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.
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
Taking the easy way
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.
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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!
I agree that when you get the big rocks right, the small rocks don’t matter. But getting the small rocks right probably does earn you some small extra return, and even 10 or 20 extra basis points of extra return compounds to not insignificant money over time. Why not take the extra money if it’s there?
The concern with separate allocations for each portfolio is that in the quest to have each portfolio conform to a neat asset allocation, you may end up paying higher fees. Optimally, as you’ve advised doctors over the years, you’d set a global allocation and buy that portfolio over different accounts to minimize fees.
However, if the alternative is paying for an expensive financial advisor, of course you can have separate allocations for each of your accounts.
I would imagine that reaching a precise and well thought out asset allocation becomes more important as you near retirement, especially if you’re looking to have your securities portfolio provide the bulk of your financial support in retirement.
If you’re starting out or mid career, far more important to get lifestyle, savings rate, debt, and tax strategy right, and then dump your savings into any half-decent allocation which has most cash going into broad equity indexes (ideally both U.S. and worldwide). Even if you don’t even know precisely what that allocation is! A few bps of boost from rigorous rebalancing isn’t going to matter on a six figure portfolio — especially if you can use that time and mental energy to find the lowest fee index funds, better car insurance, a cheaper cellphone plan — or boost your professional career.
This is how I feel. I am so busy with school and the accounts I do have aren’t very large. It seems if I use that extra time in other areas of my life I will get a greater return.
There are many roads to Dublin (i.e. retirement). I don’t think there’s anything wrong with keeping separate asset allocations in each assuming it approximates your overall desired asset allocation. In my portfolio, putting bonds in tax-deferred and equities in taxable gets close enough to my asset allocation for government work.
Having a simple, mindless investment strategy frees up time and energy for other pursuits. Some of those pursuits (like a successful blog) might actually make you even more money.
Strongly agree with each account having it’s own AA.
Each account has it’s own time line: age 60, age 70 RMDs , legacy. Each needs an appropriate AA.
I meant the above as a separate entry.
Dr. Curious , are you satisfied with bonds in a taxable account?
My former advisor put bonds into tax-deferred. 8.5 years later there was no appreciation because of low interest rates . It was a waste of a tax deferred space.
Each portfolio should have it’s own appropriate AA.
It’s been satisfactory in the sense that it’s been easy, and my overall portfolio has grown as expected based on my overall asset allocation.
Whether you are squeezing out the most growth by holding bonds in tax-deferred accounts is complicated, and controversial. WCI would say you are not. I suggest you check out the “bonds go in taxable” hyperlink in the article above, and the comments on that article as well.
WCI would say it depends on a lot of things, most of which you do not and cannot know.
I agree that different goals need their own AA.
I don’t think the technically best thing to do is to have a separate asset allocation for two separate accounts aimed at the same goal. But it is a simplification that probably doesn’t cost much.
I’ve been reading the blog and recommended books for about a year — as I learn more, the more convinced I am that having “a simple, mindless investment strategy” is best for my personality.
I’m 33, just finished fellowship and am about to start an attending job – my retirement contributions from residency are essentially all in a Vanguard 2050 Target date fund.
I will soon have an income of greater than $400,000, and am entertaining the idea of continuing a “one fund portfolio” using a Vanguard Target date fund (either 2040 or 2050). I think I can achieve a savings rate of 40 to 50%, if not higher hopefully.
I know I will max out my tax-advantaged accounts — question becomes, is it reasonable to use a target date fund for my taxable accounts as well? Essentially, I’m thinking of diverting my savings stream like this:
10% REIT (to be placed in a tax-advantaged account)
90% Vanguard Target date retirement fund (ER 0.16%) –first fill up remaining tax advantaged space, and then into taxable accounts.
I value simplicity over almost anything. I know I could probably do better with a more complex asset allocation, but a few thousand dollars is worth the simplicity to me. But is this crazy, or totally self defeating? Namely, does this put me at a disadvantage when approaching retirement? Retirement withdrawal strategy is something I’m ignorant of (still learning how to save!), but I’ve read that sometimes you want to withdraw from certain asset classes first to fill up lower tax brackets, etc etc (again I’m ignorant). If I have everything in a Target date fund, does this hamper me when I’m older?
Thanks so much for your thoughts!
I would suggest (as I did to my daughter 10 years younger than you) that Vanguard age target funds are a little more conservative than you might want to be. That’s one reason I use the separate funds- because I don’t want to be as much in bonds as the fund would put me (and have plenty of bond equivalents outside my Vanguard accounts)- but you could work around that by using a target retirement /age date of younger than you are/ later retirement than you plan.
