Look at these factors first


Many investors think about fund selection and performance first when building their portfolios. Todd Bechtel of Vanguard Personal Advisor Services explains how he first looks at goals, risk tolerance, and time horizon before building a tax-efficient portfolio of stocks and bonds, including index funds and municipal bonds.

Notes:
  • Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
  • Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.
  • Investments in bonds are subject to interest rate, credit, and inflation risk. Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund’s trading or through your own redemption of shares. For some investors, a portion of the fund’s income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.
  • This webcast is for educational purposes only.
© 2017 The Vanguard Group, Inc. All rights reserved.


TRANSCRIPT

 
Amy Chain: All right, Todd, this is a question for you. All this talk about taxation has our audience asking, particularly Eric is asking if you’ll talk about how you talk to clients about building a tax-efficient portfolio.

Todd Bechtel: Building a tax-efficient portfolio. Well again it’s going to be a top-down approach. Maybe the audience has heard this before. Bottom up which is security selection first, performance based, kind of piecing together something and at some point waking up and saying, how did I get here. That’s bottom up. Top down is again determining your asset allocation through goals, through risk tolerance, through time horizon. Once you do that then you can start to work down. It’s almost like a Christmas tree. You start at the top, it’s asset allocation, then it’s sub-asset allocation, then different types of stock funds, international, domestic. Index is a big part of that. And so back to the tax-efficient question. Indexing is a huge part. In fact, the bigger the client, sometimes the more questions I get, are you sure this index thing is the right thing? Shouldn’t we be doing something more complicated? And I say, you have more zeros and commas so you’re paying higher taxes, so we need to do this even more specifically. Trust me, we need to do this, and I show them the numbers and we build the portfolio. So indexing right out of the gate is a huge contributor to tax-efficient investing. On the bond side, since we’ve been talking a lot about fixed income and interest rates, municipal bond strategies are very big for our clients. Most of the high-net-worth investors have an overweight towards retail accounts versus IRA accounts. So and there’s different kinds of strategies you can apply in bond investments, depending on where you’re doing that, whether it’s in an IRA or a taxable account. So in taxable accounts where most of our clients live, it’s municipal bonds strategies. And that pays. I mean when I do the tax equivalent and yield for clients and they say okay that 2½% intermediate is all of a sudden 3½. That’s not too bad, it’s not great. But I’ll take that. And so what you end up getting then is tax-exempt income that’s at least federally tax-exempt and possibly partially depending on the state. You have a very tax-efficient portfolio on the equity side that’s generated in the last few years, no capital gains from the fund, and if you didn’t sell it as a client, your accountant, your CPA is loving you and loving Vanguard. And you’re keeping all of that at the end of the day, it’s a beautiful thing.

Important information Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss. Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company. Investments in bonds are subject to interest rate, credit, and inflation risk. Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund’s trading or through your own redemption of shares. For some investors, a portion of the fund’s income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax. This webcast is for educational purposes only. © 2017 The Vanguard Group, Inc. All rights reserved.