Author Topic: Implementing asset allocation across many accounts? (soon-to-be-married couple)  (Read 866 times)

The frugal geographer

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We are a couple who will be getting married this July and decided it would be a good idea to evaluate our portfolio as a whole and set up an IPS. Each of us has a 401k pre-tax, Roth IRA, HSA, and Vanguard taxable investments. We have been maxing out all tax advantaged accounts in 100% equities.

As a permanent plan, we've decided upon replicating 50% VTSAX (total domestic), 35% VTIAX (total international), and 15% VBTLX (total bond) because we didn't feel comfortable being 100% stocks forever. So just today we allocated each balance in our tax advantaged accounts to this ratio, leaving the taxable investments as-is. Makes me nervous because it sorta feels like market timing, but I know it eventually had to happen to put a plan in place.

However, the thought of managing this ratio amoungst the entire portfolio seems a little overwhelming. We contribute to each of these accounts with each paycheck, maxing out the tax-advantaged by the end of the year. Any extra funds get invested in our taxable vanguard accounts. In order to follow the IPS, I know we'll need to allocate more to bonds in tax advantaged to even out the 100% stocks in taxable. So I had a few questions:

  • How do you contribute to all accounts routinely while keeping the ratio intact?
  • Does cash savings emergency fund count towards the "non-equity" allocation? Was initially thinking for simplicity sake that we could mirror the 85%/15% ratio in taxable by just having 15% in a high interest savings cash account.
  • We plan to retire early, meaning we'd only have access to the taxable stocks at first. Every time we draw from the stocks, do we rebalance in tax-advantaged to re-establish the ratio?

Any other advice on simplifying the management of the overall portfolio across multiple accounts is greatly appreciated. I want to reduce the amount of tinkering and be as passive as possible, but I feel that the cross-portfolio approach actually requires frequent monitoring and tinkering. Also, some of the accounts don't have these total Vanguard funds, so they need to be approximated with individual funds which further complicates things. Please put my mind at ease. Thanks for any input!
« Last Edit: May 31, 2018, 07:25:34 AM by The frugal geographer »

sokoloff

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I think you're so far ahead of the pack that you can't see most of them from where you are.

With that in mind, I'd consider only rebalancing once a year (maybe in February, to maximize the time you have capital gains in your pocket before paying tax, but still getting the January effect). If you drift from 50/35/15 to 54/34/12, are you really at that much risk letting that ride until the following February?

Sibley

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First, make sure you've consolidated accounts as much as possible. You won't be able to completely of course, but the more that you can the easier it'll be. I'm thinking specifically of the HSA and taxable accounts. Not sure if you could combine HSA, but worth checking.

Next, decide what allocation means functionally. If you implement this allocation in each account individually, then you can probably use broker provided auto re-balancing to take some of the heavy lifting. So if you have 5 accounts total and each is at 50/35/15, then in total your allocation is going to be pretty darn close to that. So you setup to deposit x amount into each account every month, and the broker buys in the 50/35/15 allocation automatically, then quarterly or whatever timing the broker (or you) can go in and rebalance. To mitigate tax consequences in taxable accounts, instead of having it auto buy according to your allocation and thus require more balancing later, you could do it manually and just buy whatever fund is needed to keep your allocation.

Alternatively you could decide to implement the allocation across the whole, and have each account dedicated to one of the funds. So you would only contribute to whichever account(s) based on your desired allocation. The risk here is that you may not fill up your tax advantaged space, depending on market performance.

Also come to terms that your desired allocation is a GOAL. You will rarely, if ever, be exactly on that goal. The actual allocation is going to drift around a bit, and periodically you'll rebalance things to get back on track. You don't want to rebalance too frequently because you'll just drive yourself nuts. Just the thought of it is overwhelming you right now.

The frugal geographer

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Thanks, guys! I think I'm definitely just overthinking it, but my analytical brain likes to keep things neat and orderly. lol!

Also come to terms that your desired allocation is a GOAL. You will rarely, if ever, be exactly on that goal. The actual allocation is going to drift around a bit, and periodically you'll rebalance things to get back on track. You don't want to rebalance too frequently because you'll just drive yourself nuts. Just the thought of it is overwhelming you right now.

I need to focus on THIS and try to be passive except for maybe once per year when it's time to take inventory and rebalance.

With that in mind, I'd consider only rebalancing once a year (maybe in February, to maximize the time you have capital gains in your pocket before paying tax, but still getting the January effect).

My goal would be to not touch the taxable accounts rather than adding more funds or selling during drawdown. Besides that, it would probably be more advantageous to just rebalance the tax advantaged to maintain the overall portfolio allocation.

Cromacster

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Sounds like you are on the right path.  Bonds are more tax efficient when held in tax advantaged accounts so if your goal is 15% bonds, keep them in your 401k/Roths.
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toganet

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I have a similar challenge (multiple accounts across 4 brokers) and I ended up mapping them into Fidelity's "Full View" and then setting up my retirement goal in their system.  I can them export a spreadsheet to fiddle with if I want, which I do way too much.

