I have tried over the years to teach the principles of basic portfolio construction, with varying levels of success. Part of the issue is that most people only ever do it once and even a high-quality financial advisor may only do it 50-100 times in their life. The process involves various tasks of account selection, asset allocation, asset location, and investment selection. New Do It Yourself (DIY) investors often find the task overwhelming, so much so that they are willing to pay someone thousands of dollars to do it for them. Rather than going over the principles of portfolio construction (again), I thought that perhaps today we'd take a different angle and just go through a few completely made up case studies to illustrate the relevant principles.
The 6 Steps of Portfolio Construction
If I had to list out the steps you must take to successfully construct a portfolio, I would list them like this:
- Financial planning
- Gather information
- Account selection
- Asset allocation
- Asset location
- Investment selection
In the case studies today, I am going to assume that folks have already completed Steps 1-4. So let me very briefly describe what one needs to do to complete each of these steps.
Step 1 Financial Planning
This is where you put together an insurance plan (disability, liability, health, property, life, etc), a student loan plan, an estate plan, an asset protection plan, and a budget. You have also determined your financial goals and approximately how much you will save each year toward each goal.
Step 2 Gather information
First, gather information about yourself. What is the total of your assets and your liabilities? What is your savings rate? What are your marginal and effective tax rates? What accounts are your investments currently in, what are your current investments, and if in a taxable account, what is the basis on those investments?
Second, gather information about your employer-provided accounts. Which accounts do you have, which ones have a match, what do you have to do to maximize it, and what investment options are available in it? Among those options, what assets do they invest in, what is the strategy of the funds, and what are the expenses of the funds?
Step 3 Account Selection
A lot of people struggle to differentiate accounts and investments. Think of accounts as luggage and investments as clothing. Any type of clothing can go into any type of luggage, but you use different luggage (and clothing) for a backpacking trip versus a 3-week Antarctic cruise versus an overnight business trip. While it is often relatively simple to choose appropriate accounts for a given investment goal (such as a 529 for college savings or a taxable account for saving up a down payment) sorting through the various retirement accounts can be tricky.
The general rule is to use whatever tax-advantaged accounts you have available and then invest whatever else you need to in a taxable (aka non-qualified or brokerage) account. If you use a high deductible health plan, invest in the Health Savings Account. Most high-income professionals and their spouses should be using Backdoor Roth IRA accounts. You can use your employer or partnership provided retirement accounts (401(k), 403(b), 457(b), 401(a), cash balance plans, SIMPLE IRA, etc). If self-employed, you can get an individual 401(k) and even your own personal cash balance plan.
And of course, anyone can invest an unlimited amount in a taxable account. But if you're planning to save $80K for retirement each year, you can put $19K into a 401(k), your employer matches $10K, you and your spouse each do $6K Backdoor Roth IRAs, that leaves you $39K/year to invest in taxable.
Step 4 Asset Allocation
One of the biggest struggles that beginning DIY investors have is deciding on an asset allocation, i.e. the mix of different types of investments in your portfolio.
Should I have 20% bonds or 30% bonds?
Do I need a cash allocation?
How much of my stocks should be international?
Should I “tilt” the portfolio to REITs or small value or something else?
Do I need rental real estate?
Do I use the full value of the income property or only the equity in making my calculations?
What about commodities, gold, bitcoin, or beanie babies?
The dilemma here is that there is no right answer to any of this. In fact, there may not even be a right answer for you. There are likely dozens of different portfolios out there that would work for you. It reminds me of that eternal question about marriage — Is there one Mr. Right out there or would you likely be happy with any of dozens of different long-term partners? Any reasonable portfolio when combined with the proper temperament and an adequate savings rate is likely going to be sufficient to reach your goals. However, it is also true that there is no more important portfolio consideration than asset allocation! What a Catch-22!
Many financial authors and bloggers have come up with a recommended portfolio –Taylor Larimore, Andrew Hallam, William Bernstein, Harry Brown, Paul Merriman, and Allan Roth to name a few. They're obviously not all right. Or maybe they are all right, and that's the point. But I've never done that because I find it intellectually dishonest to pretend that I know that one reasonable asset allocation is going to be better than another reasonable asset allocation. I don't know and knowing basically requires a functioning crystal ball. The goal here is to avoid what I call an “Extreme Portfolio.” If you want to look at a bunch of reasonable portfolios, here is a list of 150 of them, but there are literally hundreds more.
