The Importance of Asset Location

There are certain factors in investing in which we have little to no control.  With this fact in mind, we have to give ourselves the best chance for success by strategically pinpointing the factors that we can control, and effectively utilize them to our advantage.  The first and most important of these is asset allocation, which has been discussed on this blog and articles on the web, newspapers, and magazines ad nauseum.  That is, stocks vs. bonds, value vs. growth, US vs. foreign, etc.  Certainly, the propensity for articles to address these issues is with merit as asset allocation has, according to published studies,  been responsible for nearly 90% of a portfolio's performance over the long-term (signifying the insignificance of market timing among other decisions).   

The second key factor within our control that indexers love to stress is the ability to control fees - both fees with your financial advisor and fees within a fund as measured by its net expense ratio.  Studies have shown that minimizing fees maximizes returns; even seemingly small differences (such as 0.4%) add up over the course of several years and you should do everything in your power to get the lowest cost investment to fulfill your asset allocation.   The third significant decision within our control is the actual security selection.  Although for indexers this point is not terribly interesting as we simply choose a fund that offers one of the lowest fees and fulfills the particular asset class we desire.  

That brings me the fourth and final aspect of investments in which he have control over - minimizing taxes in our investments.  We can do this by having a logical asset location - that is, which investments we choose to hold in taxable accounts and which we hold in tax-advantaged (401k, Roth IRA, etc.) accounts.  While we certainly can't control what the government will do in the future to tax rates (and it would be a futile affair to attempt to predict such decisions), we can exploit how Uncle Sam deals with long-term capital gains and things of that nature to minimize the amount the US government takes from our investment gains.  Small differences in taxes can compound in huge figures over the long-term and investors would be wise to consider the tax efficiency and placement of their investments to reduce their tax burden.  Avoiding (or at least minimizing) certain taxes is one of the most important strategies to maximize long-term growth of one's investments, but is a topic that is, unfortunately, frequently glossed over in articles and discussions on portfolio management.  As will be evidenced in this post with evaluations of after-tax final portfolio values based on asset location, the difference can be stark.  This is a topic that shouldn't be brushed aside.

A Basic Primer on the Rationale

Your tax burden varies largely based on the type of investment as well as the investment style and turnover of the particular fund in question.  In essence, the taxes you're responsible for depends on the taxable distributions and the rate on those.  This can vary based on if dividends are qualified, how often a fund distributes capital gains, and other factors.  The basic premise behind tax-efficient investing is to place your efficient investments in taxable accounts (and thus you won't lose as much to taxes) and your inefficient investments in tax-advantaged accounts (since you have no tax liability until distributions, or not at all if we're talking about Roth accounts).

As a general rule, bond funds are tax-inefficient because the gains they generate are all taxed as ordinary income and are subject to your marginal income tax bracket.  (Although municipal bonds have no such restriction, but typically offer lower yields to compensate).  REITs, likewise, are required by law to distribute at least 90% of their income as dividends, which is overwhelming at the non-qualified divided rate.  Thus, although REITs are traded as stocks, they too are extremely tax-inefficient.  

While stock funds are generally efficient, if they are actively managed and have a high turnover rate, it may be possible that they generate a lot of short-term capital gains.  Likewise, a fund that pays high dividends (like many value funds do) may not be as efficient.  Foreign funds typically are quite tax efficient since they are eligible for the foreign tax credit.

Hypothetical Scenarios

While the general feeling for indexers is "stocks in taxable, bonds in tax-advantaged" that is not always the case as Rande Spiegelman for the Schwab Center for Investment Research explains in his report "Location, Location, Location: Dividing Your Portfolio between Taxable and Tax-Advantaged Accounts."  He summarizes his findings in table form as follows:
Spiegelman poses two hypothetical scenarios for two different investors.  You can read his assumption on page 2 of the report, but the first case involves "Tishana" who is in the 40% combined marginal bracket and has a portfolio value starting at $200,000 (50% in taxable, 50% in tax-advantaged).  In the first portfolio (Portfolio A), Tishana places her highly efficient stocks in her taxable accounts and her bonds in tax-advantaged accounts.    In the second portfolio (Portfolio B), Tishana places her bonds in taxable and highly efficient stocks in tax-advantaged.

