Building a Tax-Efficient Portfolio
Investors can put together a solid taxable portfolio without much difficulty by following these simple tips, says Christine Benz.
Note: This video is part of Morningstar's Tax Relief Week special report.
Christine Benz: Hi, I'm Christine Benz for Morningstar.com. If you hold assets in a taxable account, putting them together in a portfolio shouldn't be too much different than putting any other portfolio together.
The first step is to consider your time horizon. If you're investing for a short-term goal, you'll want to focus on assets like cash or short-term bonds, where there's a strong probability that you'll have a positive return over your time horizon. If you have a longer time horizon of 10 years or more, stocks are the way to go.
If you're assembling a taxable account, remember that you want to be in charge of when you realize gains--you don't want to your holdings to pay out income or taxable gains when you don't need them. Equity index mutual funds and ETFs tend to pay out few taxable capital gains. Meanwhile, the income you receive from municipal bonds is typically free of federal--and sometimes state--taxes.
If you've taken care to select tax-efficient investments, you also need to make sure to be tax-efficient yourself. That means trading infrequently with an eye toward limiting taxable capital gains and being alert to opportunities to engage in tax-loss selling or donating appreciated shares to charity.
Thanks for watching. I'm Christine Benz for Morningstar.com.