I get a few questions from time to time from readers that basically boil down to “how do I manage my portfolio?” They're not asking questions about what investment accounts to use or what their asset allocation should be or what funds to buy. They're literally trying to figure out the nuts and bolts of portfolio management. So today, I'm going to walk you through some recent transactions I did a few months ago and why. This represents no change in my investing strategy or asset allocation. It is simply doing the “chores of investing.” Will this be a boring post? Intensely. But if you're struggling with managing your portfolio yourself, hopefully, it will be instructive.
Here's the issue:
I have maxed out my 401(k)s, Roth IRAs, DBP, and HSA for the year. All additional investments will go into the taxable account. I have $165,000 to invest. Where should it be invested?
When people ask me this sort of question, the first thing I usually reply is “What does your written investing plan say?” Well, I have a written investing plan. This is what it says:
Our Investing Plan
60% Stocks, 20% Bonds, and 20% real estate
If you dive into the details, it breaks down like this:
- US Stocks 40% (25% Total Stock Market, 15% Small Value)
- International Stocks 20% (15% Total International Stock Market, 5% International Small)
- Bonds 20% (10% TIPS, 10% Nominal Bonds)
- Real Estate 20% (5% REITs, 10% Equity, 5% Debt)
So how is this plan currently implemented across our various investment accounts? It basically looks like this:
TSP (Old military 401(k))
- G Fund
Partnership 401(k) at Schwab
- Total Stock Market ETF
- International Small ETF
His White Coat Investor 401(k) at Vanguard
- Vanguard TIPS Fund
- Vanguard Total International Fund
Her White Coat Investor 401(k) at Vanguard
- Vanguard Total International Fund
- Vanguard Small Value Fund
His Roth IRA at Vanguard
- Vanguard REIT Fund
- Vanguard Small Value Fund
Her Roth IRA at Vanguard
- Vanguard Small Value Fund
The Taxable Account
- Equity Real Estate (various holdings)
- Debt Real Estate (various holdings)
- Total Stock Market Index Fund
- Total International Stock Market Index Fund
- Intermediate Term Tax-exempt Bond Fund
Hiking in Geiranger Fjord, Norway
This might seem odd to you at first glance, but to the experienced eye, it will not. There is a method to the madness here. You'll notice that there is overlap in most of the accounts. That is to say, at least one of the funds in each account is held in another account. The reason for this will soon become obvious.
Where Do You Stand?
Once you have a plan, the next step is to figure out where you stand. In my case, that means updating my spreadsheet with my current values. My personal spreadsheet is ridiculously complex as it contains every single investing transaction for the last 15 years. But the relevant part for this discussion can be visualized in this particular screenshot.
Whoa, that's heavy. Let's talk about what it all means. The line at the top is the total. That space on the spreadsheet shows this:
=H13-BL13+165000
where H13 is the square on the spreadsheet with my total retirement assets and BL13 is the square with the total of my defined benefit account, which I exclude from my asset allocation since that asset allocation isn't under my control. The 165,000 is the amount I'm adding to the portfolio.
There is one black line for each asset class and the red lines are totals of other lines. The first column lists the various asset classes. The second column is simply the percentage I want in each asset class, as noted above. The third column shows the actual percentage of the portfolio, including that $165,000 currently sitting in cash, that is actually invested in that asset class right now. That basically works out to be the number in the fourth column divided by the total at the top. The fourth column shows the dollar amounts in the various asset classes. The fifth column is how much I WANT in each of those asset classes, or the number in column three multiplied by the total at the top. The sixth column is simply the difference between the fourth column and the fifth column. That's the column I really care about because it tells me what I should do with that $165,000.
It tells me I need to put about $49K into TSM, $39K into Small Value, $52K into TISM, $23K into TIPS, $7K into nominal Bonds, $33K into REITs. It also tells me that I'm already overweight in international small as well as two categories of real estate.
Now that I know where I stand, I can move on to the final step.
Figuring Out The Transactions
This is the part that actually takes a little bit of thought. Let's take it asset class by asset class and determine what it is going to take to get that $165K invested and keep the portfolio in some kind of balance.