Total Portfolio A
Total Portfolio B
Advantage (Disadvantage) of Portfolio A

As you can see in the above, Tishana would have more than $210,000 more in her final portfolio value after 40 years of investing if she practice tax-efficient placement of her investments.  $210,000!  That's certainly not an insignificant amount of money; it's more than her beginning portfolio value and more than 10% of her final portfolio value.  Would you want to pay $200,000 more in taxes over 40 years simply because you don't want to practice tax-efficient investing?  Of course not.

Next in the article, Spiegelman proposes a situation in which Tishana instead invests in actively managed stock funds in taxable and bonds in tax-advantaged.  In that case, while Portfolio A outpaced Portfolio B in the 5, 15, and 30 year timelines, Portfolio B actually had the higher value after 40 years to the tune of $105,000.  By the way, Portfolio A when utilizing actively managed funds ended at $1,524,169, a full $317,499 less than if Tishana had used tax-efficient index funds.  And that's when assuming the actively managed fund performed identically to that of the index fund, something most actively managed funds fail to do.  Even giving the active managers' the benefit of the doubt on that, the fund has to not only outperform the benchmark to break even because of higher fees, but also because of higher taxes.  Yet another reason to go the passive approach!  Again, such a decision could save you huge amounts over the long-term.

The article then discusses Sam who has a lower 30% combined marginal bracket.  In Sam's case, the difference isn't as severe since he loses less to taxes in general so doesn't need to concern himself as much.  Still, the advantage for Portfolio A when using over 40 years is $96,621, which is a quite considerable sum.  In the case wherein Sam uses actively managed funds, Portfolio B outpaces Portfolio A after 30 years. Thus, if you absolutely insist on using actively managed funds (which I do not recommend), then you should consider the turnover and management strategy of the fund to determine the best placement, argues Spiegelman.

Likewise, Vanguard has a nice report worth considering titled "Asset Location for Taxable Investors" written by Colleen M. Jaconetti in 2007.  Jaconetti concludes the following:
If an investor’s primary goal is to maximize after-tax return, then, in general, an optimal portfolio, from an asset location perspective, would hold broad-market index equity funds/ETFs or tax-managed equity funds in taxable accounts and taxable bond funds in tax deferred accounts. This assumes the investor is willing to forgo owning active equity funds (or other tax-inefficient investments), unless space in his or her tax-deferred registrations allows for it.
Jaconetti also proposes hypothetical scenarios similar to the Schwab study above to illustrate this point in real dollars.   Such scenarios are helpful to the average investor to actually associate such decisions with real-dollar amounts as opposed to simply learning about these theoretical rules of thumb.  All the same assumptions are made for the first three scenarios as stated on page 2 of the report.

In the first scenario, highly efficient index equity funds are used in taxable account and taxable bond funds are in tax-deferred.   The post-liquidation value after 10 years is $1,694,671.  In the second scenario, taxable bond funds are used in taxable accounts and index equity funds are used in tax-deferred accounts.  In this case, the portfolio grows to $1,531,413.  As you can see, this is considerably less than the first scenario.  In the third scenario, the investor utilized municipal bond funds in taxable accounts (which are tax-free) and index equity funds in tax-deferred.  Such an example grows to $1,583,088.  While this is better than the second option, it still lags the first scenario considerably.

