fund we have a 10 year tax cost ratio of 1.61%. Pretax returns the past 10 years have been 10.99% but after tax is 9.21%

Now you say that's better than the S&P 500 isn't it? I agree it is. But when the tide turns and large caps come back into favor that tax load is still there.

The past five years had a pretax return of 1.97% and after tax returns of 0.85%. The past three years had returns of 0.02% and after tax -0.75%. So the tax load does eat into returns.

Again, on the surface, 1.78% tax drag appears like a lot--until we put it into context.  That number is a 10 year total, not 1 year.  So what is our annual tax drag?  Approximately .18% for SV?  What about the others?  Here is what I see in approximate annual tax drag (spread) over the last 10 years, using 3 higher-cost DFA funds and 1 Vanguard S&P fund (using M* data):

LB: .03
SV: .18
ILV: .13
ISB: .12

Blended tax drag for equity (25%): .115
Blended tax drag for SUBH-PP (100%): .028

So the added tax drag for the entire SUBH-PP over the last 10 years appears to be less than 3bp annually.  That's for 100% taxable investors with no tax deferred space.

With #1 (ER drag) and #2 (Tax drag) added together, we are looking at about 10bp annually over the last 10 years to implement a SUBH-PP.  Unless I'm missing something, I'd be willing to give up 10bp to gain 95bp annually--even if I were solely a taxable investor.  

I think the best we can do is make estimations based on the taxes of the funds and rebalancing. But I'm still on the side that for a taxable investor it's probably not worth the trouble and in some cases of a return of very high taxes it will be a liability going forward.

I can appreciate your perspective and I enjoyed discussing it with you.  In the end, we may just have to agree to disagree on this one.  

[craigr]

So the added tax drag for the entire SUBH-PP over the last 10 years appears to be less than 3bp annually.  That's for 100% taxable investors with no tax deferred space.

I ran a slice and dice portfolio in the past and the taxes are a problem. The funds pay out more in dividends which are taxed. The funds also have higher turnover so you get capital gains from the fund each year that are taxed. Then you have the rebalancing costs of keeping everything in check that is taxed for the gains. The costs are there...

But I'm not stopping anyone from doing it. I'm just giving a fair warning of some of the potential issues...

[bigamish]

The topic of this thread is extremely timely, as I am ready to take the plunge into a 100% taxable early-retirement PP and am paranoid about the tax-related complications.  Loving the idea of keeping it simple & reallocating on a yearly basis, I have the following allocations in mind:

25% Gold - IAU
25% Bonds - TLT
25% Stocks - VTI
25% Cash - mix of high-yield savings slush fund account (30%) & SHY (70%)

Any huge tax red flags here? 

Also, I have gotten the impression from my extensive lurking that a simple traditional PP allocation is preferable to PRPFX (or 90% PRPFX & 10% EDV), again assuming a taxable account.  Is this a correct assumption?

Thanks for any input you folks may have!

[moda0306]

I prefer to think of any qualms with PP allocations as "yellow flags" instead of red, since you are already so far ahead of the curve by owning something close in the first place.

Some may not like your using your savings account as a part of the PP, but at only 30% you're fine I think.

I truly think having even a few ounces of hard gold is a good idea.