Author Topic: Another Asset Allocation Question  (Read 1683 times)

WillPen

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Another Asset Allocation Question
« on: November 12, 2013, 07:33:13 AM »
Hi Everyone,

I'm wrapping up reading the Boglehead's Investment Guide. I would definitely recommend it to everyone here. The book covers efficient asset allocation for tax purposes and advises placing tax inefficient funds, like bond funds, in your tax deferred accounts (like an IRA). And placing tax efficient funds like a stock index fund, in your taxable accounts (like a brokerage account). The book also advises applying this methodology across your accounts

To illustrate with some simple figures and two funds, lets say that I am 30 years old, have $50k in a traditional IRA, and $50k in a brokerage account. If I want to keep 30% of my savings outside of equities I think my asset allocation would need to look like this:

IRA
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$30k - Total Bond Market Index Fund
$20k - Total Stock Market Index Fund

Brokerage
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$50k - Total Stock Market Index Fund

While the bond fund makes up 60% of an IRA, it's really 30% of total savings applied across both accounts. I will also point out the book covers how gains and returns on these types of accounts are taxed, and provides some examples to illustrate. But I will spare you those details :)

Does anyone else follow this guidance in practice or have some additional insight they would like to share? My brain says "I want that IRA to be more aggressive, I don't want to put that much money in bonds right now" and doesn't want to look at the accounts together.. Just feels kind of strange.

Thanks everyone..

aclarridge

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Re: Another Asset Allocation Question
« Reply #1 on: November 12, 2013, 08:32:28 AM »
I am following these principles in practice.

If it helps, create a Yahoo Finance portfolio which includes all your holdings in the correct amounts (you can put in what you paid for them). Then you can view your entire portfolio in one place, if it helps. Google finance has the same thing. Try only checking your portfolio once a month/quarter/year though. Set it and forget it pretty much.

One small issue I am having is that I don't have enough contribution room in my registered account, so I'm faced with either holding some bonds outside of it until I get more contribution room (increased transaction costs and tax inefficient) or deviating from my chosen asset allocation. I decided to deviate a bit temporarily.

alanwbaker

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Re: Another Asset Allocation Question
« Reply #2 on: November 13, 2013, 11:05:25 PM »
Hi WillPen,

Yes, it feels strange initially, but you've got it.  To set your asset allocation consider all your assets as a whole, then put the bonds in the tax-advantaged accounts.  I (successfully) follow this strategy; I just wish I'd understood it when I was 30!

There will be further rebalancing off in the future...  Contributions to tax-advantaged accounts are limited so your taxable accounts will probably grow faster over time.  So when those taxable accounts reach 70% of your assets you'll have all your equities in them and all your bonds in the tax-advantaged accounts.  Even farther down the road you'll add bonds to your taxable accounts to maintain your asset allocation.

As FI40 suggested, it's helpful to put your investment info into an online portfolio; my favorite is Morningstar's.

You're on the right track; keep it up!

Alan