At any rate, if you want to design a portfolio, you'll need to come up with a reasonable allocation that you believe in and can stick with for a long time. Steps 5 and 6 are generally done together due to the fact that investment selection is often limited by availability of investments in employer-provided retirement plans.
The Case Studies
Let's get into the case studies. It would have been fun to do this with real live investor portfolios, but let's be honest, those asking for advice have rarely done Steps 1-4 correctly before coming to me and even if they have, they rarely share the answers. So I'm going to make them up for three hypothetical, but realistic, white coat investors.
Investor Number One — Molly
We're going to call our first investor Molly. Molly is a 35 years old single internist making $250,000 per year, She would like to retire in 20 years and wants some help with constructing her portfolio. She has her student loans paid off and is working toward paying off her mortgage. She also already has $120,000 saved up for retirement in the various accounts listed below:
- 401(k): 70,000 (58%)
- 457(b): 30,000 (25%)
- Roth IRA: $20,000 (17%)
She has spent a fair amount of time thinking about asset allocation, and has decided she wants to keep it pretty simple. She was going to use a three-fund portfolio (US Stocks, International Stocks, US Bonds) but feels like there would be some benefit to overweighting REITs and adding TIPS to the portfolio and she is willing to deal with that complexity. She does not want to be a landlord and doesn't trust any of the newer real estate investment companies out there. She thought about factor investing but decided that she really isn't sure which if any factors are actually real. She settles on the following allocation:
- US Stocks: 35%
- International stocks: 20%
- US Bonds: 25%
- TIPS:10%
- REITs: 10%
She wishes to save 20% of her income ($50,000) for retirement. She took a look at the accounts her employer offers. There is a small match in her 401(k) (50% of the first $10,000 she puts in there) and her 457(b) has reasonable investing options, reasonable distribution options, and she thinks the company will be very stable for decades. So she has decided to split her $50,000 in savings each year in the following manner:
- 401(k): $29,000
- 457(b): 15,000
- Roth IRA: $6,000
While disappointed she cannot afford to max out her available retirement accounts each year, Molly is also glad that all of her retirement savings can be in tax-protected accounts. Since she is in her peak earnings years and really isn't a super-saver, she elected to use the tax-deferred option in her 401(k). There is no Roth option in her 457, so that was not an issue. She decided that while she would rather use the 457(b) than invest in taxable, she wanted to max out the accounts she really owned (i.e. the Backdoor Roth IRA) first.
Her Roth IRA is at Vanguard, so Molly has a plethora of low-cost options for her desired asset allocation there. She took a look at the 401(k) and found it full of mostly actively managed stock and bonds funds. There was a low-cost S&P 500 index fund with an expense ratio of 0.10% and a good track record of matching the index. There was also two actively managed bond funds, one with an expense ratio of 0.8% and one with an expense ratio of 1.0%. There was one Vanguard fund in the 401(k), the international value fund with an expense ratio of 0.38%, but there were no REIT or TIPS funds in the 401(k). There were two other international funds, but they had expense ratios over 1.2% and short-track records.
She was surprised to learn that she had a totally different line-up of funds in the 457. For some reason, it was held through Fidelity. All of the Fidelity Freedom Target Date funds were available, but they also had the three main low-cost Fidelity Index Funds — Total Market Index Fund, International Index Fund, and US Bond Index Fund. In addition, the Fidelity Inflation-Protected Bond Index Fund (TIPS) was in there. She decides to “roll her own” portfolio with the index funds in there rather than use the target date funds due to their higher expense ratios and the fact that they don't mix well with the other funds she will need to get her asset allocation.
Since there are no REITs available in either employer-provided accounts, she has decided to place those in the Roth IRA. So what does her portfolio look like?
