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
Geiranger fjord

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.

Asset allocation

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.

Larry Keller

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

fairway mortgage josh mettleThis 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

Disability InsuranceNot 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.

lucidity wci scholarship

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!