#1 Total Stock Market
I have this fund (the ETF version) in my Schwab 401(k). But I can't add any more money to that. I also have it in the taxable account. So it looks like I'll need to use $49K of that $165K to buy this fund in taxable.
#2 Small Value
This fund is in her 401(k) and both of our Roth IRAs. However, her Roth IRA is 100% small value and we're not adding any new money there. So unless we're going to add the fund to taxable, which I'd prefer not to given that it is less tax-efficient than TSM and TISM, we're going to have to transfer some money into Small Value within her 401(k) or my Roth IRA. The right answer is her 401(k), for reasons that you will soon see. So the needed transaction is selling $39K of TISM in her 401(k) and buying Small Value with it.
#4 Total International Stock Market Index Fund
This is the most complicated piece of this process. This fund can be found in all kinds of places in the portfolio. It's in his WCI 401(k), her WCI 401(k), and the taxable account. We're already $52K short on this fund. Plus, we know we're selling another $39K of it in her 401(k). My mind is exploding. Let's leave this one and come back to it.
#5 International Small
This one is held entirely in the Schwab 401(k). It's a little out of balance, but not bad. And I really don't want to add it to any other account within the portfolio if I don't have to. Nor do I want to sell any of it to buy the TSM ETF since there are (admittedly very small) commissions involved in doing so and I'll likely just end up reversing that transaction in a couple of months. So I'm just going to let it ride for now.
#6 TIPS
These are held entirely in my WCI 401(k). That's already maxed out for the year, so if I want more, I've either got to add it to another account or I've got to sell something else in the account and buy TIPS with it. The only other thing in the account is TISM. So I guess we'll sell $23K of that and buy TIPS with it.
#7 Nominal Bonds
My entire nominal bond allocation used to be just the TSP G Fund. It's a cool little fund that pays treasury yields while taking money market risk. As I write this (back in April) it's paying 2.75%. Unfortunately, my TSP account became 100% G Fund, and I can't add any new money to that account. So I had to add nominal bonds to another account. I chose to do so in taxable, for reasons discussed here. Since I'm in a high tax bracket, if I'm going to hold bonds in taxable, I should hold tax-exempt bonds. So the fund I've chosen in the Vanguard Intermediate Tax-Exempt Bond Fund. The spreadsheet says I'm a little over $7K short in this asset class, so I'll use $8K of that $165K to buy this fund.
#8 Real Estate
I'm still overweight in the two less liquid real estate asset classes, due to having to meet the minimums for some of my real estate holdings a few months before. But I'm actually underweight in REITs, which I use for rebalancing this major asset class since they are much more liquid and in a tax-protected account where transactions have no tax consequences. But I don't actually want to completely rebalance this sub-asset class. I simply want to rebalance the major asset class. That is $6K short, so I'll add $6K to REITs. The only place I hold those is in my Roth IRA, so we'll sell $6K of Small Value and buy REITs with it. We'll let the other two asset classes ride for now and they'll slowly come back into balance as I add money to the portfolio in coming months. This also explains why buying small value in her 401(k) was the right move instead of buying it in my Roth IRA- I needed that money for REITs.
…Now, back to Small Value
Since we sold $6K of Small Value in my Roth IRA, we need to add that to that transaction in her 401(k), where we were selling $39K of TISM to buy Small Value. In reality, we need to sell $45K of TISM to buy Small Value.
… And now, back to the “head explosion” that is TISM this month
Not only do we need to add $52K to this asset class, plus the $45K that is being sold in her 401(k), but we also need to add the $23K I used to buy TIPS in my WCI 401(k). That adds up to $52K + $45K + $23K = $120K. The problem is I've only got $165K to invest, and I've already earmarked $49K for TSM and $8K for the muni bond fund. $165K – $49K – $8k = $108K, not $120K. Okay, I can live with that. We'll just put $108K in there and we'll be a little low until next month.