If you do any management at all consider using Vanguard to decide your risk profile and how much you should have in stocks versus bonds versus other things (REIT etc) and the risk profile of such a total profile, then assess your portfolio and where it fits compared to your preferred level of risk, adjust either your target dates as I mention above or be happy with your current set up.
Thanks very much for your advice and comment! I agree that one should ignore the actual target “date”, and rather look at the underlying asset allocation of a target date fund and match it with your personal risk profile. I think this is what your comments getting at.
The Vanguard 2050 fund is currently 90% stocks and 10% bonds : https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0699
I have a high risk tolerance given my upcoming high income, and my age (33). The 2050 asset allocation seems plenty aggressive/risky to me (in fact maybe too much so!). Hopefully I understood your message correctly — if not, I appreciate any feedback. Thanks again for your thoughts.
For every one who thinks TR funds are too conservative, there is someone who thinks they’re too aggressive. If you don’t like them, modify at will (or use a different year fund-i.e. select by asset allocation not year.)
Behaviour is the most important determinant of out come in investing, so if you highly value keeping things simple, there’s absolutely nothing wrong with your plan. You’d likely get a slightly better return paying more attention to asset location and tilting to this and that, but the main thing is to feel comfortable with what you are doing. Like Jack Bogle says “Simplicity is the master key to financial success.”
If you value simplicity over tax-efficiency, then yes, it’s reasonable, not crazy.
The only hamper you’ll run into later is you will likely have to pay some capital gains taxes if you later change your mind about your strategy.
Agree, except for the part about Betterment. Why pay .25 plus more money in an expense ratio? An astute investor can now pay .03 for a Total U.S stock index fund with Schwab, and .06 for an International index fund. If the investor is smart enough to do everything else in the article, she can certainly avoid using Betterment. Lastly, Howard Marks has a lovely philosophical article out (“memo to clients”) dated July 26th. I really liked it and wanted to point it to your attention. It does not completely jive with your philosophy, but it is interesting to read and he makes some good points. https://www.oaktreecapital.com/insights/howard-marks-memos
Schwab lets us add in outside holdings to its performance management tool which makes seeing our big picture very easy.
“Why pay .25 plus more money in an expense ratio?
because you believe the tax loss harvesting, at a granular level, will more than compensate for the advisory fee.
And the excellent counterpoint to that point of view..
http://thereformedbroker.com/2017/07/27/tennis-with-howard-marks/
My 8-month dalliance with Betterment ended in large part due to my concern about the wash sale rule. My gains from tax loss harvesting exceeded the fees Betterment charged. Using Betterment’s funds/etf’s in other accounts, however, concerned me. Admittedly, it’s unlikely the IRS would ever notice…
I completely agree.
I do the fancy spreadsheet and balance many accounts mostly because I enjoy it. I don’t think the strategy makes me any $
I’ll go one step further. If I decided not to rebalance for the next five or ten years, that would probably be no big deal either. Would probably just end up with marginally more money and more risk.
Continually finding small (and big) ways to spend less and save more has a bigger cumulative impact.
Agree. I think it’s true that the higher a person’s IQ is the greater the tendency to feel that complexity is better, in the quest to squeeze every last basis point out of one’s portfolio, when simpler is usually better. Not knowing the details of what’s available for US retirement accounts (being Canadian), I think it’s also quite reasonable to put a target date retirement fund in all all retirement accounts and concentrate on the big rocks.
I think I read a similar post from Rick Ferri saying the same thing. It can make things alot easier
You are absolutely right. Even on Bogelheads more time is spent on “Do bonds go into taxable or tax deferred’ and ” How often should I rebalance” rather than Save and Get out of Debt! (or spend less and don’t get into debt)
Somebody should start a blog called ” Debt is a Disease” ……..Gordon
Getting the big stuff right (homes, debt, income, etc.) and not worrying about the small stuff (asset allocation and buying a cup of coffee) is definitely the correct mantra. There are many reasons doctors come through the years without becoming rich. Buying a Tesla or owning extra for instance.
Asset allocation is important, but not that important when it comes to wealth accumulation.
I had a simple and sloppy setup like you describe for about the first five years of my career. It wasn’t until I realized I was dealing with a portfolio in the mid six-figures that I realized it was time to start paying more attention to what I was doing with my investments and why.
The “easy way” essentially employs the Pareto principle. Doing 20% of the work gets you 80% of the results.
Doing the additional 80% of the work to be fully optimized makes sense if you have an interest in personal finance and are willing to spend dozens or hundreds of hours reading books and websites, focusing on tax efficiency, looking for tax loss harvesting opportunities, etc… Most people don’t want to do that or can’t find the time.