- 401(k): 70,000 (58%)
- S&P 500 Index fund $42,000 (35%)
- Vanguard International Value Fund (20%)
- 0.8% ER actively managed bond fund $3,000 (3%)
- 457(b): 30,000 (25%)
- US Bond Index Fund: $18,000 (15%)
- Fidelity Inflation-Protected Bond Index Fund: $12,000 (10%)
- Roth IRA: $20,000 (17%)
- Vanguard REIT Index Fund: $12,000 (10%)
- Vanguard Total Bond Market Fund: $8,000 (7%)
Five asset classes and six funds across three accounts. Most of that was pretty straight forward. The US stocks fit well with the only index fund in the 401(k). The REITs are obviously in the Roth IRA. There isn't room there for the TIPS, but luckily the 457 has a TIPS fund, so they can go in there. The international value fund isn't ideal for someone who really didn't want a factor tilt, but the expense ratio is so much less than the other international funds in the 401(k) and the 457 and Roth IRA are being mostly used for other asset classes, so a compromise must be made somewhere. The US Bonds are spread across all three accounts. This allows for a relatively easy rebalancing of the portfolio.
Are there other ways this portfolio could be reasonably built given those constraints? Perhaps, but this is certainly reasonable. Some might complain that bonds were put in the Roth IRA. I've addressed that issue elsewhere, but if that really bothers you, then you could hold more of the actively managed bond fund in the 401(k) and add the total international fund to the Roth IRA. That would also have the benefit of a more diversified and lower cost international stock holding. This portfolio should “age” pretty well given the ratios of new additions in each account but perhaps in 5-10 years, she may find herself gradually moving an asset class from one account to another. More likely, Molly will end up at a different job with different employer-provided accounts to deal with.
Investor Number Two — Deshawn and Aaliyah
This early 40s dual professional couple has a far more complex financial situation. Deshawn is a partner anesthesiologist making $450,000 per year. Aaliyah is an employee dentist making $150,000 per year, for a total household income of $600,000. They are around 40 and already have a seven-figure portfolio, paid off student loans, and a paid-off house. The current portfolio looks like this:
- His 401(k)/Profit-Sharing Plan $380,000 (35%)
- His Defined Benefit/Cash Balance Plan: $140,000 (13%)
- Her 401(k): $110,000 (10%)
- His Roth IRA: $42,000 (4%)
- Her Roth IRA: $42,000 (4%)
- Taxable account: $386,000 (35%)
Aaliya is the financial brains of the family and so has put a lot of time and effort into asset allocation. After reading a bunch of books, she was heavily influenced by Paul Merriman and his factor-tilted portfolios. However, Deshawn gets a lot of his news from Zerohedge and demands that they have some gold in the portfolio. He also did well with Bitcoin back before they got married (he used the profits on the wedding ring and an Audi) and wants to include some of that. She was able to get him to agree to limit gold to 5% of the portfolio and Bitcoin to 2%. When she first drafted it up, she found there were 15 asset classes in the portfolio. Knowing The White Coat Investor said having more than 10 was just silly, Aaliyah consolidated a bit and ended up with this asset allocation:
- US Large Stocks: 20%
- US Small Cap Value Stocks: 10%
- REITs: 10%
- US Bonds: 20%
- International Large Stocks: 12%
- International Small: 7%
- International Small Cap Value: 7%
- Emerging Markets: 7%
- Gold: 5%
- Bitcoin: 2%
They are pretty good savers and plan to save $150,000 per year toward retirement in the following amounts:
- His 401(k): $56,000
- His DBP: $15,000
- Her 401(k) (including match): $24,000
- His Roth IRA: $6,000
- Her Roth IRA: $6,000
- Taxable account: $43,000
Deshawn's 401(k) has tons of great investing options including Vanguard and DFA options. There is a low-cost passively managed fund for each asset class they wish to hold, except for emerging markets, Gold, and Bitcoin.
His defined benefit/cash balance plan actually allows him to select the fund it is invested in, but he is limited to one of three Vanguard Life Strategy Funds — Income, Conservative Growth, and Moderate Growth.
