advice for where to start with taxable investing

[illinicheme]

I'm looking for any general tips on where to start with taxable investing. I have some ideas, but there are so many choices that I am interested in other opinions.

A little background:
I'm 32 and DH is 34. We're doing pretty well on retirement savings, though a little behind due to squandering our early 20s on grad school. We max out my 401(k), max out two Roth IRAs, and roughly 5% (?) of DH's salary is a mandatory contribution to his CalPERS pension fund. We're saving roughly 16% of gross in retirement accounts, not counting my employer's 10% contribution, nor the contributions DH's university makes to his pension fund. (We might be over-saving for retirement, but maxing out the 401(k) helps bring our AGI down to below the Roth eligibility income limit.)

All non-retirement saving up to this point has been in online savings accounts. It made sense in recent years to keep the bulk of our savings liquid, as we relocated across the country in late 2009 and just recently purchased a home in our new area. But now that our lives are starting to stabilize, it seems like its time to move some of our cash into taxable investments. I also anticipate that we'll be over the Roth IRA income cap within a few years (perhaps even for 2011, depending on the size of my pending bonus).

Current assets (not counting cars/house):
401(k) - ~$135k at Fidelity (~90% stocks, 10% bonds)
my Roth IRA - ~$50k at Vanguard in Target Retirement 2050
DH's Roth IRA - ~$40k at Vanguard in Target Retirement 2045
~$10k in other accounts for DH (403(b) and CalPERS - I'm not sure of the current balances)
~$35k in online savings accounts
~$35k theoretical value of my RSUs/SSARs (vesting over the next three years)

DH is quite a bit more risk averse than I am, but I'm hoping to convince him that we should start taxable investing with at least $5-10k of our current cash savings. We are currently TTC, so will still want to keep a decent chunk of cash liquid if I do get pregnant in the near future. Thoughts?

[jk70]

when you say "where" do you mean what company to use for investing? (ie, fidelity or Vanguard). If so, you already have accounts there so just start there. I would never tell individuals to invest in individual stocks but your better off finding an sp500 index fund and a small cap index fund at those companies. fees are very cheap. Then hold, hold, hold (even when the market takes a beating).

[illinicheme]

When I mean "where" I meant more what types of funds. There's just so many choices.

I'm pretty good at the buying and holding part.

[souldoubt]

What type of funds would depend on your asset allocation. I see that you listed some of it but saying 90/10 split between stocks and bonds in regards to your 401K doesn't give enough information about what stocks or bonds you're invested in. Your 401K is roughly half of your investment balance (excluding savings accounts) so if you're overweighted in certain stocks there then you don't want to put more money into similar investments when you start taxable accounts.

[hsclassic]

I'd keep all of my accounts at Vanguard since your Roth's are there already. They give you a full-view of all of your investments with them on a single screen. Very easy to use. (We have joint MMA, trust accounts with individual stocks and mutual funds for each of us, plus hubby's IRA, with Vanguard.)

I agree with jk - at your age, focus on equities and less on bonds. S&P500 is what we chose (started at your ages 20 years ago) and have since added Wellington (about 4-5 years ago, 60/40 blended fund)) and TIPS (last year, all treasuries) for diversification purposes. A full market index fund is another option to the S&P500. You can always start there and add additional mutual funds in the future as your income and wealth increase.

I believe Vanguard has a $250 minimum for auto-deposits (not sure however) and put yourself on automatic contributions every month to whatever you choose. Compounding over these 21 years with Vanguard has been very kind to us.

[phil5185]

I would do more of the same - your 401k, Roth selections are great. The Target 2050 would be a good choice - diversified, they do very little managed trading during the year so the annual taxes would be small - ie, most of your return would consist of tax-deferred capital gains. And cap gains have a preferential rate when/if you sell some.

[cronewitch]

I use my low cost broker that has mutual funds. I invest the same amount in each of several funds. They have a 10K minimum to open the account I have without fees. So if I was starting with 10K I would buy maybe 5 funds at 2K each and not reinvest the dividends.

Then years later when I decide I want some money I could sell one or two and know my basis was 2K even. You pay income tax on distribution as you get them so they don't hurt your basis. If you reinvest dividends like you would in a retirement account you would need to track your basis and if you buy all different times and different prices you might not know your basis when you sell. The broker will track your basis but if you move to a different account it is lost information.

You can spend the distributions or leave them until they add up to enough to do something with. If you are putting in monthly you could put that into a new mutual fund with your distributions when it hit your standard amount so every 2K you get buy a different fund.

[lurkyloo]

Just wanted to chime in that we're in a similar situation; very interested to hear the advice!

One other question: what happened with the increase in capital gains taxes and extra Medicare taxes for high-income households? Did those get overturned in the extension of the Bush tax cuts?

[2kids10horses]

Well, I would start by checking out the ETFs rather than mutual funds. These trade during the day, like stocks. But they are based upon indexes.

Several have suggested the S&P500 index, and that's not all bad. I'd allocate 33 to 50% there. The real growth is in smaller stocks. So, I would suggest that you allocate some (maybe 25 to 33%) of your portfolio to the Russell2000 stocks. Just buy the IWM etf. It's the Russel2000. You might then consider an international fund for the remainder.

[Deleted]

Well it is possible for your DH to retire as soon as 50 and start drawing on his Calpers retirement fund depending on his formula. So that could be as soon as 16 years. So it's good you're thinking about contributing to taxable accounts. They could be a bridge until you and/or DH is eligible for SS, and taxable funds.

While in general I like a 50% investment in SP, 25% for Emerging markets and 25% in Sm/mid caps in index funds for someone your age, given both a likely time for retirement AND a long time in retirement (together a time frame of 50+ years?) you should take this time really understand your retirement vehicles and understand what's in them. Then you can take a look at your whole portfolio and make adjustment based on the holistic view.

I was a Calpers local agency employee and our contract is 2% at 55 so early retirement is at 50 at a reduced %. Do you know your DH's formula? "The contributions" listed my annual statement are based on a 6% rate of return. I've done calculations to see how long it would take for me to burn through my contributions based on today's returns. It would take me about 5 years. So no way am I going to cash in those funds and try to invest the money in a "better" vehicle (i.e. investment fund).

Do you understand the rules of the 403b? My 457 allows me access without the 10% penalty (but we will have to pay the tax). So when I separated from service I did not role it over into an IRA which doesn't have the penalty free feature in spite of the $100 or so annual investment charge. This is going to come in handy because when DH retires in 18 months when his contract ends, he will be 5 months shy of being eligible for to access his 401k early. He has to wait 5 years until he's 59.5. So we can take withdrawals from my 457 without penalty to bridge income until we can access the earnings of his 401k. These may seem like details or nits but over your career lifetimes I'm sure you will be faced with the same issues that faced us; e.g. job changes, relocations and job layoffs. Understanding your options can have you make better decisions.

Have you and DH done some reading about asset allocation? Have you read the Random Walk down Wall Street and the Intelligent Asset Allocator? They may give DH some reassurance why he needs to take some risks at this point in his life rather than later. Don't make my mistake of being so conservative early on.

There's lots of good reading out there. Morningstar has a nice system for helping you evaluate potential funds. Not only do you get their ratings but also information which makes it easy to find fund costs, composition of the fund, historical returns and how they compare to various benchmarks. While you can find a lot of this information in the funds prospectus, I find the Morningstar format much easier to read.

Good luck on this interesting step in your life together!