Making the Transactions
So the transactions that need to be completed are:
Taxable account
- Buy $49K of TSM
- Buy $108K of TISM
- Buy $8K of Intermediate Tax-Exempt Bond Fund
His WCI 401(k)
- Exchange $23K of TISM for TIPS
Her WCI 401(k)
- Exchange$45K of TISM for Small Value
His Roth IRA
- Exchange $6K of Small Value for REITs
Whew! We survived! Managing a complex portfolio across multiple accounts requires a little bit of time and effort and some basic math skills made much easier with a well-designed spreadsheet.
Portfolio Management Learning Points
There are a few lessons about portfolio construction and management that were demonstrated here. Let's list them out.
# 1 Nothing is ever perfectly balanced
Rebalancing should be done at least once every 1-3 years. But if your portfolio is still relatively small compared to your new contributions, you can just rebalance with the new contributions. If you're a little off, no big deal. The market itself will knock things out of whack the next day anyway, and you can fix it up next month. Just try to get close.
# 2 Minimize transaction costs
There were 6 transactions this month. None of them required a commission to be paid. Don't kid yourself- investment costs come out of your pocket (i.e. your returns) so minimize them whenever possible.
# 3 Rebalance in tax-protected accounts
You'll notice nothing was sold in the taxable account. In fact, I try very hard to never sell anything in a taxable account, at least anything with a gain. If it has a gain, I use it for my charitable contributions. If it has a loss, I tax loss harvest it. But mostly, what I previously bought just sits there and I buy more. If there are rebalancing transactions (exchanges) that must be done, I do them in the 401(k)s or Roth IRAs.
# 4 Keep it as simple as possible, but not simpler
Remember that goofy set-up I showed you at the beginning, with a single fund or two in each investment account? It kind of looked dumb didn't it? But look how easy it made rebalancing the portfolio! The method to the madness. Can you imagine if I had all nine asset classes in all seven accounts? That would be 63 holdings. Instead, I've got 13 plus the illiquid real estate stuff. Way easier. This is about as simple as it can be while allowing me to maximize the use of retirement accounts, invest in nine asset classes, and have relative ease of rebalancing. Be aware that this changes from time to time as different accounts become larger and smaller percentages of the overall portfolio. The latest trend is slowly moving asset classes out of tax-protected accounts and into the taxable account.
# 5 Pay attention to asset location
There are some basic principles to asset location, and this post demonstrates them relatively well.
- High expected return, tax-inefficient asset classes (like REITs) go in tax-protected accounts
- Low expected return, tax-efficient asset classes (like muni bonds) go first into taxable accounts (if something must)
- High expected return, tax-efficient asset classes (like TSM, TISM) and/or low expected return, tax-inefficient asset classes (like nominal bonds when rates are low) go into taxable accounts next
- Take advantage of the best available funds in each account (such as the G Fund in the TSP, ETFs in the Schwab 401(k))
- High expected return assets preferentially go in Roth accounts (acknowledging that this isn't a free lunch, it technically represents taking on more risk after-tax)
I hope this has been a helpful exercise and that I didn't put you to sleep. You can do this. It'll take a little bit of time, effort, and thought, but when the alternative is paying someone else $25K a year to do it, it's probably a good use of your time. It is best to start doing this when your portfolio is small and simple. A 7 figure portfolio might be intimidating to manage, but it really isn't if you've already managed a 4, 5, and 6 figure portfolio over the last decade or two.
What do you think? Do you have any other portfolio management tips to share? Comment below!
“I hope this has been a helpful exercise and that I didn’t put you to sleep. ”
As I tell my patients almost every day, going to sleep isn’t the hard part. It’s making sure you wake up!
Rebalancing is certainly a critical part of the equation. Really interesting to see how you perform this with a much larger account. At this stage of the game, I simply buy whatever I need to in order to rebalance because my account balances are not large enough to cause me to need to sell.
Thanks for sharing your process, even it does seem a bit cumbersome!
TPP
At this hour, it won’t take much to put me to sleep, but I’ll be difficult to arouse after a few hours — fortunately, I’ll be off call and done working for the week by then.
I use a spreadsheet with a section similar to the one above to show me where I’m underweight or overweight and how much money needs to shuffled around to get things back in line with my IPS. Setting it up takes some doing, but it’s a good exercise to do if you want to learn to work a spreadsheet and be more confident managing your own portfolio.