Aaliyah's 401(k) is crappy. She goes through all 20 funds in the plan, looking at the asset classes they invest in, their expense ratio, and their track record against an appropriate index. The 401(k) is so bad she wonders if it is even worth using because all of the funds have expense ratios of at least 0.7% and most are over 1%. All are actively managed. She plans to talk to the clinic owner about it, but for now, she has identified a US stock fund with reasonable long-term performance with an expense ratio of 0.7% and the PIMCO Total Return Bond Fund (ER 0.89%) as possible options for inclusion in the portfolio.
The Roth IRAs and the taxable account are held at Fidelity. While there could obviously be tax consequences for changing holdings in the taxable account, due to a recent downturn, the value of the account is pretty close to basis. They've been carrying enough losses forward each year from DeShawn's stock-picking days that they can invest how they like in that account except for one holding — $50,000 of Apple Stock with a basis of just $20,000 that he was gifted by his still-living grandfather a few years ago.
Aaliyah laid the portfolio out like this:
- His 401(k)/Profit-Sharing Plan $380,000 (35%)
- Vanguard Total Stock Market Index Fund (3%)
- Vanguard Bond Market Index Fund (5%)
- Vanguard FTSE All World International Small Fund (7%)
- DFA Small Cap Value (10%)
- DFA International Small Cap Value (7%)
- Vanguard REIT Index Fund (2%)
- His Defined Benefit/Cash Balance Plan: $140,000 (13%)
- Vanguard LifeStrategy Moderate Growth (13%)
- Her 401(k): $110,000 (10%)
- PIMCO Total Return Fund $110,000 (10%)
- His Roth IRA: $42,000 (4%)
- Fidelity Real Estate Index Fund $42,000 (4%)
- Her Roth IRA: $42,000 (4%)
- Fidelity Real Estate Index Fund $42,000 (4%)
- Taxable account: $386,000 (35%)
- Fidelity Zero Total Stock Market Index Fund (12%)
- Fidelity Zero International Index Fund (9%)
- Fidelity Emerging Markets Index Fund (7%)
- SPDR Gold Trust (GLD ETF): (5%)
- Bitcoin (2%)
Again, the small Roth IRAs were relatively easy and she elected to keep her crummy, little 401(k) simple. So it really came down to what goes in his 401(k) and what goes in the taxable account. Well, it was easy to put EM, Gold, and Bitcoin in taxable since they weren't options in the 401(k). Total stock market index funds are notoriously tax-efficient, so that makes for a good taxable holding. However, broadly-diversified international index funds like a total international index fund also make for a great holding. While not quite as tax-efficient as a US index fund due to its higher yield, it does qualify for the foreign tax credit which helps make up for it. Another reasonable option would have been to put some of the bonds in taxable as a muni bond fund, but given the great bond option in the 401(k) and recently rising interest rates, she opted to keep bonds in tax-protected.
While Deshawn thought maybe they needed at least a little bullion in their safe at home, they put most of their gold position into the ETF GLD. The Bitcoin was also kept in the fire-safe on a hard drive rather than on an exchange given security concerns.
Overall with 10 asset classes and 14 funds in 6 different accounts, it's far more complex than Molly's portfolio, but it certainly is put together well.