The biggest win for me was simplifying the allocations in the largest $$ amount accounts first, and then mapping contributions in the active accounts to allow for adherence to our AA.  That way I can rebalance less frequently, and have the option of adjusting future allocations vs. having to sell-to-buy each time.

Travis

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On one of my financial spreadsheets I broke down each fund into a percentage of the whole portfolio and set a target percentage for each.  Since my stock allocation is in different funds, I update the totals/percentages every couple months and see if I need to add more to one fund over the other.
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talltexan

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Can you get into a situation in which you're putting Roth IRA money in on Jan 1 for the whole year, perhaps even borrowing money to do this? You could then use that contribution to get close to a rebalance at one time, then use the monthly $433 payments to knock out whatever debt and accumulate for the following January.

mintleaf

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I feel your pain. We're managing an allocation of 6 different asset classes across 7 different accounts. It gets tricky, for sure. I recommend creating a custom spreadsheet just for rebalancing. Asset classes in the columns (include cash, if you're accumulating), and accounts in the rows. Punch in your current amounts, and add some logic to tally everything up and report the delta from your ideal allocation. That will tell you how much to trade of each asset type.

If you want to get fancy from there, you can make a space to punch in proposed trades, and have it validate that everything adds up. Having a custom-made tool like this has been an incredible help.

MDM

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You might want to peruse https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts.  It has some relatively complex suggestions, but also notes one "might be better off holding the identical Target Date, Balanced or LifeStrategy funds in every account."

See also Using a spreadsheet to maintain a portfolio - Bogleheads if so inclined.

The frugal geographer

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Thanks for all the tips and advice! I will definitely be creating a spreadsheet tool to help monitor and manage the asset allocations. Also, thanks for those linkes MDM, I haven't yet found those but will be reading thoroughly.

One specific question regarding drawdown-- we plan to stop working early before access to tax advantaged accounts, and will only have stocks in our taxable accounts due to inefficiency of bonds there. Each time we withdraw, would we take stocks from the taxable account, but then rebalance tax advantaged to replenish the bond balance? And what if there's a big crash, we'd still have to withdraw the stocks from taxable which would deplete that account early.

MDM

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The frugal geographer

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...we plan to stop working early before access to tax advantaged accounts...

How to withdraw funds from your IRA and 401k without penalty before age 59.5

Aha, thanks MDM--almost forgot about that option. I'm also mega-backdoor-rothing up to the max, so that should help too!

The_Dude

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I am in a similar situation as you where my wife and I each have multiple 401k accounts and after tax portfolio accounts.  I initially used a spreadsheet like others mentioned.  It was a giant pain in the butt.  then I discovered Vanguard will do it all for me.

I enter all my non vanguard account information in Vanguard and use their Portfolio Watch and Portfolio Tester tool.  The Portfolio Watch will compare your investments across all accounts and give you the asset break down.  It does the typical big asset break downs such as stocks vs bonds or international vs domestic etc.  However, it does a lot more granular breakdowns too.  Such as by sector (11 of them), Large cap, mid cap, small cap, developed markets (EU, Pacific, Canada), emerging markets and compared all of those to the broader market.  It also assess tax efficiency, blended expense ratio, bond break down and risk to interest rate and credit etc.  Then you can use the Portfolio Tester to run scenarios to easily figure out how to rebalance your portfolio in the easiest and most tax efficient way.

Now the bad news.  I believe the Portfolio Watch and Portfolio Tester used to be open to everyone but are now only open to Flagship level clients?  Helpfully, if you and your wife have separate Vanguard accounts you can link them and it will look at the combined balance to determine if you are Flagship eligible.  That's how my wife and I did it.

You will have to manually update your external account share balances for new purchases or dividend reinvestments.  I do this 1-2 times a year and re balance accordingly.  I have good reasons not to roll over my previous employer 401k's and now no longer sweat having a number of different funds.

Finally, there are service providers that offer the same types of portfolio monitoring.  So if you don't have enough assets to access this in VG you can try one of the other free portfolio services.  Personally, I find the level of info and ease of use in the Portfolio Watch to be far better than any spreadsheet.   

MustacheAndaHalf

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After tax deductions, do you have over $77.4k of AGI?  If you hit the 22% tax bracket or higher, tax-exempt bonds might make sense:
BND (Vanguard Total Bond ETF) earns 3.10%, after 22% tax, 2.42%
VTEB (Vanguard Tax-Exempt Bond ETF) earns 2.56%, tax-exempt, 2.56%

If tax-exempt makes sense, you'd want your tax-exempt bonds in a taxable account.

Another way to view your accounts:
1/2 US market
1/3 international
1/7 bonds

Maybe taking rough numbers will make life easier than getting the exact 33.3% vs 35%, etc.

