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When comparing a four-fund portfolio to a target date fund, especially in a taxable account, there are several key factors to consider. Here’s a breakdown that clarifies the differences and implications of each approach:

1. Structure and Simplicity

• Four-Fund Portfolio: This strategy typically involves holding four distinct funds, often consisting of U.S. stocks, international stocks, bonds, and cash. You have the flexibility to manage these funds individually, allowing you to decide which fund to withdraw from based on performance and market conditions.
• Target Date Fund (TDF): A TDF is a single fund that automatically adjusts its asset allocation over time based on a target retirement date. It simplifies investment management by blending various asset classes into one fund but lacks the control you have with a four-fund portfolio.

2. Withdrawal Strategy

• Four-Fund Portfolio: You can selectively withdraw from funds that are performing well or avoid selling assets that are down. This strategic withdrawal can help preserve capital during market downturns.
• Target Date Fund: Withdrawals are made proportionally across all asset classes within the fund. This means you may be forced to sell assets that are underperforming, which can negatively impact your overall returns.

3. Rebalancing and Performance

• Rebalancing: Target date funds automatically rebalance their portfolios to maintain a predetermined asset allocation. While this can be beneficial for maintaining risk levels, it may not be tax-efficient in a taxable account due to capital gains distributions triggered by rebalancing.
• Performance Variability: Historical data shows that different asset classes (e.g., U.S. vs. international stocks) can perform variably year-to-year. By using a four-fund portfolio, you can capitalize on these fluctuations by choosing which funds to draw from based on current performance.

4. Tax Efficiency

• Target date funds can generate taxable income through dividends and capital gains distributions, making them less suitable for taxable accounts. The recent Vanguard lawsuit highlights concerns about tax efficiency in TDFs.
• A four-fund portfolio allows for more strategic tax management, as you can choose when to realize gains or losses based on your financial situation.

5. Long-Term Considerations

• While some argue that over a long period (20-30 years), the differences in total returns might balance out due to daily rebalancing in TDFs, your ability to manage withdrawals strategically could lead to better outcomes in certain market conditions.
• The argument against the impact of withdrawal strategies assumes uniform performance across asset classes, which historical data does not support.

Conclusion

Your preference for simplicity is understandable, but the choice between a four-fund portfolio and a target date fund in a taxable account involves weighing control against convenience. The ability to selectively withdraw from your four-fund portfolio provides significant advantages during market fluctuations and allows for better tax management compared to the automatic rebalancing of a target date fund.In summary, while both strategies have their merits, if you prioritize control over your investments and tax efficiency, the four-fund approach may indeed prove more beneficial in managing your portfolio effectively over time.