Investor Number Three — Gaurav and Uma
Our third investor is a married couple, Gaurav and Uma, who just retired. Gaurav is a retired pediatrician so they're in a fairly low tax bracket now. Uma was mostly a stay at home mom but worked for Fortune 500 companies at times during her career and so acquired a bit of a 401(k). They inherited a bit of money (and a lot of gold jewelry they liquidated) from her parents a few years ago too, which, when combined with a single paid-off rental property, is the source of their taxable account. They don't anticipate any paid work going forward (and so have rolled all of their work accounts into IRAs at Vanguard) but will be doing some small Roth conversions each year over the next 6 years or so until they start taking Social Security. They will be starting to withdraw from their portfolio this year and plan to take out about 4% a year of the mutual fund portfolio, adjusting as they go for portfolio returns. Their accounts look like this:
- His traditional IRA: $1,100,000
- Her traditional IRA: $220,000
- His Roth IRA: $120,000
- Her Roth IRA: $40,000
- Taxable Account: $520,000
- US Stocks: 25%
- International Stocks: 10%
- Real Estate: 10%
- Small Value Stocks: 5%
- Nominal bonds: 20%
- TIPS: 20%
- Cash: 10%
The big question for these folks is dealing with that rental property. It is paid off, cash flows well, is minimal hassle due to their top-notch manager, and has a long-term tenant so they plan to keep it indefinitely. It is currently worth $160,000. The other issue they will deal with over time is a shrinking taxable account and growing Roth IRAs as they do Roth conversions the next few years. Gaurav lays out the portfolio like this:
- His traditional IRA: $1,100,000
- Vanguard Total Stock Market Index Fund: $120,000 (6%)
- Vanguard REIT Index Fund: $40,000 (2%)
- Vanguard Small Value Stock Index Fund: $100,000 (5%)
- Vanguard Intermediate Term Bond Index Fund: $400,000 (20%)
- Vanguard Inflation Protected Securities Fund: $400,000 (20%)
- Vanguard Prime MMF: $40,000 (2%)
- Her traditional IRA: $220,000
- Vanguard Total Stock Market Index Fund: $22,000 (11%)
- His Roth IRA: $120,000
- Vanguard Total Stock Market Index Fund: $120,000 (6%)
- Her Roth IRA: $40,000
- Vanguard Total Stock Market Index Fund: $40,000 (2%)
- Taxable Account: $520,000
- Total International Stock Market Index Fund: $200,000 (10%)
- Vanguard Prime Money Market Fund: $160,000 (8%)
- Rental property: $160,000 (8%)
This portfolio is a thing of beauty. This will be so easy to manage it isn't even funny. Almost all of the rebalancing will be done in one account, his big IRA. As the Roth conversions happen and more US stocks go into the Roth IRAs (and the taxes are paid by the taxable cash), the total stock market fund in his IRA will be exchanged to Prime MMF. The only asset class not in the traditional IRA is the international stocks, but you could even put some of that in there (and some US stocks in taxable) if you wanted to. Should you put the total international fund into taxable before the total stock market fund? Well, the jury is still out on that subject, so the truth is that if one set-up is better than the other, it isn't by much. If the property appreciates faster than the overall portfolio, you may end up selling some of the REIT index fund or vice versa.
With 7 asset classes and 8 funds across five accounts, this one won't be too tough for Gaurav or the advisor to handle.
There you go, three case studies and while your situation won't perfectly align with any of them, I hope you can apply the same process to your portfolio as you move to become a more competent DIY investor. If you would like even more help with drawing up your own financial plan, consider taking The White Coat Investor's Fire Your Financial Advisor online course. It isn't free (it isn't even cheap at $499), but it is far less expensive than hiring a professional and even if you end up hiring a pro afterward, the course will teach you how to make sure you're getting good advice at a fair price. At 1/3 the cost of the online courses of other physician financial bloggers, it's looking like a better deal all the time.
What do you think? Do you agree with this process? What would you have done differently, if anything, with the portfolios in the case studies? Comment below!
I agree that it can be daunting to know exactly what percentage of bonds, small-cap, large-cap, etc to have in your portfolio.
Long ago when I was a youngin, I invested in the stock market and watched it regularly and had a strategy of investing in large cap, dividend paying companies. My grandma did that and made a few million over her lifetimes. She would buy companies like J&J, Southern Company, IBM, Bank of America, etc. She reinvested the dividends. I did that too. I also bought some energy / oil companies as “bets”, like tanker stocks.
Then I went to med school and either sold them or let them ride out or forgot about them.
Now that I’m older, and more risk adverse, and everything that I’ve read over and over and over and over that investing in the market and not a stock is the best way to invest…I’ve changed my strategy. Now I have a set it and forget it portfolio.
What did I use? I basically did exactly what this Kiplinger article said 5 years ago. I own all 5 of these ETFs.
https://tribunecontentagency.com/article/these-5-vanguard-index-funds-are-all-you-need/
Until someone says this is a terrible idea (which it isn’t), I’m very happy with a set it and forget it portfolio.
Even now, with a turbulent portfolio, I continue to buy VCIT, VBR, etc and getting in on low prices. I’m not retiring for another 20-25 years.
It’s good, try it.