Cheers!
-PoF
It makes me sad to see you up so late. At least I have the excuse that I was in 5 countries yesterday!
And yet, here you are responding to comments after your whirlwind travels. You are the consummate professional.
Seriously!
Which five countries, by the way?
Norway, Denmark, Sweden, Holland, and the US, all in around 30 hours including a night’s sleep! We had an extra 3 hours before our flight left from Copenhagen so we made a quick jaunt over to Sweden.
I don’t know if you’ve explained this before, but my only question is: why TIPS at all? It seems you have plenty of inflation protection with stocks, you don’t have a fixed dollar amount need, and you are still young. Thanks.
Are you saying “why bonds” instead of more stocks or are you saying “why TIPS instead of more nominal bonds?”
The answer to # 1 is I’m not 100% sure that stocks will outperform bonds over my investment horizon and I’m not 100% sure I can tolerate the losses a 100% stock portfolio could see in a nasty bear.
The answer to # 2 is that I’m not sure which will do better so I own both inflation-protected and nominal bonds. Frankly, most of my nominal bond allocation is in the G fund, which also protects somewhat from inflation/rising interest rates, because I view inflation as a far more likely risk than deflation.
Would a portfolio that doesn’t own TIPS be wrong? No. But I also wouldn’t say one that includes them is wrong. Many roads to Dublin. Pick a reasonable portfolio and stick with it. You don’t have to invest like me to be successful. You make your bets and you take your chances. If you don’t want to add TIPS to your portfolio until you have fewer stocks or have a fixed dollar amount need or are older, I don’t think that’s unreasonable, but it is also not what I have chosen to do. My goal is not to convince you that my portfolio is the one true portfolio. I just hope to convince you to pick something reasonable and stick with it.
And by the way, I’ve been pretty happy with the performance of my TIPS. The Vanguard fund has returned 4.05% over the last 15 years according to Morningstar and my timing has been such that I’ve beaten that handily (strangely enough about twice that high, but that’s only because I was in Schwab’s fund for a while in my 401(k) while TIPS weren’t doing well.)
no, just why tips and not 20% nominal.
even more of an academic question since you are using the G fund which is TIPS + stable value – esque.
thanks.
In some ways, this was a bet I lost. I was hedging against the possibility of unexpected inflation and we haven’t had much inflation at all this last decade, so I lost the bet. Now if inflation had spiked to 7% you wouldn’t be asking this question.
Peds asks why use TIPS at all, which I ask myself repeatedly. I use Schp in a taxable account, Treasury TIPS in my cash equivalent account, and VAIPX in a tax-deferred account. Regret Minimization is a psychological principle of investing . The history of investing teaches me humbling respect for inflation; the 1970s were devastating for bond investors. I understand that a high allocation to stocks might eke out ahead of inflation, and REITS are an inflation correlate, but I want direct protection against the vicissitudes of inflation.
One of the biggest mistakes new investors make is to treat each account separately and try to do rebalancing individually.
The correct way to do it in my opinion is to combine everything and treat it as one entity for rebalancing purposes.
Then after you know what asset is lagging (or ahead) comes the tax planning phase which is to pick which location offers the best tax or cost implications for the transaction.
Like The Physician Philosopher I too prefer adding new money into the system (which I was going to do anyway) directed towards the lagging assets rather than selling.
I strongly disagree with above. Each account addresses it’s own goal and time frame. Each account should have it’s own AA with consideration of expected returns, tax efficiency, and time to goal.
I’m not sure I agree with either of you. I look at all accounts aimed at one goal (and thus the same time frame) as one big account. So all my retirement accounts AND my taxable account (at least that part of it that will be used for retirement) get looked at together as noted in this post. I don’t include HSA, 529s, or money being saved for next quarter’s tax bill in this asset allocation.
Do you have the same time frame for your early retirement taxable account as your tax- deferred retirement account?
Mine differ by 10 years.
No, just one big retirement account for everything although it is generally wise to deplete the taxable account before touching the tax protected ones. Seems overly complicated to have two to me.
Jim I actually think that is what I am doing as well with my method suggested.
