Earlier this week, I posted my personal asset allocation, which I post again below for your review:
75% Stock
50% US Stock
Total US Stock Market 17.5%
Extended Market 10%
Microcaps 5%
Large Value 5%
Small Value 5%
REITs 7.5%
25% International Stock
Developed Markets 15%
Small International 5%
Emerging Markets 5%
25% Bonds
Nominal Bonds (G Fund) 12.5%
TIPS 12.5%
I currently have 5 different investing accounts, all with different expenses and different options available, as well as differing tax treatment. Those 5 accounts don't count ESAs and 529s for each of my kids, nor the 4 accounts I've used in the past that don't currently have anything them, including a SEP-IRA, two traditional IRAs I use each year to do Backdoor Roth IRA contributions, and a taxable account. With multiple investing accounts, it can be a bit of a puzzle how to best implement your asset allocation within those accounts. Hopefully seeing a real life example will make it a little more clear.
My Current 401K (18%)
Schwab Total Stock Market Index Fund 18%
My Old 401K (TSP) (29%)
G Fund 12%
S Fund 10%
I Fund 7%
My Roth IRA at Vanguard (31%)
Vanguard Total Stock Market Fund 4%
Vanguard Total International Stock Market Fund 8%
Vanguard TIPS Fund 1%
Vanguard REIT Index Fund 8%
Vanguard Emerging Markets Index Fund 5%
Vanguard International Small Index Fund 5%
My Roth IRA at Bridgeway (4%)
Bridgeway Ultra-small Market Fund 4%
Spousal Roth IRA at Vanguard (18%)
Vanguard TIPS Fund 7%
Vanguard Value Index Fund 5%
Vanguard Small Value Index Fund 6%
Every year it looks a little different because different amounts get added to different accounts, and investments perform differently. Only $5K total can go into my Roth IRAs, and only $5K total can go into my spouse's Roth IRA. I can't put any money into my old 401K. And I can put up to $50K into my current 401K. It's easy to see that it won't be long before I will need to move asset classes from my Roth IRAs to my current 401K. Since the only low-cost fund in my current 401K is the Schwab TSM fund, I'll have to start using the brokerage option there soon and buy ETFs to maintain my desired asset allocation. The TSP will gradually move from G, S, and I to just G and S, then eventually will likely be all G. The separate Roth IRA at Bridgeway makes rebalancing that fund a pain. It requires that I either do part of my backdoor Roth IRA at Bridgeway, or that I do a rollover periodically from Vanguard. I'll likely move that asset class to my 401K eventually for simplicity (assuming I keep it.)
One principle of allocating investments into accounts that many people don't recognize is that for easy rebalancing, each account needs to share one asset class with another account. You'll notice that each of my accounts does that, with the exception of the Bridgeway Roth IRA. But for simplicity and to get access to lower cost admiral funds, you don't want too many funds in each account.
One thing I've been pretty happy with (and worked very hard to attain) is to have a relatively large Roth portion of our retirement accounts at this stage in my career. Over half of our retirement assets will never be taxed again. We achieved that by maxing out our Roths each year in residency (I confess we didn't quite make it one year), making Roth IRA contributions either directly or via a backdoor Roth each year, and a couple of Roth conversions at relatively low tax rates. Even though the majority of future contributions will be tax-deferred, we should still have a Roth component of significant size at retirement, allowing for tax diversification in the withdrawal phase.
One other thing I'm proud above about this implementation is that I've been able to keep the expenses quite low. The average expense ratio for this portfolio is 0.16%, dirt cheap by any standard, despite having several relatively expensive asset classes- microcaps, emerging markets, and international small.
I hope you find this example helpful as you implement your own asset allocation.
“The average expense ratio for this portfolio is 0.16%, dirt cheap by any standard”
Other than using passively managed index funds, is this low ER in part because, for example, you have the Admiral Shares at Vanguard versus the Investor Shares?
Also the TSP shares with a 2-3 basis point ER.
Admiral shares, index funds, TSP etc all have very low expenses. If I were willing to drop some of my higher expense investments (microcap, small international, peer to peer lending etc) I could get them even lower.
What type of expenses do you pay for peer to peer lending?
There are some fees to close the account but the main one is that Lending Club takes 1% of every payment made.
WCI
Great site. I’m trying to read through all the older postings. I seem to recall you also having a cash balance plan with a guaranteed return, correct? How do you account for that in your asset allocation? Or do you?