In scenario four, there are a few different assumptions as stated on page 4.  In this case, the investor utilizes active equity funds in taxable and taxable bonds in tax-deferred accounts.  Such an account has a post-liquidation value of $1,623,108 after 10 years.  It is better than Scenarios 2 and 3 suggesting that even if you have actively managed funds, you should still place them in taxable.  This conclusion seemingly contradicts that from Schwab, but if you look at the actual Schwab report, he came to the same conclusion for the 15-year timeframe (closest to the 10-year that Vanguard considered).  It wasn't until 30 or even 40 years where the opposite conclusion was delivered.  While scenario 4 beat scenarios 2 and 3, it still lags the first one.  Yet another piece of evidence to support the idea of investing in index funds.

In the end, after ten years, Scenario 1 in which the investor utilizes tax-efficient index funds in taxable accounts and taxable bonds in tax-deferred performed the best after taking taxes into consideration.  Scenario 2 lagged by more than $163,000, while Scenario 3 trailed by $111,583, and 4 was $71,563 behind, suggesting that such a location decision is less important for those implementing actively managed funds.  As stated at the onset, scenario 1 optimizes returns.

Other Research Reports

Dammon, Poterba, Spatt, and Zhang from CMU, MIT, CMU, and UT-Dallas reached the same conclusion as the Vanguard report utilizing arbitrage arguments in their 2004 TIAA-CREF Paul A. Samuelson Award-winning paper, which they discuss in a research dialogue.  They conclude:
Using arbitrage arguments, we showed that holding equities in taxable accounts
and bonds in tax-deferred accounts is the optimal asset location strategy even if capital gains are realized and taxed on an annual basis, as long as the tax rate on capital gains is less than that on interest income. This implies that even actively-managed mutual funds that generate large capital gains (losses) each year should be held in taxable accounts and bonds in tax-deferred accounts. The asset location decision is a matter of indifference only if capital gains are fully taxed each year (i.e., no deferral) and dividends, capital gains, and interest are all taxed at the same rate.
It appears that that Schwab came to a different conclusion as to where to place actively managed funds (and that's the only significant difference) than Vanguard and the above academics due to different assumptions that you cannot predict.  (Although Schwab came to the same conclusion over shorter-time frames.  Just not the 40-year hypothetical growth scenario).  This is yet another reason to hold index funds - you know what you are getting and can manage it in a way to confidently minimize taxes.  This much is sure, though - placing tax-efficient stock funds in taxable and bonds in tax-advantaged accounts is indisputable and can save you a boatload of cash.  These investors also single out REITs as stock investments that make the most sense in tax-advantaged accounts.  Of course, tax-exempt bonds should also be held in taxable accounts.

William Reichenstein, the Pat and Thomas R. Powers Chair in Investment Management at the
Hankamer School of Business at Baylor University, brings up yet another point in his paper "Asset Allocation and Asset Location Decisions Revisited."   He concludes that not only is their an optimal asset locations as discussed above, but that the profession in general has been "miscalculating an individual's asset allocation, and the measurement error can be substantial.  Asset allocation should reflect after-tax funds because goods and services are purchased with after-tax money."  This is quite an interesting point that will be revisited in the future post, but I think it's important to note that if your tax-advantaged accounts are largely bonds and your taxable accounts are filled with stocks, then your intended asset allocation may actually be out of whack with the after-tax value of such investments and a tax-adjustment may be prudent.  

To conduct such adjustment, simply multiple the pretax values in tax-deferred accounts (401k, Traditional IRA, etc. not Roth accounts) by 1 minus the expected tax rate during retirement.  Taxable accounts are also subject to capital gains taxes so an adjustment there may also be wise (such as adjusting for the 15% long-term capital gains tax for your stock gains).   There is still some debate in investment circles about this approach, though, and many state that investments don't care where they are housed and thus calculating asset allocation percentages by adjusting for taxes is unnecessary.  