I don’t include 529s like you (although I do include my hsa because I treat it like a stealth IRA and don’t plan on taking out money till post retirement.
So my big consolidated method for rebalancing purposes includes: my vanguard taxable brokerage account, my 401k, my roth ira, and my HSA.
I treat that as one combined asset, pop the numbers in my spreadsheet and it tells me what asset class is lagging and I typically put new money into it.
Also like you I don’t use cash in my emergency account or savings for this method of rebalancing (just used for net worth calculation)
So you don’t balance across your HSA as well?
you can if you are not planning on using it.
It’s a good question. So far we haven’t thrown the HSA into the retirement pot. It wouldn’t make a big difference if we did, but honestly, we do invest it for the long term.
Thanks for this post. I hope that this information will be applicable to me in the near future. I read your disclosure at the beginning of the post, and I ignored it… Made it through the post by my 2nd cup of coffee this morning.
well said; its quite easy to create a diversified portfolio using mpt
asset allocation model is responsible for more than 90% of your returns as we know
great article!
Thank you for this. I have been asking this same question because I have found the amount of work required to be onerous. But now I see that you use a spreadsheet that looks very much like mine and it is just as much work for you. No magic bullets after all. I guess the real lesson is that there is a market opportunity for someone who can write some software to help.
While I agree it’s a pain, it helps me to consider how much it would cost to get someone else to do it for me. 1% of a $3M portfolio is $30K a year. I can put up with some pain for that kind of savings.
Very helpful article, thanks. Deep down I feel like I should correct my current allocation percentages based on whether I’ll pay taxes when the assets are liquidated in retirement. So perhaps 401K and taxable should be multiplied by an arbitrary 90% to reflect future income tax to be paid, whereas my Roth and HSA accounts wouldn’t receive this correction (assuming the latter was spent on healthcare).
If (hypothetically) my investing statement were “50% TSM and 50% total bond market”, and I had $50K in TSM in 401K and taxable combined and $50K in bonds in Roth/HSA combined, and I project 10% income tax in retirement, really I’m at 47% stocks ($45K/$95K)and 53% ($50K/$95K) bonds, and so if I had $2K to invest, it should go into taxable.
But maybe this is way too much minutiae.
Yes, I agree that to be totally correct you should do that. I don’t know anybody who does though and suspect those who do need a new hobby.
Thanks for this, Jim. Nuts and bolts posts like this are very helpful. Like you said, it’s not about the exact details or allocations, it’s about the methodology. I tend to forget some of the mechanics, so I bookmark these “how I do it” posts from you and PoF and embed them in my written financial plan so that when I am about to do my financial dirty work I do a quick refresh , roll up my sleeves, and punch through it. I too am fairly motivated by the 1% AUM savings to DIY.
I love this write up! PoF got me into “spreadsheet’n” and it’s made all the difference. Want to add $11k for a Roth on January 2nd and where does it go? Easy! Thanks again.
I am relatively new to the site and investing in general, but a simple question. When you invest in a target date retirement account (e.g. Vanguard Target Retirement 2040), don’t they basically do this for you? What are the downsides to such an investment strategy? Thank you.
TGD funds are great for tax-deferred accounts. In my opinion, they will steer you away from the common behavioral mistakes. For a taxable account, you will prefer to use munis for the bonds and ETFs for stocks which are more tax efficient than mutual funds. ETFs do not distribute cap gains until you choose the decade to sell.
Yes they do and if that fund is available in all accounts you own AND you are happy with that asset allocation, then it’s fine to use. Unfortunately, neither of those apply in my case.
Thanks for asking this; that’s what I am in and it was making me really nervous to not have that fund mentioned at all
GREAT POST!! I have a small enough portfolio that currently I can manage a fairly decent AA with just new contributions.
I am beginning to realize that I will so be coming to a crossroads where I will have to do something different in order to keep things balanced.
I will probably start structuring a spreadsheet with a similar approach to this.
