From Chapter 13

Research on Safe Withdrawal Rates

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JWR1945
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From Chapter 13

Post by JWR1945 »

Chapter 13 of our featured book, Common Sense on Mutual Funds by John Bogle, addresses mutual funds in taxable accounts. Taxes magnify the damaged caused by the short-term outlook typical of actively managed funds. High turnover means that taxes are due immediately. The short tenure of most mutual fund managers makes things even worse. A new manager almost always changes a fund's stock selections to suit his own preference, which results in even more sales.

John Bogle praises an early version of tax managed funds, which mimicked a low-yield high-growth (i.e., high capital appreciation) index and which imposed fees, payable to the fund and its remaining shareholders, for making any withdrawals within 5 years. He notes that later funds have abandoned these principals. Nor have they limited their fees.

As expected, John Bogle considers an index fund to be a good choice in a taxable account because of its low fees and its low turnover rate. But he suggests something else for those with enough resources: abandon mutual funds altogether and buy stocks directly. He recommends buying shares of blue-chip growth stocks in 15 to 20 unrelated industries. He acknowledges that there is an increased risk. But owning a sufficient number of stocks (15 to 20) and holding them for a long time reduces the effect of that risk. The tax advantages of owning individual stocks outweigh any penalty for abandoning an index. [See his remarks on pages 292 and 293.]

Have fun.

John R.
Mike
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Post by Mike »

What 15 to 20 stocks would you recommend for a long term buy and hold strategy?
JWR1945
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Post by JWR1945 »

John Bogle recommends buying shares of blue-chip growth stocks in 15 to 20 unrelated industries.

I would buy a copy of Barron's and turn to its Market Week section (with stock prices, bond prices, etc. and various Market Laboratory, indicator and analysis sections).

I would pay special attention to the stocks in the DOW Jones averages. They generally satisfy John Bogle's selection criteria.

Following John Bogle's basic strategy, I would select half of my stocks from among the thirty in the DOW Jones Industrial Average. I would not emphasize growth (via price appreciation) and low dividend payouts to the extent that John Bogle did when he wrote his book. Taxes on dividends have been cut since then.

I would not exclude the other companies in the DOW. I would include at least some utilities. I might use the DOW Jones Utility Average as a starting point. I would be reluctant to include anything from among the transportation issues. [The airlines especially fluctuate in wildly in value and they frequently have negative net worth for a quarter or two.]

If I were to buy stock in 20 companies as opposed to 15, I would reserve five of the selections for stocks that I like, ignoring John Bogle's advice. But that is just me. Someone who has to live off of his investments might show greater restraint. It is just that I think that there are at least a few special cases that do not fall within the guidelines.

Have fun.

John R.
Mike
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Post by Mike »

Dow stocks seem reasonably safe, as the Dow selection committee seems to know what they are doing. They do change them occasionally, so this wouldn't necessarilly be a buy and hold forever type of strategy. I might be inclined to sell if a stock was dropped from the index
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Post by peteyperson »

Then all you have is a Dow index fund.. or were you just being humorous?

Petey
Mike wrote:Dow stocks seem reasonably safe, as the Dow selection committee seems to know what they are doing. They do change them occasionally, so this wouldn't necessarilly be a buy and hold forever type of strategy. I might be inclined to sell if a stock was dropped from the index
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Post by Mike »

The point is that it is a very low cost index fund, much cheaper than even Vanguard could offer.
JWR1945
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Post by JWR1945 »

Remember that John Bogle is talking about taxes and taxable accounts. You never pay taxes on price increases before you make a sale. Since you can control all sales of individual stocks, you never have to pay any taxes before you take your money out. That is how your personal DOW index holdings can beat even an index fund.

(There are special cases and weird outcomes. Some dotcom types sold their restricted stock [via options?] before they could convert their shares to cash or something like that. Then their stocks took a nosedive, sometimes to zero. Those sellers were stuck with a tax bill for their paper gains but without any money to pay it.)

Have fun.

John R.
Mike
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Post by Mike »

Remember that John Bogle is talking about taxes and taxable accounts.
The do it yourself approach helps more in taxable accounts, but it is also more cost efficient inside of an IRA. There are no annual expense ratios to contend with. If you don't trade, your only expense would be a $20 to $30 account maintenance fee (waived for larger accounts).
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