Cheers!
-PoF
More risk is a BIG DEAL (I am an moderately aggressive investor). Asset Allocation is ESSENTIAL during the Retirement Red Zone, to avoid sequence of returns risk. If you don’t allocate well when your portfolio is absolutely it’s biggest (around 5 years-10 years before and after retirement), you stand a chance of declining enough to make it very difficult to recover.
Correct allocations is one of the easiest things you can do, far easier than saving or earning, so why not do it? Additionally, having a disciplined asset allocation is valuable to determine when to rebalance your portfolio (aka selling high, buying low)
On the point about “across accounts”, I use Robo-advisors (most of it with no fees thru my employer). The other robo-advisor pays for itself thru smart tax loss harvesting, auto-rebalancing, dividend reinvestment.
Whenever someone asks me about investments I give them a very short basics on index funds but tell them they can simply buy a target date index fund and not have to think about those things. They can always learn more and decide to be more intricate later.
“…get something reasonable done” and “…save yourself a lot of hassle and advisory fees that would help make up for any under performance issues.” That is my overriding philosophy to a ‘T’ Dr. Dahle. Occasionally I wonder if it might be a bit on the ‘too simple’ side of ‘keep things simple but not too simple’ mantra. Sure I could try and squeeze some more juice from the lemon by fussing to get a ‘better” asset allocation and try and rebalance my way to nirvana, but I like feeling (investing wise) like that picture above looks – maybe with a beer in hand however.
I found myself at age 42 with a 200k negative net worth and zero/nada/zilch in retirement assets – not exactly PoF territory. Now, this was not because of an improper asset allocation or lack of rebalancing, as you might imagine. It was because of all the stupid @#$% I did/didn’t do that Dr. Dahle referenced at the end of his post. I’ve since got my @#$% together and do the big stuff right (I think) and don’t sweat the small stuff. Our entire portfolio is either at Vanguard or in Vanguard index funds. It consists of about 75% in target date funds spread over 401k, 403b and 457 accounts, 8% in small cap, small cap value and REIT index funds in 2 Roths and an HSA. The rest is in an employer cash balance plan, a 529 and our emergency fund. We’re about to start a taxable account at Vanguard.
The other issue for me is when we’re going to access, and spend from, each fund. For example, I have to liquidate the 457b within 5yrs of separation from my employer – and pay taxes on that distribution. We plan on living off of that money over the first 5 yrs of retirement. However, we don’t plan on accessing my wife’s 403b until RMD’s are required (age 70 for her, 75 for me). That has asset allocation implications within each account (at least I think it does).
Anyway, this may not be the best approach, but, whatevs. I think we’re getting the “big rocks” right – I’m 49 and we’re coming up on a million net worth and plan on retiring early(-ish). That is, if I don’t do something stupid again in the interim.
I agree with WCI. When I first started paying attention to investing and tried to pick “the best” asset allocation, I quickly learned that there is no such thing as “the best” or even “the correct” asset allocation. Everyone has their own idea of what they think will work well, but in truth, no one has a clue which AA will be best over the next 30 years. The key is that you pick one and stick with it consistently to avoid buying high and selling low multiple times over your career. Therefore, I don’t think it would matter at all if you do as WCI suggests and just have a hodge podge of investments spread across multiple accounts. As long as each one is reasonable and low cost (total stock market, bond market, international, etc), who cares what the exact percentages are? But, whatever you do, be consistent through bear markets and bull markets alike. I think that’s way more important than which portfolio you actually follow.
I agree that behavior matters more than asset allocation, at least through a range of reasonable asset allocations.
Yup. Simple is best!
Especially if you have:
1. Big income
2. Big savings rate
3. Big percent invested in equities
4. Big focus on low-cost investing.
The rest is almost irrelevant commentary.
How fast you get rich depends mostly on #1 and #2
having all your assets with one firm makes life easier and rebalancing at least yearly is always prudent
own tax free munis in your taxable accounts if you like monthly tax free income for life
Ads on the bottom by myfinance on mobile are pretty unsightly and intrusive. n=1 opinion.
Thanks for the feedback. That’s a work in progress, but needed to run them for a month to see what the baseline revenue is from them.
1. Asset allocation will have a very large impact on your portfolio’s performance.
2. Your savings rate will have an enormous impact on your total wealth accumulation.
3. Fees have a large impact on your terminal wealth.
4. Having a plan you actually execute (by sticking to it in the dark times) is also critical.
The relative impact of #1, and #2 change over time. #3 and #4 remain our trusted friends throughout the journey.