Can you explain why you consider TSM and TISM tax efficient? Would managed accounts with a similar index (disregarding loss of basis points/commission) just for comparison be ”as” tax efficient? My big goal right now is to try to understand tax efficiency regarding mutual funds and it is a concept I am having a hard time grasping regarding the differences. ( It likely has something to do with ”For a taxable account, you will prefer to use munis for the bonds and ETFs for stocks which are more tax efficient than mutual funds. ETFs do not distribute cap gains until you choose the decade to sell.” as you commented above but I am still missing something (maybe it is my concept of how ETFs and mutual funds vary, but I am not sure).
Also unrelated to that question:
Do you have one of these spread sheets blank with all the calculation pieces built in that we could download. I use quicken now but would love to give something like this a try on the side.
Thank you.
very nice. yes totally boring like doing the last calculus problem for a days’ homework. but, it took me a while to figure this process out on my own. wish I read this several years ago. the EXAMPLE of doing this is VERY beneficial. keep them coming.
Can I make the argument that $165,000 is too much money to be sitting around in cash (even for a few months)? Over the years this “cash drag” really adds up. Getting that money in sooner (as you earn it) would grow more quickly over the years. Once you get up to 50k perhaps do this exercise. I know that means more work, but you are very well compensated for that work with a “mini frontload.” I did an analysis for someone once about every two week entry into the program versus yearly entry. The difference was 1 million dollars over a 25 year period. I hate seeing that much cash not working you while you sleep. I like the 108k TISM in the taxable. You get to receive “credit” for dividend taxes that you already paid in the foreign country, right? Theoretically you save good money that way, and in realty to, no? Some foreign countries tax their dividends very high (30 to 40 percent), and you get a credit for already having paid that tax. To my understanding you don’t get that credit in a tax deferred account.
Sure, you can make that argument. I’m not sure who is going to argue against it though. This money was invested “as I earned it,” within a day or two of knowing how much I had to invest that month. Obviously how much I have to invest each month is highly variable and $165K is a pretty darn good month.
I agree that the foreign tax credit is a good reason to use a tax efficient foreign stock fund like TISM in taxable.
Does foreign tax credit offset the non-qualified portions of the dividends as well as higher dividends rates for international funds including small caps? I am finding it hard to decide if I can have small value international in a taxable account without significant extra tax drag.
You’re asking the right question. I’m not sure I know the answer. I suspect it does for TISM over TSM in taxable but doubt it for SVI over TSM in taxable. The good news is that by the time you’re worrying about investing trivia like this, you’ve learned so much that your success is assured.
Thank you, Jim! A lot of credit goes to being ripped off by the so-called financial advisor/salesman.
Excellent post. “Nuts and bolts” can be the most important at times. I have to deal with this in figuring how to allocate quarterly distributions, each of which is varying and unpredictable amounts. The other part that I include in portfolio management is my mortgage as a “negative bond” since accelerated mortgage payoff is part of my IPS.
A negative bond is a good way to think about debt. I’m not sure it helps people stay the course in a bear market though.
The mortgage being a “negative bond” concept is mainly there to help remind me that when I’m figuring out asset allocation, money put into prepaying the mortgage should be counted in the bond portion. In other words, if I neglect to count it, my true asset allocation is heavier towards fixed income than I realized.
I’d like to echo the sentiment that this is a very useful type of post. It reminds me of PoF’s backdoor Roth tutorial, another favorite. Would love to see more content like this.
Thanks for the post, I found it really helpful. It seems that your spreadsheet is fairly similar to the one that I put together. Although I gleaned some useful tidbits from your approach to make mine better.
How did you come up with the amount of small value and small international tilt? Struggling with this myself. I have a three fund portfolio.
More tilt than that and I’d have trouble with the tracking error. Less tilt and I’d have fear of missing out for not tilting more. It’s kind of a personal thing; there’s no right answer. If you have a three fund portfolio, you presumably don’t really believe a small or value tilt is worth the trouble. At least that’s how you’re betting your money.
Paul Merriman is wearing me down….
I’m thinking of adding a 4th fund with small value vanguard or target value DFA fund in my retirement account.
I think SV is a good choice for a fourth holding. The other popular one is real estate in some form, such as the Vanguard REIT index fund.