Timely and another great and thought provoking article
Can 35 year old Molly contribute $29,000 to her 401-k?
$19,500 plus $5,000 match equals $24,500 unless I am missing something.
You got me. Sounds like I blew the math. Not sure it changes much though. She’ll just have to invest that extra $5K in the 457 and then a bit in a taxable account to get to $50K.
Diversification did not help in the crashes of 2000 and 2008. Every asset class went down so modern portfoilio theory did not hold to be true
Bonds helped in 2000 and 2008.
# 1 That’s not true. Take a look at treasury bonds in both cases for instance. Or small value Stocks that had a 22% return in 2000.
# 2 That’s not what modern portfolio theory says.
Thoughts on corporate bond funds in todays environment?
Crystal ball cloudy.
I agree with Bernstein: take risk in equities, not in bonds.
To the extent that I’d have bonds in my portfolio, it would be the TSP’s G fund, intermediate term US debt, or up to 50% intermediate term state municipal index fund if you lived in a high tax state like New York or California.
I don’t have much desire to hold corporate debt. I certainly don’t want company-specific default risk with debt or less than investment-grade (“high-yield”) corporate debt. Might as well have the upside potential of stock investing.
Excellent post, covers nearly all one needs to know to get set up. It is a little bit of work upfront but the trick is to keep going and not get stuck. Usually, the place folks get stuck at is the asset allocation. The accounts are easier to figure out- since one has access to only a few accounts. If asset allocation is the problem, stay simple. Simple is not a compromise, it truly is good enough. Start with 1 mutual fund- a Total Stock Market Fund is a great place to start. Or stay. Take your time, take a year to read up and make up your minds on what to do next. It really is that simple.
-PFB
Thank you for the examples. I see Molly has REITs and bonds in her ROTH. If her REITs go down, she can easily rebalance from the bonds. If I have REITs and SCV in my ROTH and they are both out of tolerance, how do I know whether to rebalance by buying a more expensive fund (e.g. 0.37) in 401k or buying the same fund in taxable? Thanks for any advice!
Not enough info to give good advice, but if I had a REIT index fund with an ER of 0.37% in my 401(k), and I was low on both REITs and SCV, I’d sell some REITs in my Roth and buy SCV there and then exchange something else in the 401(k) for the REIT index fund.
I think this is ok but there is a better way. With target retirement funds so cost effective nowadays there is no reason to construct a portfolio. Just use a index target retirement fund and let them do the heavy lifting
That works fine if you agree with the asset allocation and glide path of the target retirement fund, AND if it is available in all your accounts.
How do you invest in a Roth with a $600k income?
Through the Backdoor:
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
Thanks for all you do! Your advice has helped me make smart financial decisions as a young physician. I recently finished residency last year and am maxing out my employer 403b and backdoor ROTH IRAs for my wife and I. After one year of employment I am eligible for my employer 457 which I also plan on using. I currently have both IRAs and my 403b in Vanguard target retirement funds. As I understand it they are skewed toward more aggressive/high-risk stocks early on with a gradual shift toward more conservative funds as the target date grows closer. What are your thoughts on using those funds exclusively to avoid rebalancing every few years on my own? I still plan on reviewing periodically every 5 years or so to make sure I am comfortable with the risk level and can adjust to an earlier or later target date fund if needed but it seems like these funds could provide the necessary rebalancing automatically. I am not one who wants to spend the time tinkering with my accounts and prefer to just set and forget as much as possible.
They’re fine if they’re available in all your accounts, especially if you’re not investing in a taxable account.
https://www.whitecoatinvestor.com/7-reasons-i-dont-use-target-retirement-funds/
Dr. Dahle, I looked through your book recommendations. Do you have one to recommend that discusses where to put what (ie. bonds in Roth account debate, which ones are most tax-efficient, etc)??
Any updates to the book recommendations in general. I see one is specific to 2020!
Part of the reason books are so good is precisely that they are NOT specific to 2020. They are classic and evergreen. Thus they’re great for your foundation. You can use blog posts and forums to supplement more real-time information. Some of my favorite books are 10-20 years old. I think they’re still worth reading.