To get back to the main point of the post, Reichenstein holds somewhat of a morphed view of the Schwab report and TIAA-CREF award-winning paper above.  While he agrees that bonds should be tax-advantaged and stocks should be in taxable accounts, he also posits that such a decision is much more important for a passive investor than to an active investor.  He also concludes that if one absolutely insists on holding bonds in taxable accounts, then one should adjust his or her asset allocation to have a relatively large bond holding.  That is, such decisions should not be made in a vacuum and instead the optimal asset allocation and asset location decisions should be made jointly.

In yet another paper published in February 2006, "Trends and Issues: Tax-Efficient Saving and Investing," Reichenstein highlights a few key points.  The first being that individuals should maximize their contributions to tax-deferred and after-tax accounts as much as possible as they all "allow for tax-exempt growth on their after-tax values."  He again brings up the point of miscalculating one's asset allocation by not adjusting for after-tax values and thus individuals "overstate the allocation to the dominant asset class held in tax-deferred accounts."  This is the paper you should consult if you want a clear explanation as to how to calculate your "true asset allocation" as I briefly described above.

For a more simplified description of the above including various investment choices, one can consult the Bogleheads wiki article on this topic.  The wiki summarizes the strategy as follows:
  1. Choose your basic asset allocation (stocks/bonds/cash) before worrying about taxes.
  2. If possible, put your most tax-inefficient funds in your tax-advantaged accounts (IRA, Roth IRA, 401(k), 403(b), etc.). 
  3. If you would have to hold a tax-inefficient fund in a taxable account, consider a more tax-efficient alternative, such as a stock index fund rather than an active fund. 
There is also a helpful graphical representation of how efficient various asset classes are as reproduced below.
That is certainly a helpful graphic to refer to when making asset location decisions.


While devising an investment plan, establishing a reasonable asset allocation based on your risk tolerance, objectives, and timeline is probably the single most investment decision you can make.  Security selection to minimize fees and optimize returns while fulfilling a particular asset class also is vital in your investment well-being.  In addition to those two factors, however, the decision to implement a tax-efficient investment plan to minimize taxes has proven to provide a significantly larger nest egg.  The effect of taxes on one's portfolio should not be understated and one must consider the tax-efficiency of their investments when considering asset location.  This is certainly an area that is often neglected but shouldn't be as the ramifications are profound.  Studies utilizing historical data on the distributions and capital gains of investments as well as the current tax laws in place lead to an overwhelming benefit to the investor to place taxable bonds in tax-advantaged accounts and highly efficient stock funds in taxable accounts.  Notable exceptions to the stocks in taxable accounts include REITs and actively managed funds with high turnover.

The location of your investments is vital to minimize taxes and maximize your after-tax portfolio return.  I can assure you that you won't be sorry for considering tax-efficiency in your investment plan.  It could mean literally hundreds of thousands of dollars more in your name when all is said and done.


Dammon RM, Poterba J, Spatt CS, Zhang HH. "Maximizing Long-Term Wealth Accumulation: It's Not Just About 'What' Investments To Make, But Also 'Where' To Make Them," TIAA-CREF Institute. 2005.

Jaconetti, Colleen.  "Asset Location for Taxable Investors," Vanguard Investment Counseling & Research.  September 12, 2007.

"Principles of Tax-Efficient Fund Placement," Bogleheads Wiki. 2010.

Reichenstein, William.  "Asset Allocation and Asset Location Decisions Revisited," The Journal of Wealth Management.  Summer 2001.

Reichenstein, William.  "Tax Efficient Saving and Investing," TIAA-CREF Institute Trends and Issues.  February 2006.

Spiegelman, Rande.  "Location, Location, Location: Dividing Your Portfolio between Taxable and Tax-Advantaged Accounts," Schwab Center for Investment Research.  June 2004.