Sorry to revive an old post. But curious which fund you are holding for your International Small Value allocation. I’m deciding between VSS-Vanguard FTSE All-Wld ex-US SmCp ETF (ER 0.11) vs AVDV-Avantis International Small Cap Value (ER 0.23 and wider bid/ask spread). I’m open to others if you have a good suggestion.
Thanks for all you do!!! You literally saved my financial future–or at least lit a fire under me to educate myself. As you’ve told the story, you’re whole WCI path was started by some stupid whole life insurance broker selling you some garbage. Researching why in the heck my then financial advisor would try to convince me that more whole life is better than a backdoor Roth is what brought me to your site. I already fell for his first pitch. I fired him. Thank you soooo much!!!! Someday, when I’m retired and kids through college, I’ll be sending you a nice gift.
VSS.
You’re welcome.
Please pay it forward to your colleagues and trainees.
Thank you, Jim, for a great post when I needed it most. After losing significant money in whole life insurance recently, I wanted to be in control of my financial matters. I read a few books and almost all of your blogs in the last 2 months. I am very confused about what should be my asset location which is tax efficient and makes rebalancing easier later on. This post helped me a lot. But with crappy options in our retirement plans, I’ll have to still spend some time to have desirable asset allocation and location.
I am curious about your statement about the small-cap value being not very tax efficient. I was reading bogle head forum about this topic, and someone has a google spreadsheet which showed that they are actually slightly more tax efficient than TSM. Their tax efficiency figures are different from morning star. Any comments on that as it might make my asset location easier.
Thank you for such a wonderful website. I wish I had come across before buying whole life just based on my friend’s recommendation and financial advisor’s sales pitch. I am out of it now.
I think that is highly unlikely. The small value fund has a higher yield (1.79% vs 1.67%) and higher turnover (19% vs 3%). I don’t see a way for it to be more tax-efficient over any reasonable time period given those numbers. I can’t comment on someone else’s tax efficiency numbers, but I suspect if they’re arguing TSM is less tax efficient their data is confounded by the fact that TSM has had higher returns than SV lately.
Thank you, Jim. That makes sense.
This post is really helpful. Despite having read your book, this website for years, and multiple recommended books, this process has always seemed hard for me to really visualize how to put it in practice. Doesn’t help that I don’t have much/any money to be investing, but I’ve wanted to better understand how to figure out where to put each fund and how to best manage contributions and rebalancing. This makes sense. Although it’ll be a few more years before I’m doing anything more than contributing to my Roth IRA, I appreciate that I’ll have this post to turn to when my financial situation changes. It’s been bookmarked.
It doesn’t start out this complicated. It starts out with a Roth IRA invested in a target retirement fund and gradually becomes more complex as life goes on.
I’m not ready for the spreadsheet thing yet. My mind will explode. : ) But I was wondering what kind of paperwork trail that I need to keep for record keeping and tax purposes? Do I need to keep a record of every transaction in IRA’s and taxable accounts? Does Vanguard do some of the record keeping for me? I will someday start the process of learning the spread sheets with time as I figure things out, but for now what is the best system for basic record keeping that folks use and do you have any pearls of wisdom?
I can’t speak for anyone else, but I also find spreadsheet analysis at this level of detail to be unnecessary. Of course, this is partially because Vanguard is the retirement plan holder for my employer. That means, in direct response to your question, I am able to rely on Vanguard to do my tracking as well as provide me the relevant 1099s I need for tax reporting. But even if you have accounts with multiple mutual fund companies, they will still provide you with your reportable tax information.
I’m curious what your process is for deciding where to invest new money each month. Do you just invest the same amount into every asset class each month and then rebalance once a year or something?
Yes, generally speaking but the rebalancing is only as needed, which has been every 3 years or so. I set a tracking allocation in Vanguard so I can compare. Then, since my work retirement funds (403b, 403 Roth which I use for after tax contributions, 457b, and 457f) are all in Vanguard institutional shares, I use the same target retirement fund (2025) to dollar cost average (DCA) into all those accounts. The target retirement fund of course automatically maintains the advertised allocation among international and domestic equity and bonds. I also have the same fund for my Roth IRA account but only use it for backdoor Roth’s. While I do have significant after tax investments as well, I DCA each month into the same index funds (500 and TSM) . Then I use the target retirement fund selection (e.g., I recently shifted them all from 2030 to 2025 to increase the bond allocation to offset the taxable stock fund build up) to rebalance every few years if my target bond allocation gets out of alignment. It is a simple algebraic adjustment. To round out the investments, I also have two rental properties. One paid off and one close. So while I could track their value for allocation purposes the reality is I don’t because It doesn’t matter to me. I really only care about the planned cash flow in retirement.