My wife and I (non-Docs) actually have a decent-by-today’s-standards defined benefit (pension) in a cash balance plan. It gets at least 4%/yr plus contributions of 7-9% salary as long as we stay with the company (18+ yrs and counting). I haven’t given it much thought, but that could easily be assigned to my fixed income percentage allowing more risk with the other investmetns if desired. (I still have work to do on my asset allocation and plan).
I haven’t really accounted for it yet, since it is less than 5% of my portfolio. However, as it gets larger I’ll have to start accounting for it. It has a guaranteed return, but that return is guaranteed by me, so I would just treat it like the 60% stocks and 40% bonds that it really is.
In general, I would use a true pension just like Social Security- rather than accounting for it in your asset allocation, I would use it to decrease the amount of income your portfolio actually needs to generate.
Can you comment a bit more on the Bridgeway Ultra-Small Market Fund account? In the recommendation tab, you call them “good guys” and you seem pleased with what they are about. Why did you start with them? Is there any other comparable micro-cap in Vanguard or Fidelity?
Thanks!
No, there isn’t. But there are some microcap ETFs that are reasonable options. I dislike the relatively high ER of the fund (relative to the rest of my portfolio) as well as the frequent tracking error. The truth is that it is very hard to capture the microcap return.
Very interesting and helpful, thanks or the detail here. Three questions, if it’s not too much trouble.
1. It looks like you originally posted this in 2012. Is it safe to assume that your allocation still roughly the same now, three years later?
2. In the related post about the evolution of your portfolio, you say you rode the allocation down through the 2008-2009 bear market and then back up through the last few years. How did your allocation fare through the collapse? How much of a loss did your portfolio take before it started coming back up?
3. I remember seeing somewhere on another post you stating what your return has been with this allocation over several years, but I can’t seem to find it. Do you mind sharing that again?
Thanks again!
Sorry – clarification on question 2 – I’m asking about the % loss during the bear market, not absolute dollar loss. Wasn’t trying to pry into the size of your portfolio.
It was around an $80K loss. For better and for worse, the portfolio is much larger now and another 33% loss would be a lot more money. That said, I expect to lose 20-40% of my portfolio again at some point in the future.
1) Yes
2) I think I lost around 33% of the portfolio from peak to trough.
3) Let me check, I just added it up a couple days ago in order to put my 401(k) contributions in the right place: 2004-2015 9.24% per year annualized/XIRRed
Thanks – great example of why it’s important to “stay the course.” You lost 33% in the crash but are still up 9.24% over the last 10 years. Helpful to hear and reinforce that one should just make the allocation decision and force themselves to leave it alone.
Fast question to make sure I understand this post correctly – why have the the Extended, Large, Small, and Micro funds in your portfolio? Aren’t all of those contained in your Total U.S. Market fund? Is it just that you want to adjust the weightings between those company sizes?
Yes, they are all contained. It essentially overweights those portions of the market. I’m basically betting those asset classes/corners of the market will outperform the market as a whole over the long run.
Quick question about asset allocation … I recently read an article on Seeking Alpha where the author argues that US Midcap Stocks are the “Equity Sweetspot” and have better returns long term that large or small cap. A quick comparison between MDY (mid cap etf) and SPY on google finance seems to support this theory. Yet I don’t see Midcap’s in your allocation. Any thoughts? Thank you!
Extended Market is very heavy on mid-caps and is included in my allocation for exactly that reason. TSM also contains some mid-caps so I wouldn’t say I have excluded those stocks at all. In fact, I am overweight mid-caps compared to most investors and the overall market.
Why is it that the slice and dice portfolio focuses on large-cap and small-cap and not mid-cap? Or, is this a different school of thought from S&D? Thanks!
I have a dedicated “mid-cap” allocation, primarily invested in the extended market index (S fund) in the TSP. But there are dozens of reasonable ways to “slice and dice.”
I get it- many roads to Dublin. I assumed S&D referred only to Merriman’s Ultimate Buy and Hold Strategy.
I see. Has your asset allocation significantly changed since you wrote this post? Thanks.
Not significantly. I added P2PL into the fixed income side 3 years ago or so.
thank you for your answers. I hope you don’t mind one more question. Do you ever buy individual stocks? Any thoughts on dividend growth investing (buying companies with track records of raising their dividends year after year, like KO, JNJ, etc?) thank you much for your time.