It’s been stated before, but Personal Capital is free to use and makes it easy to view one’s asset allocation across all accounts. While there is some upfront time to plug all your passwords into it (401k, taxable accounts, 529, etc), once you’ve done that, it’s awesome. I can quickly see how to deploy extra cash since Personal Capital digs into every account I have and gives me my AA across all accounts.
What is the website for the Personal Capital tool for asset allocation?
One thing that I haven’t seen adequately addressed in how the expected tax burdens of each of these accounts plays into asset allocation selection. At the time of retirement when you are withdrawing funds, Roth, tax deferred, and taxable all would have different tax burdens. Roth $ are more valuable then taxable $, and then come tax deferred $. So while taking your entire portfolio into account makes sense, the end result is not as simple. A 60/40 split that is irregular distributed across your accounts (ex. more bonds in tax deferred), will have a very different value when withdrawing than if you had it evenly balanced within each account. Obviously there are tax drags that need to be accounted for so it may not make sense to have the same AA for each account type, but there may be reasons to consider what WCI is suggesting.
Anyway, I am curious how other people reconcile these differences in the value of each of your accounts when determining an asset allocation.
Now you’re really digging deep into asset allocation. Once more, the academically correct thing to do is to tax-adjust all of your accounts to determine your after-tax asset allocation. In reality, few do this because it’s a hassle and doesn’t matter all that much.
I used to decrease the value of my tax-deferred accounts by 20% and my taxable account by 10% which are guesstimates of how much tax I’d pay on them in retirement. ROTH accounts I value at face value
Once I started holding bonds in taxable, I started calculating how many unrealized gains I had in taxable and it was very little so I actually adjust every year and assume I’ll pay 20% on those (which are low since the bond funds pay out dividends regularly)
This is not hard at all and I don’t really understand why others don’t do it (excepting those who take the simple road)
The most important thing about retirement saving can be summed up very easily: you need to actually do it!
I like this article; I think the key point is the emphasis placed on “something reasonable”. As long as your overall asset allocation has a great chance of beating the rate of inflation over your investing timeline, and your savings rate is appropriate then the rest becomes more a matter of fine tuning and personal preference.
If I had a similar situation to the example though, I’d just feel best using something like Personal Capital to get a good idea about how my overall allocation looks. For others, I could see how the simplicity of the approach taken by the post might make it more appealing than others.
are many of you using tax free munis in your taxable accounts; I gotta believe most do
trust me when you near retirement cash in some of your chips and go more conservative unless you have oversaved and able to take more risk
whats better than preserving the millions you worked hard to attain to leave to your family
I do a variant of a 3 fund portfolio in each of my accounts:
– standard 3 fund portfolio in tax deferred / advantaged accounts (Roth IRA, Roth 401k)
– all equities in the kids’ 529s and our HSAs (being more aggressive in smaller, less pressing accounts)
– target date fund in husband’s traditional 401k (he’s less interested in these financial matters)
– and yes, we utilize muni bonds as part of our 3 fund variant in the taxable accounts
This post makes me feel better. We have either a simple 3 fund portfolio or a Target fund for all of our accounts. I was thinking of changing everything to the 3 fund but maybe I’ll just leave it . . .
I have always managed my separate investment accounts independently, for precisely the reason you indicate – it is just easier.
I have read a lot about putting bonds in tax deferred and equities in taxable, but that just does not work for me. Approximately 80% of my investments are in taxable with the rest in and tax deferred (and a smidge in tax free). So I manage them separately. The only thing I am willing to do differently is to have less tax efficient funds in my 401K, whereas my taxable accounts are loaded primarily with very low cost ETF’s and muni bonds.
FWIW, I fully retired from work last year at 53 with no pension – DW and I live solely off our investments. Although a bit off point, I plan to do Roth coversions every year from now until I turn 70 to convert as much of my tax deferred account to tax free and reduce as much as possible the amount of my RMD’s.
Glad to hear I’m not the only one who manages each retirement account somewhat independently. Not only is this simpler, but I actually target a different allocation in my taxable account compared to my tax-deferred or tax-free accounts.
For my taxable account, I might actually want the money in 5-10 years (for example, in an early retirement scenario, or to purchase a rental property). Therefore, I have a more conservative asset allocation.
In comparison, for my tax-deferred/tax-free accounts, I won’t touch the money for at least 25 years, so I have a very aggressive allocation.
Bear in mind you can change asset allocations in your tax-protected account to compensate for raiding your taxable account first. That’s not a reason you need a different asset allocation there.