Car Jack

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First, you don't implement the AA in every account.  You implement it across all accounts....and there's a big difference.  How easy/hard that is sort of depends on the size of the accounts.  My wife and I have 10 accounts between us including some taxable.  My IRA is almost half our total investment which makes life really, really easy and is why rebalancing takes literally seconds.  Let me show you what I mean:

1) My IRA:  equity, bond, international
2) Her IRA: bond
3-10....roths, taxable, 401k, other taxables.....all equity

When it's time to rebalance, I go to account #1.  Every other account has exactly 1 fund in it.


The frugal geographer

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I believe the Portfolio Watch and Portfolio Tester used to be open to everyone but are now only open to Flagship level clients?

Thanks for the recommendation! It looks like Portfolio Watch is open to Voyager clients, which I meet the requirements for. I'll play around with this, though the one thing I don't like is having to manually update the outside accounts since there are so many and they are constantly being contributed to.

First, you don't implement the AA in every account.  You implement it across all accounts....and there's a big difference.  How easy/hard that is sort of depends on the size of the accounts.

This is the type of simplification I'm looking for. Using the largest account as the lever which includes all assets. Our smallest investment accounts are the HSAs, is it alright/smart to go 100% bonds in those to make up part of the bond portion of the portfolio?

alanB

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My wife and I have a total of 12 investment accounts, it is confusing at first but once you have a system it is not so bad.  You should balance across all accounts with the goal of minimizing taxes.  I periodically export all the balances using Personal Capital and check the allocation (they have it built into the website too, but it does not always correctly categorize everything).  If you can use the Vanguard one that is even better.  Fix AA by trading funds in non-taxable accounts or buying more taxable investments as needed.  I do that once or twice a year.

Our smallest investment accounts are the HSAs, is it alright/smart to go 100% bonds in those to make up part of the bond portion of the portfolio?

The only cheap fund we had in our HSAs was 100% stock so we went with that.  There is an evergreen debate on whether you should keep bonds in a non-taxable account or not.  Stocks accrue more capital gains, so it could make more sense to hold stocks there.

After tax deductions, do you have over $77.4k of AGI?  If you hit the 22% tax bracket or higher, tax-exempt bonds might make sense:
BND (Vanguard Total Bond ETF) earns 3.10%, after 22% tax, 2.42%
VTEB (Vanguard Tax-Exempt Bond ETF) earns 2.56%, tax-exempt, 2.56%

Based on your "Location: Virginia" - If you pay a lot of VA income tax you could also consider some VA municipal bonds which would be fed+state tax free.  I have never lived there though, so no idea whether any of the funds are any good...

MustacheAndaHalf

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Right now dividends on stocks are lower than bond fund interest payments.
Vanguard Total Stock Market has a 1.8% dividend,
Vanguard Total Bond Market pays 3.1% interest

But that's not the whole picture, you also need to reflect the actual tax rate - it differs between dividends and ordinary interest income.
Total Bond, 3.1% ordinary income taxed at median 22% tax rate = 0.7% paid in taxes/year
Total Stock, 1.7% qualified dividends taxed at 15% tax rate = 0.3% paid in taxes/year

For this case, it seems much better to keep stocks in taxable, rather than bonds.

alanB

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Right now dividends on stocks are lower than bond fund interest payments.
Vanguard Total Stock Market has a 1.8% dividend,
Vanguard Total Bond Market pays 3.1% interest

But that's not the whole picture, you also need to reflect the actual tax rate - it differs between dividends and ordinary interest income.
Total Bond, 3.1% ordinary income taxed at median 22% tax rate = 0.7% paid in taxes/year
Total Stock, 1.7% qualified dividends taxed at 15% tax rate = 0.3% paid in taxes/year

For this case, it seems much better to keep stocks in taxable, rather than bonds.

That is the whole picture, but you have to watch the whole movie.  Capital gains on stocks held in a taxable account could be side-stepped if you plan well, but you might end up paying more.  Long term capital gains tax rates might increase in the future.  Step-up in basis on death might disappear.  Bond & dividend yields will of course move around.  Expense ratios could vary between the available funds by >0.4%, and can change over time. 

In any case, you are probably still right ;P

talltexan

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CarJack-
can you explain how you came to put so many bonds in a pre-tax IRA account (i.e. your wife's)? Were the Roth IRA's just not large enough?

NorCal

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You're doing all the right things.  I went through this a few years back and it took a few tries to figure out what worked for us.  Here's what worked for me.  Something similar may or may not work for you.

1. For auto-deduct accounts like 401k's, contributions are based on the target allocation and re-balanced annually.
2. I have one ROTH account in the Schwab Roboadvisor program to test it out.  It rebalances itself every so often.  I actually quite like it.
3. I manually invest money in my taxable account as I'm paid.  My investments are always made to move my portfolio closer to being balanced.  I have a spreadsheet that tracks this pretty well.

At one point I tried to get fancy and tax-advantage my allocations by putting more bond funds in my retirements accounts and stock funds in my taxable accounts.  This got too complicated to manage for the same reasons you've described.  I found it wasn't worth the effort.