Q&A: Seeking Diversification


Howdy. In the next several years, I'll inherit an IRA from my parents. Please compare and contrast, indicating the pros and cons of both taking the lump sum vs. taking payouts over time. My annual taxable income is about 47k (so you can figure my tax bracket). I do not particularly need the money, but want to make the most of it long term. 

Second question, can you recommend a mutual fund that has about 80% muni-bonds and 20% total-stock-market or similar equity? I'm a Vanguard (and index) fan, but they don't have anything that fits those parameters. Obviously, I want it to be tax efficient. This would be for a different batch of money than from the first question


The first part of your question, about the taking a lump sum or payouts over time from an inherited IRA, has a fair amount of complexity and is, in large part, dependent on your tax situation.  Frankly, I can’t give you a good answer without knowing more about your personal situation.

As to the second part, finding a good balanced fund.  I am a bit curious as to why you want a portfolio that is 20 percent in stocks, and 80 percent in municipal bonds.  That’s risk-averse but likely to see very, very low returns in the low-interest-rate environment we have today.  Plus, the highest quality municipal bonds don't make sense unless you are in the highest tax brackets. Instead, can I get you to consider three choices?  They each hold 60 percent in stocks, 40 percent in bonds  -- a traditional “balanced” fund.  They all have low expenses, fairly long track records, and good management.

VWELX   Vanguard Wellington is the grandaddy of balanced funds.  It’s been around forever and has been well managed.  It’s no load and has low expenses (just 0.26). My only two issues with Wellington are that it’s actively managed and it holds mostly U.S. stocks.  A portfolio better balanced between the U.S. and international stocks has meant greater returns at lower risk over decades past.  One added point in its favor:  it leans to more value stocks, which have produced better long-term returns than growth stocks.

VBINX  Vanguard Balanced Index Fund.  Low expenses, check.  Good diversification, check.  And it’s an index fund, BIG check.  My only complaint is that it hold almost no international stocks.  And its holdings are pretty well dominated by large companies.  Still, I would probably pick this fund unless I could own...

DGSIX  DFA Global 60/40.  Operated by Dimensional Funds, you can only buy this fund with the help of an advisor that has been vetted by Dimensional.  It’s a no-load fund with low expenses, has the greatest international exposure of the three, and a healthy exposure to value stocks. Dimensional builds their portfolios differently than Vanguard (more exposure to small, value and illiquid stocks), and I suspect that, over time, that will make a return difference.

I hope this helps, Robert.  Any time you are building a portfolio I would suggest getting wide diversification, low cost and not paying any commissions.  All of these funds would fit those categories.


Tom CockComment