  1. Awesome post-the most complete treatment I've seen of this important topic online. Great sources, charts etc.
    When I give talks on investment issues and mention "takeaways" that can be worth $000s this is one of them.
    One nitpicking point that is probably just me but when you say "...we can leverage how Uncle Sam..." I'd change "leverage" to "exploit". When I see "leverage" my brain thinks "borrowing money to make an investment". :0)

  2. haha, very astute point! You're right - "leverage" is probably not the best word to use in this circumstance and "exploit" would be a far better choice, especially for an investing blog. Good thing I wasn't an English major in college! (I studied engineering.) And thanks for the compliment. While it seems fairly common knowledge among the educated public that investing in tax-deferred accounts in highly advantageous, based on my experiences, few actually take into account the tax efficiency of the investments themselves. They say "I'm maximizing my 401k! How could I possibly be more tax efficient?" Certainly, saving for retirement in tax-deferred accounts in also pivotal, but not sure why the "asset location to minimize taxes" message doesn't get said or heard nearly as much.

  3. Hello,

    First I would just like to say that this blog is one of the most informative investing blogs that I have came across and I think there is a lot of useful information here and I appreciate all of it. Secondly, I have a question regarding whether I should place my tax inefficient investment in a Roth or not due to my low tax bracket (I'm a student and make around 15-25k). I've chosen the funds you selected in your lazy portfolio with some slight adjustments:

    80% Stocks / 20% Bonds
    45% Vanguard Total Stock Index Fund (VTSMX)
    25% Vanguard Total International Stock Index Fund (VGTSX)
    10% Vanguard Total Bond Market Index (VBMFX)
    10% Vanguard Inflation-Protected Securities Fund (VIPSX)
    10% Vanguard REIT Index Fund (VGSIX)

    I believe this allocation is appropriate for my age of 23, but please let me know what you think. Now should I place the Total Bond, REIT, and TIPS in a Roth IRA and place the other two funds in a brokerage account as you have advised above? Since my tax bracket is fairly low would you suggest just placing all in the brokerage or maybe just placing everything in the Roth IRA for simplicity purposes? As you can tell I'm still a little confused on where to place these investments. As of now I do not have a Roth and plan to invest around $1000 per year and maintain this allocation for some time. Please any feedback would be appreciated.

  4. Thanks for the compliments. I'm glad you've found the blog helpful. Now, to answer you questions. That portfolio looks great for somebody your age - it's very diversified with limited overlap, low-cost, and easy to manage and re-balance. A 20% bond allocation is certainly reasonable for a 23 year old.

    My suggestions about asset location and tax efficiency is ONLY for those that have too much money to place in tax-advantaged (Roth, 401k) etc. It's almost always better to place as much money in tax-advantaged accounts as possible. If you don't have any additional assets, then simply investing in those accounts is the way to go. It's NOT tax inefficient to place tax efficient funds in a Roth. The Roth as an investment vehicle is tax efficient for EVERYTHING. Thus, it doesn't matter what you place in there, so if you have both taxable and Roth accounts, it's better to place the more inefficient funds in there since the taxable account will take a bite out those investments. But if you don't have taxable investments, then placing all your funds in the Roth makes sense.

    It would be MUCH wiser to place $1,000 in a Roth than $500 in a Roth and invest $500 in taxable. A Roth even lets you take out contributions at any time tax and penalty free, so there's nothing to worry about there. You're letting the money grow tax free and saving a significant some by using the Roth over a taxable account.

    Having said all that, if you only have $1,000 per year to invest, you are not eligible for the funds you mentioned above. They all have a $3,000 minimum and thus your portfolio is only possible if you have $30k in total investable assets. There are some Vanguard funds (like all the Target Retirement funds) that have a $1k minimum. However, Vanguard has a $3,000 minimum to open a Roth IRA. Thus, perhaps saving up for a bit until you have $3k, and then opening the Roth with Vanguard and investing it in Vanguard Target Retirement 2030 (56% Total Stock, 24% Total International, 20% Total Bond) would be your best bet. This is single, low cost, highly diversified fund that re-balances for you automatically. The difference between it and your proposed allocation would be minimal, especially for the account size you're talking about. I would suggest sticking with a single target retirement fund until your portfolio size reaches $30k or so. It's just unnecessarily complicated otherwise. If you have money in taxable accounts that you'd like to invest, though, and a Roth IRA, then perhaps holding Total Stock and Total Bond in Roth, while holding Total International in taxable as a three fund portfolio would make sense. But, the tax savings still would not be huge until you get to a larger portfolio size, so there may be something to be said for simplicity of a one fund portfolio.