Most books by Bernstein, Swedroe, and Ferri contain at least a little discussion of asset location. I hope you’ve seen these posts too:
https://www.whitecoatinvestor.com/asset-location/
https://www.whitecoatinvestor.com/my-two-asset-location-pet-peeves/
2Questions on target retirement funds:
if we were to buy all the funds that are included in the TR fund, and rebalance ourselves each year, would we have a lower expense ratio?
I am new to all this – does rebalancing cost money/difficult to do, or do you simply transfer some money from one fund to another? My guess is no cost in a tax protected account, but potentially yes in a taxable account?
Yes.
No. Very easy and usually free (at least when using mutual funds at Vanguard inside retirement accounts).
Great post, concise and informative! I’ve been reviewing options for portfolio development, asset allocation, and overall financial help, I’m fairly new to this, but I hope to grow in time to have something very solid. I haven’t quite decided my path yet and I was hoping to get your take on robo-advisors +/- personal financial help that employ modern portfolio theory. Take for example betterment and personal capital platforms as both have robotic algorithms with the additional benefit of personal and overall wealth management with personal capital with a fee of around 0.25-0.5% and 0.89%, respectively. Is this worth it? What do you foresee are the benefits and pitfalls?
https://www.whitecoatinvestor.com/what-you-need-to-know-about-roboadvisors/
At 0.89%, I expect a lot more on the financial planning side than a roboadvisor can provide. At 0.2-0.3%, it’s probably a fair price for asset management.
Excellent post.
How about putting most of the money in vbiax; vanguard balanced index fund. Covers both total market stocks and bonds. Maybe international exposure not a good idea at this time with all what’s going on. Any thoughts?
Thanks
I don’t try to time the market. So I don’t try to guess if international will outperform domestic this year or vice versa when setting my long term asset allocation.
If you have decided you don’t want international stocks, the Vanguard balanced index fund is certainly a very simple investing solution. Here are some others to consider: https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
Wow. The Gaurav Uma example was helpful but lots of missing info in my mind. I guess they can live on 80k even after paying taxes plus their social security? Thanks for all the work and advice over the years. Have pretty much been very diversified. Only 57 years old. No debt, at all. Have amassed about 6.7 million in retirement and after tax accounts (that’s with the 5% Covid loss) and have a paid off house worth about 1.5 million. The qualified retirement accounts total 3.3 Million of which 900k will be paid out lump sum at retirement (I will pay taxes on 300k gains). Now the hard part. About 55% equity and 45% bond funds/cash. Setting everything up for the future in these accounts. Where should I keep the bond funds versus equity funds, ie tax efficiency important. What accounts to spend from? After the 2008 financial crisis I knew I needed to have a sizable cash account(s), I am risk averse. Right now 1.2 million cash in high yield banks and 2 CDs to tap. The retirement spending planning and tax planning is complex. Will need good advice and I will not be paying any large standing fixed fee advisory or asset under management fees. I need some good advice and I am willing to pay for that. Willing to pay probably twice per year too. To complicate matters I may do some low income level consulting and or part time surgery. Finally. Two of the qualified retirement accounts have a guaranteed 3% interest rate and these funds are completely liquid, so need that considered into the current state of affairs with bonds. I am in a huge public retirement system with TIAA and those guaranteed rates are real and useful. I would need to take mandatory distributions in those accounts at 70.5 years. Oh yeah. I plan to spend about 180 k per year.
Congratulations on your success.
If you want more info, feel free to make it up. What you see there is all made up anyway. They’re hypothetical examples.
I don’t see that Deshawn and Aaliyah’s Apple stock was addressed. I assume they didn’t sell due to the low cost basis or they had enough prior losses to cover the $30k in gains? I would love to see a post on how to move from holding individual stocks with large gains in a taxable account to a more diversified index fund allocation.
Good pick up, impressive. Looks like I didn’t close that loop. Yes, either option would be fine. They could either pay for the gains on it with other losses or they could build the portfolio around it. Let’s assume they paid for the gains on it with the other losses since it didn’t show up later.
https://www.whitecoatinvestor.com/legacy-holdings-in-taxable-account-podcast-86/
There’ll be a blog post coming out on it in a few weeks too.