That’s a pretty good way to do it. It’s VERY tough to do that given my account situation and asset allocation though.
Apologies if this double posts. I lost one submission.
Holly, your mutual fund will track and report taxable transactions to you (and the IRS). I personally do not use spreadsheets to track my balances since all my accounts are with Vanguard and I can track my accounts just fine there for asset allocation purposes.
No. Your brokerage/mutual fund firm will keep track of it for you. And it only needs to be kept track of in a taxable account anyway. If you’re interested in calculating your returns and don’t like the way the brokerage/mutual fund firm does it then you’ll need to keep track of that stuff though.
How do you plan to do the mechanical work of investing without something like a spreadsheet? Are you just going to do the math by hand with a phone calculator? That’s not crazy for a simple portfolio, but a spreadsheet seems easier.
All along I was thinking how odd that you were rebalancing at an arbitrary point in time (did August simply hold your annual rebalance date?). Then I reread the premise and one of your follow up comments, which clarified that you were allocating your monthly income after having maxed out tax-protected space.
You’ve worked incredibly hard and earned every penny, and many of us take a vicarious pride in your accomplishments, but let me just say that I pinched myself on your behalf when that one sank in. Congrats, and may we all have such problems going forward.
Wow.
-CD
You’re not the only one who pinches himself frequently. I publish this stuff once a year on the state of the blog post, but a lot of people just never put it together. When we live on $10-15K a month and have a 7 figure income, even after giving a bunch of money away and paying a lot in taxes there’s still a lot of money to invest each month. I expect to invest 7 figures this year and unless something changes dramatically, going forward for at least the next few years. Although my wife and I are talking about a pretty serious home renovation…
Can’t wait to see how that home reno plays out.
Yea, me either.
I was wondering if anybody else noticed the numbers. One of the underappreciated aspects of this website, in my opinion, is that Dr Dahle’s extreme transparency makes frank discussion of money not seem taboo. This, of course leads to a virtuous cycle in which more people come to the website, which subsequently makes more money.
I think it helps that I get to see all of your finances. Sure, I do it privately and one at a time, but I can assure you I am neither the wealthiest nor the highest earning doc here. It’s always easier to talk money with someone richer than you for some reason!
This is a great post but man, where were you a month ago when I was struggling through this??! Believe it or not, your sheet is simpler than mine and will surely make rebalancing easier going forward. I fired a 2% AUM financial advisor a little over a year ago and have been slowly moving toward a three fund portfolio from over 20 different funds each in taxable and IRA accounts. Thanks for all that you do.
ME
You’ll find this gets a lot easier going forward with 3 funds instead of 20.
I purchased your online course and I am working my way through it. I am currently working on constructing my asset allocation plan so I found this post particularly useful. I’m just wondering why you purchased a TIPS fund in your 401(k) account instead of in your Roth. Your course talks about them being very tax-inefficient and as I understand it, you will be paying taxes on the growth in a 401(k) account when you cash it out. If you could help me understand that it would hopefully clarify some of my confusion and I can move forward with making my plan. Thanks! P.S. I’m about 35% through your course right now and I’m LOVING it!! Thank you!
TIPS (and other tax-inefficient assets) can be put into any type of tax protected account, whether tax-deferred or tax-free. I chose to put them in the 401(k) because now our Roth IRAs are a very small part of our portfolio so we can’t really get too much in there. It’s mostly small value and REITs in there. Why those instead of TIPS? Mostly because of a higher expected return from those asset classes. Now technically that means we’re taking on more risk because a tax-free dollar is worth more than a tax-deferred one, so it isn’t a free lunch. But that’s why.