    (See rest of response in next post.)

  5. (See the beginning of response in the above post)

    If you just can't wait and want to contribute to a Roth right now, then I believe Schwab has only a $1,000 minimum. And their funds only have a $100 minimum. If you go the Schwab route, I'd recommend using SWTSX for Total Stock (~$600) and SWISX for Total International (~$400), and then just be done with it. Adding bonds is not going to make much of a difference for your portfolio size and the Schwab bond fund, SWLBX, is not very good - check out its performance in 2008. If your assets do end up growing substantially at Schwab, I'd probably recommend the Intermediate-Term Treasury ETF, SCHR, for your "total bond" holding. SCHP is a TIPs fund and SCHH is a low-cost REIT ETF offering from Schwab. ETFs require you to place an order during the day and have bid-ask spreads, etc. so I'd say for a novice that funds are preferable. If you do use ETFs, make sure to use a limit order and NOT a market order, especially since Schwab ETF volume isn't all that high. Then if you want to add Emerging Markets, you could eventually use the SCHE Schwab ETF.

    To summarize:
    1. Portfolio looks great, but not doable with only $1k to invest
    2. Invest as much in Roth as possible after minimum is met (maximum contribution by law is $5k/year)
    3. Wait until you have $3k invest, then open a Roth with Vanguard in Target Retirement 2030 fund (VTHRX)
    4. If you can't wait, open a Roth with Schwab and use SWTSX and SWISX instead. If your assets grow there substantially, you could eventually use various ETFs to equate to the Vanguard portfolio.

    Hope that helps. Good luck!

  6. Thank you for your feedback on my portfolio and I have a few ideas that may help myself out. Since I don't have too much to invest in an index fund, I may just create a lazy portfolio of ETFs with Vanguard. I believe there are no commissions for this as well with a Vanguard account. What exactly is your opinion on investing in ETFs vs Index Funds, long term wise?? Also I have been looking into the LifeStrategy Growth Fund which recently eliminated the AOA fund and lowered it's expense ratio which is making it very attractive. I could possible invest 3k for this and I like how it's allocated. I don't really like how the Target Date Funds either are too aggressive for too long or become too conservative too fast, and that defeats the purpose for me.
    At this time I'm leading toward the ETF Strategy as I will have a little more control over my portfolio. What is your opinion on VYM, a high dividend ETF which invests in large stable companies or other dividend funds for that matter? I was considering making this a portion of my portfolio to increase dividend income. I realize chasing yield is risky, but the fund seems to invest in very good companies with high dividends. Thanks again for your input, as I have a much better idea of what I want to do now to create a solid portfolio. Whatever I choose I am for sure opening a Roth IRA with Vanguard most likely.

  7. I think the LifeStategy Growth Fund would be a great choice for an all-in-one portfolio. Now that it doesn't have the asset allocator fund, one can more easily dictate the stock/bond split and it doesn't change on you without you making the change yourself. Going to ETF route (and doing more slicing and dicing) is also doable since there are no minimums, but note that Vanguard charges a $20 annual fee for a brokerage account if you're not a Voyager client (>$50,000 in assets invested). The brokerage account is a separate from a mutual fund only account. Certainly, $20 isn't going to break the bank, but just note that it exists for each brokerage account you have.

    I personally think with only $3k using a bunch of individual ETFs makes things unnecessarily complicated and it will likely have minimal to no effect on your portfolio value vs. using an all-in-one fund, but if you find it interesting/fun/exciting, I don't see anything inherently wrong with the ETF approach.

