Taxes Have a Role in Asset Allocation

When it comes to investing in bonds, Van Slyke prefers the low-cost, index-style mutual funds from Dimensional Fund Advisors, available only through advisers or through employer-sponsored retirement plans, and from the Vanguard Group. He currently uses these short-term funds: (DFFGX) DFA Five-Year Government Portfolio, (DFGFX) Dimension Two Year Global Fixed Income Portfolio, (DFGBX), DFA Five Year Global Fixed Income, (VBISX), Vanguard Term Bond Index Funds and (VFISX) Vanguard Short-Term U.S. Treasury Fund.

As a core equities holding, he uses (VFINX) Vanguard 500 Index Fund, then adds small-caps and international funds with the following: (VISVX) Vanguard Small Capitalization Value Index Fund, (VDMIX) Vanguard Developed Markets Index Fund, (VEIEX) Vanguard Emerging Markets Stock Index Fund and (VTRIX) Vanguard International Value Fund.

Steve Blankenship, CFP, principal with Heritage Financial Planning in Grapevine, Texas, says he tries when possible to have his clients put bonds in their retirement accounts. He even goes so far as to include large-cap dividend stocks, even though taxes on dividends are low by historic standards. "A tax is still a tax," he says.

To keep taxes and expenses low when investing in equities on the taxable side, he relies on passive or index ETFs for the large- and mid-cap portion of his allocations: iShares S&P500 Growth Fund (IVW), iShares Russell 1000 Growth Fund (IWF), iShares Russell 1000 Value Index (IWD) and iShares Russell Midcap Index (IWS).

For two other asset classes, he uses actively managed funds. For small-cap stocks, he prefers (MGSEX) Managers Funds Special Equity Fund and (FPACX) UAM Funds Trust FPA Crescent Portfolio; while for international equities he likes (OAKIX) Oakmark International Fund and (VGVIX) Thornburg Investment Trust International Value Fund.

Blankenship believes that tax planning is essential to retirement saving for clients.

"They're spending more, they're retiring earlier and they're living longer, and that's a recipe for disaster," he says. "I need to help them pick up and retain as much return as possible."

>To order reprints of this article, click here: Reprints