People often ask me portfolio design questions. For years I have been advising people to look at all of their accounts that are invested toward the same goal as one big asset allocation. So if the goal is retirement, and you have retirement money in a 403b, a 457, an individual 401(k), a Roth IRA, and a taxable account, you should look at it as one big account. Use the best investments from each account (at least those where your investments are limited) to fulfill your desired asset allocation while paying attention to relevant tax-location issues. The Bogleheads Wiki does a nice job of delving into the details of how to do this. I still think that is the academically correct answer and that is what I do with my own portfolio.
However, after encouraging hundreds or even thousands of people to do this, both online and in real life, I've discovered it is really hard for some people to do. The result? They either don't do it, they end up hiring an “advisor” and getting sold products they don't need, or they hire a good advisor and pay thousands a year for something that maybe doesn't make a difference of thousands a year.
Alternative Asset Location
How bad is it really to look at every account separately? Is it really a big investing sin? Because in some ways, it is a LOT EASIER to do that.something reasonable in each account, maybe it's no big deal that it turns into a big hodge podge of various investing strategies and investments, as long as you make sure each asset allocation is reasonable, low-cost, and something you can stick with long term.
For example, maybe somebody does something like this:
- 403(b): Invest in the “three fund portfolio” using a total stock market fund, a developed market index fund, and a PIMCO bond fund.
- 457: Put everything in a 500 index fund because it is the only reasonable low cost fund available.
- Individual 401(k): All Vanguard funds. Maybe a classic small value tilted portfolio with some REITS and TIPS.
- Roth IRA: A target retirement fund
- Taxable account: A Betterment 90/10 portfolio
It feels so dirty doesn't it? Everything all mixed up like that and nobody really knowing what your true asset allocation is. No attention is being paid to asset location at all.
But would that be the end of the world? Probably not. There isn't a bad investment in there. You no longer have to worry about rebalancing the entire portfolio from time to time. No complicated spreadsheets. Heck, you wouldn't even have to rebalance but one or two of the individual accounts and you could even eliminate that if you like. You don't have to worry about whether bonds go in taxable or not.
The truth is that investment management is probably the least important aspect of your financial success and certainly the easiest to automate. Maybe it's okay to quit trying to optimize it (especially since nobody really knows the optimal asset allocation a priori) and just get something reasonable done. You can certainly save yourself a lot of hassle and advisory fees that would help make up for any under performance issues.
I find it interesting that as I've moved from broke to nearly financially independent over the last 10 or 15 years, and as I've interacted with thousands and thousands of high income professionals about their financial situations, I've learned to spend less and less time on investment management and asset protection and more and more time on lifestyle/budgeting issues, tax reduction (primarily by maximizing the use of tax-advantaged accounts), attitude toward debt, and proper investor behavior. That's where the bang for your buck is. When I run into doctors in financial trouble, the issue is never whether or not they looked at all their retirement account as one big portfolio. It's only occasionally their asset allocation. The problem is usually low income compared to others in their specialty, a high debt to income ratio, a McMansion bought prior to residency graduation, overpayment of advisory fees, poor decisions with regard to student loan management, under or overinsured, a pitifully low savings rate, or ignorance of the basics of retirement accounts and tax reduction.
I didn't get rich because I determined it was optimal to put small value stocks in my Roth IRA or my 401(k). I got rich because I made a lot of money, saved a large percentage of it by controlling my lifestyle, invested it in some reasonable way, and insured against financial catastrophes. Get the “big rocks” right and it turns out you can ignore a lot of the small ones. Maybe managing all your retirement money as one big portfolio is one of the small ones.
What do you think? Do you cringe at this idea? Would it be insane to have five separate retirement asset allocations? Why or why not? Comment below!