    I prefer the mutual fund route at Vanguard for long-term investors since one can place an order at any time, can invest an exact dollar amount, don't have to worry about bid/ask spreads, and can also set up automatic investing. It really allows you to set it on autopilot and get the fund price at NAV. With ETFs, you have to place the orders during market hours, you have to worry about premiums to NAV, and bid/ask spreads (ALWAYS use a limit order!), you can't place exact dollar amounts investments, and more. I would recommend ETFs for the few mutual funds that have purchase/redemption fees (e.g. VSS, VEIEX), though. Best to avoid those fees for sure.

    As an example, if you want to invest $500 every month in a particular fund/ETF three days after your paycheck, you can set up an automatic investment with a mutual fund. Not so with an ETF. With the ETF, you'll have to place the order on that day entering an appropriate limit order, worry about the bid/ask spread, and probably have to do like $480 one month, $530 the next (depends on ETF's price). ETFs give you the flexibility of intraday trading, but as a long-term investor, this shouldn't matter. In addition, Vanguard lets you (with no tax ramifications) convert mutual fund shares to ETF shares, so you can always change it if your want to (to avoid redemption fee, to take advantage of lower expense ratio, etc.). You can't go the other direction, though (convert ETF -> Mutual Fund).

    I think VYM is fine - I'd say I'm neutral. Is there a reason you need dividend income right now? You're in the accumulation stage so I would think growth is equally important at this juncture. This ETF/fund will likely outperform when people look for stability and value in perhaps times of economic turmoil (like the last couple years), but will likely underperform when sustained growth is occurring. Nothing wrong with that; I would consider it perhaps an ever so slightly more "stable" fund with less upside than VTI, for example. It should perform similar to VTV (Value Index).

    Hope that helps. Good luck!

  8. Thank you for your help. I just placed 3k in the Vanguard LifeStrategy Growth Fund. I think it is a great choice for my asset allocation. Now I'm starting to become interested in investing some money in a REIT that will offer a decent yield and take up a little extra room left in my Roth. Which funds do you recommend? VNQ seems well diversified but has a low yield. NLY and AGNC have great yield, but I'm worried that these investments might be too risky. I would be willing to put 500-1000 into a REIT ETF to help diversify my portfolio and create some additional income to my Roth. Please let me know if this is a good idea or not? Also how much do you recommend that I contribute to VASGX per month? I make around 20k now, but when I graduate in about a year and half I should make close to 40k.

    1. No problem. I think REITs serve as a good diversifier in an account, but putting $500-$1000 in it probably won't make that much difference in the large scheme of things. Thus, you may want to keep things simple and just stick with a single fund for now until your assets grow. While VNQ may have a lower yield than NLY and AGNC, you've hit the nail on the head with your comments that it's more diversified and that the individual securities are more risky. There's no free lunch. 99.9% of the time, more yield = more risk. And, of course, one company's stock is always more risky than a diversified fund. In this case, with only $500-$1000, you could probably risk choosing an individual security (since it going to zero wouldn't be the worst thing in the world when you compare it to your lifetime of investing), but I wouldn't get in the bad habit of picking individual stocks. If it ends up doing awesomely, you'll think you have some stock picking skill, when in actuality, it was basically luck! ;) I actually invested in NLY at one point in my life and learned the errors of my ways and now have my REIT investments in an index fund. I'd stick with VNQ or just VASGX on its own.

      I would recommend you put as much in VASGX per month as you can assuming you don't need that money for 5-10 years. If you need that money for other things (paying off student loans, car payments, etc.) then you should choose an investment that is less risky/volatile, like bonds. VASGX went down about 50% in 2008 - would that cause you to panic and sell? It's also almost doubled since the bottom in 2009. As with any equity, it's a volatile roller coaster ride at times, but it is the best way for growth for a long-term (10+ years) investor that ignores the daily noise.

      Hope that helps. Good luck!


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