Yes, I have thoughts about it. I think it is taking on uncompensated risk.
https://www.whitecoatinvestor.com/uncompensated-risk/
Hi, had a gap between patients in clinic today and was browsing the site and had some thoughts about this older post, maybe it would give you a thought for a future one. Similar to you I have a work 403b and 457, backdoor Roth IRAs for my wife and I, and a HSA brokerage account (next step is a taxable after we close on our new house). What I’ve noticed as I fill out my asset allocation is that, because my 403b/457 investment choices are pretty limited and really only good for Vanguard Total Stock/Int./Bond funds, I use contributions in my Roth IRA and HSA to fund allocations to more exotic asset classes like Emerging, REITs, Small Value, etc. Like you I look at my total portfolio across all accounts, but the reality is these accounts are separate and will probably be withdrawn differently in retirement, so is this asymmetric asset allocation not a problem? What do you think?
No, I don’t think it’s an issue. As you withdraw from the various accounts in retirement, you can just rebalance. I think you’re doing it the right way.
Hi,
Do you “tax-adjust” your asset-allocation (accounting for the fact that 100% of the Roth is yours vs x% of the tax-deferred (401k) vehicle belongs to the IRS (where ‘x’ is your expected tax-bracket in retirement). Read about this on Bogleheads and not sure if it worth the extra calculations. Thanks!
I know all about it. I think it is a reasonable thing to do and the most honest/accurate way to look at your AA. I don’t do it though because it’s a bit of a pain, requires a fair amount of guess work as to future tax rates/burdens, and exact AA doesn’t matter all that much anyway. I think it’s a pretty low-yield activity.
Thanks for your perspective, appreciate the insight! As for explaining myself above, I wasnt sure if the term was something widely used or not- my inexperience 🙂
This is an excellent post that I reference often. Any chance for a 2016 update in one of your future blog posts? WCI has taken off and it would be interesting to see how this changes going forward.
If you really think it would be interesting, it would be an easy post to do. It’s a pretty fluid process between 2 Roth IRAs and 4 401(k)s though. The AA and actual investments haven’t really changed much, but what’s in which account certainly has.
All right, I did it last night. It’ll run in a few months.
Awesome. Look forward to reading about it. Thanks for listening.
What about your HSA? How does that factor in?
I’ll be doing an update soon, but so far I’ve kept it separate as its own allocation.
I recently finished reading Ferri’s “All About Assett Allocation” and was intrigued by the microcaps option also. However, with the theoretical perceived benefit of 0.8% improvement in returns he proposes with a 20% microcaps allocation when the fund itself is charging 0.73% i’m wondering if it’s even worth it? There is also the ishares microcap ETF (IWC) he provides as an alternative fund later in the book, but still sports a 0.60% fee. Maybe i’m missing something, but just seems like it’s a wash or close enough to it when all is said and done……
T
I have the same issues about the theoretical improvements on microcaps offered by DAF. Paul Merriman writes about it in one of his books (?Financial Fitness). He compares the Vanguard small caps to the Dimensional funds and makes the argument it may be better with DAF even after the management fees. I am not entirely convinced.
It may be good enough to do the tilts (small, value, international) in Vanguard and not worry about the more esoteric, theoretic benefits of the finer minutiae (?momentum, quality).
I wonder how WCI feels about this?
WCI isn’t sure how he feels about these other factors. A great resource for someone trying to wrap their mind around them would be Swedroe’s new one on Factor Investing. I haven’t gotten around to it yet.
I read Swedroe’s Factor investing two weeks ago. It’s an interesting book as it references lots of economic papers. It’s analogous to one of our medical books referencing lots of clinical trials. I would recommend reading it for those interested in understanding the tilt factors. Bottom line. I am not entirely convinced.
Hi Jim, I remember mention of your HSA including VTI and VTSAX??? Not sure, but there were two funds I think…. anyways, I was hoping to hear your reasoning behind why you choose to have those funds in an HSA. I’m going to start working for an employer that allows us to contribute to an HSA (never had one before) and am kind of excited/nervous. Any tips for a first time retirement saver and what should I place into my HSA? Thanks for all you do and have done.
My HSA is a trivial part of my portfolio so I just use one fund to keep it simple. That fund is the total stock market index fund. It’s 25% of my portfolio anyway so it fits in well.
If you’re investing for the long term, you can do something like that. If you’re actually spending from it as you go, have at least some of it in something much safer, probably cash.