More on this book
Community
Kindle Notes & Highlights
An Investor in Early Retirement Using Vanguard Funds Total Stock Market Index Fund 30% Total International Index Fund 10% Total Bond Market Index Fund 30% Inflation-Protected Securities 30%
An Investor in Late Retirement Using Vanguard Funds Total Stock Market Index Fund 20% Short-Term or Total Bond Market 40% Inflation-Protected Securities 40%
Some funds impose a fee when a shareholder exchanges from one fund to another within the same group of funds.
Two sources of mutual fund income are subject to tax—dividends and capital gains.
The lower rates on qualified dividends increase the tax-efficiency of stocks relative to bonds whose yield is taxed at ordinary income tax rates. For this reason, and the fact that stocks benefit from the lower capital gains tax rates, we generally recommend placing stocks in taxable accounts and bonds in tax-advantaged accounts.
A capital gain occurs when a stock or bond is sold for a profit. This profit is the difference between the purchase cost of stock or bond shares and their sale price when redeemed (sold).
A short-term capital gain is a profit on the sale of a security or mutual fund share that is held for 12 months or less. A long-term capital gain is a profit on the sale of a security or mutual fund share that is held for more than one year.
Short-term capital gains are taxed as ordinary income at the shareowner’s highest marginal income tax rate, while long-term capital gains enjoy a maximum tax rate of 15 percent—approximately half.
we think most investors are better served by holding bond funds with the oversight of an experienced bond fund manager rather than trying to buy bonds directly.
We think the best way for most investors to minimize taxes is to take advantage of IRS tax-favored retirement plans specifically designed to encourage people to save for their retirement (401(k), 403(b), IRA, etc.).
Employer contributions to deferred compensation plans are not reported on the employee’s W-2 forms and are not reported as income on the employee’s income tax return.
high-income individuals who are not eligible to contribute to a Roth IRA can now directly do what’s become known as a back-door Roth.
If the investor doesn’t have an existing TIRA because they weren’t eligible to contribute to one due to the income limitations, they would first contribute to a nondeductible IRA and then immediately convert that to a Roth IRA,
The Roth IRA, like the traditional IRA, is also a personal saving plan, but operates somewhat in reverse. For instance, contributions to a Roth IRA are not tax deductible, while contributions to a traditional IRA may or may not be deductible.
when money is withdrawn, traditional IRA withdrawals will be fully taxed, nondeductible IRA withdrawals will be partially taxed, and Roth IRA withdrawals will not be taxed at all.
Two IRA calculators that we like can be found at www.morningstar.com (look under “Tools”) and at www.vanguard.com (use “Search”).
You are living off savings, borrowing, or other nontaxable income. This could be an excellent time to convert—at least in the amount that brings you up to the top of your current low tax bracket. In this situation, your converted IRA savings were tax-deductible, tax-deferred until converted, and will be income tax free at withdrawal—it doesn’t get much better than that!
Place your most tax-inefficient funds into your tax-deferred accounts, then put what’s left into your taxable account.
Diversification offers two distinct benefits to investors. First, it helps reduce risk by avoiding the “all the eggs in one basket” scenario that we just discussed (all of your money invested in a single company). And, second, you could increase your return at the same time.
if two stocks (or funds) normally move together at the same rate, they’re said to be highly correlated, and when two investments move in opposite directions, they’re said to be negatively correlated.
Despite what some investors think, simply owning a large number of mutual funds doesn’t automatically achieve greater diversification. If a portfolio holds a number of funds that overlap and are highly correlated, there is little benefit.
The logical alternative to performance chasing and market timing is structuring a long-term asset allocation plan and then staying the course.
The most recent version of Joseph Hurley’s The Best Way to Save for College is considered by many to be one of the very best books on this subject.
It’s very important that Savings Bonds be titled correctly in order for the bonds to qualify for the tax-free educational benefit. To qualify, bonds must be titled in one or both of the parents’ names; they cannot be titled in the child’s name.
The Coverdell Education Savings Account (ESA) was formerly known as the Education IRA.
Although the contribution is made with money that has already been taxed (after-tax money), the growth in the account is tax-free as long as the proceeds are used to fund any qualifying educational expense.
There are two types of 529 plans: education savings plans and prepaid tuition plans.
The 529 education savings plans are offered by every state, and each comes with its own set of rules.
Contributing a large sum in a single payment to their grandchildren’s 529 plans can be a great way for well-to-do grandparents to quickly reduce the size of their taxable estate while benefiting their children and grandchildren.
The earnings in the 529 plans grow tax-deferred, and withdrawals for qualifying education expenses are currently tax-free.
there’s a wealth of free information available in IRS Publication 970 (Tax Benefits for Education). You can read or download a free copy of this publication at www.irs.gov/.
The most important secret to preserving a windfall is to not touch it until the emotions subside and you come up with a sound plan for putting the money to work.
A good place to begin seeking advice is from a Certified Public Accountant who does not sell investment products.
If you want to check out the credentials of an attorney, Martindale & Hubble (www.martindale.com) is the place to go. Some financial professionals are both attorneys and CPAs and can handle most of the work for you.
Two of the professional designations that fall into this highly regarded category include the Chartered Financial Advisor (CFA) and the Certified Financial Planner (CFP).
Unlike a broker who is steering you into high-commissioned products, the fixed or hourly fee advisor is free to recommend the most appropriate investment for you.
even if you’re considering hiring a financial professional, you still need to do your homework first in order to become a better-educated consumer. When it comes to your financial future, remaining an uninformed consumer simply isn’t an acceptable option.
portfolios that were never rebalanced had the lowest Sharpe ratios of all the rebalancing methods studied. Since the Sharpe ratio measures the additional return an investor receives for taking on more risk, this lower ratio indicates that investors who didn't rebalance were not being compensated for the additional risk they were taking.
Rebalancing may also improve your returns, since asset classes have had a tendency to revert to the mean (RTM) over time. By rebalancing, you’re selling a portion of your winning asset classes before they revert to the mean (drop in price) and you’re buying more of your underperforming asset classes when their prices are lower, before they revert to the mean (increase in value).
Vanguard offers Portfolio Watch, a free online service that shows the percentages of the various asset classes in your portfolio each time you log on to your account.
Costs would include any commissions and fees incurred by trading. Taxes would be a factor if the rebalancing takes place in a taxable account, because you may realize capital gains.
The most common method of rebalancing is based on time. The typical time frame is either quarterly, semiannually, or annually.
second method of rebalancing involves the creation of expansion bands. With this method of rebalancing, you create a window, such as plus or minus 5 percent from your desired allocation. You would rebalance whenever the asset class exceeds those bands.
Rebalance your tax-deferred account first, whenever possible, since there are no tax consequences.
Use tax-loss harvesting in your taxable account as part of your rebalancing strategy. If you have losers to sell, then sell them prior to December 31, so you can get the tax benefits on this year’s tax return.
If you have winners to sell in your taxable account, you might want to wait until after January 1 to sell in order to push the tax bill into the following year.
Broad market index funds rebalance themselves automatically.
Unlike valuable information, investment pornography is designed to hold your attention, get you excited about beating the market, and get you to buy products or information with the hope of getting rich.
Predictions about the future direction of the market and which stocks are likely to be winners are usually based on recent performance. Our tendency to believe that what has happened recently will continue to happen in the immediate future is a behavioral trait called recency bias,
Overconfidence may be the biggest return killer of them all.
