Author Topic: Asset allocation by account, or entire portfolio?  (Read 4047 times)

MaudMan

  • 5 O'Clock Shadow
  • *
  • Posts: 17
  • Location: Toledo, OH
Asset allocation by account, or entire portfolio?
« on: November 08, 2014, 02:09:23 PM »
I just thought of another question as I was reading through some posts... I'm curious to know how most folks do their asset allocation -- by account, or based on your entire portfolio?  In other words, for simplicity, let's say you were going with 80% stocks / 20% bonds.  Do you do the 80/20 in each account (Regular IRA, Roth IRA, 401K, taxable, etc), or do you consider your ENTIRE portfolio as one big pile of money and then allocate that 80/20.  This means you could end up with a particular account that has all (or mostly) bonds, and another account that might be all stock funds or ETFs. 

Make sense?  This is just a curiosity of mine. I basically treat each account separately, so I would have an 80/20 allocation in each one regardless of whether it's taxable or tax-advantaged.  I know this isn't the best way for tax purposes, but it seem to be the easiest to think about and manage since I handle my accounts and the wife's accounts as well.

Dave

thedayisbrave

  • Pencil Stache
  • ****
  • Posts: 700
  • Location: Raleigh, NC
  • CFO @ My Life
Re: Asset allocation by account, or entire portfolio?
« Reply #1 on: November 08, 2014, 02:29:02 PM »
AA is typically across the entire portfolio.  Better if you can organize it in a tax efficient way.  If you prefer convenience, that's fine, but there are studies out there that show having a tax optimized portfolio boosts returns when comparing the same amounts of money.  So, why would you not, unless you value "convenience" THAT much more?

RyeWhiskey

  • 5 O'Clock Shadow
  • *
  • Posts: 83
Re: Asset allocation by account, or entire portfolio?
« Reply #2 on: November 08, 2014, 02:39:51 PM »
This can become complicated when it comes to required minimum withdrawals, etc... but generally speaking one's asset allocation is based upon one's entire portfolio. The reason for this is quite simple: tax efficiency. Keeping low-turnover stock index funds in taxable account is highly tax efficient, especially if one is in a lower tax bracket. Keeping taxable bonds, most notably inflation-protected securities, in tax shelters is likewise very tax efficient.

Here is a link to the Bogleheads wiki on "Principle of Tax Efficient Fund Placement:"
http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

MaudMan

  • 5 O'Clock Shadow
  • *
  • Posts: 17
  • Location: Toledo, OH
Re: Asset allocation by account, or entire portfolio?
« Reply #3 on: November 08, 2014, 02:41:34 PM »
AA is typically across the entire portfolio.  Better if you can organize it in a tax efficient way.  If you prefer convenience, that's fine, but there are studies out there that show having a tax optimized portfolio boosts returns when comparing the same amounts of money.  So, why would you not, unless you value "convenience" THAT much more?

It just seems like this would greatly complicate re-balancing, especially if AA is across taxable and tax-advantaged accounts. Also, what about the fact that the wife & I each have a regular and a ROTH IRA, I have a 401K, and then we have joint taxable investment accounts?  Would I consider everything as one big portfolio for AA purposes?

GGNoob

  • Pencil Stache
  • ****
  • Posts: 726
  • Age: 33
  • Location: Colorado
Re: Asset allocation by account, or entire portfolio?
« Reply #4 on: November 08, 2014, 02:42:57 PM »
Personally, I like having my preferred AA in each account. But, we are 100% stocks (for retirement investments...some bonds in HSA and muni bonds in emergency fund) so I don't have to worry about having bonds in a taxable account. I also have the benefit of having Vanguard index funds in each of our investment accounts, so I don't have to worry about trying to hit my AA with expensive managed funds. So because it's possible and easy for me, that's just what I prefer.

MaudMan

  • 5 O'Clock Shadow
  • *
  • Posts: 17
  • Location: Toledo, OH
Re: Asset allocation by account, or entire portfolio?
« Reply #5 on: November 08, 2014, 02:50:25 PM »
Here is a link to the Bogleheads wiki on "Principle of Tax Efficient Fund Placement:"
http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

Thanks for the link RyeWhiskey! It already answered one of my questions....

Treat your entire portfolio as a whole (include spouse).


MaudMan

  • 5 O'Clock Shadow
  • *
  • Posts: 17
  • Location: Toledo, OH
Re: Asset allocation by account, or entire portfolio?
« Reply #6 on: November 08, 2014, 02:55:44 PM »
Personally, I like having my preferred AA in each account. But, we are 100% stocks (for retirement investments...some bonds in HSA and muni bonds in emergency fund) so I don't have to worry about having bonds in a taxable account. I also have the benefit of having Vanguard index funds in each of our investment accounts, so I don't have to worry about trying to hit my AA with expensive managed funds. So because it's possible and easy for me, that's just what I prefer.

Thanks Logan, points well taken. Although, if you're 100% stocks, you don't have much AA to worry about. :)  I thought about just doing our preferred stock/bond allocation in each retirement account, and then keep our taxable accounts basically 100% total stock index funds (domestic & international).  I think I'd be OK with the higher risk there as long as our retirement money was allocated across non-correlated asset classes to help smooth out the bumps.

Crushtheturtle

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Asset allocation by account, or entire portfolio?
« Reply #7 on: November 09, 2014, 01:47:23 AM »
I do Equal Location. The money you save by having bonds exclusively in tax advantaged is more than offset by the opportunity cost of missing out all the tax deffered/exempt growth:

http://whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

See also:

http://www.rickferri.com/blog/strategy/does-asset-location-make-sense/

GGNoob

  • Pencil Stache
  • ****
  • Posts: 726
  • Age: 33
  • Location: Colorado
Re: Asset allocation by account, or entire portfolio?
« Reply #8 on: November 09, 2014, 08:13:33 AM »

I do Equal Location. The money you save by having bonds exclusively in tax advantaged is more than offset by the opportunity cost of missing out all the tax deffered/exempt growth:

http://whitecoatinvestor.com/asset-location-bonds-go-in-taxable/

See also:

http://www.rickferri.com/blog/strategy/does-asset-location-make-sense/

I always cringe when I see a Roth IRA that is 100% bonds. Personally, I can't imagine having my slowest growing asset in the best tax advantaged account.


Sent from my iPhone using Tapatalk

Left

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: Asset allocation by account, or entire portfolio?
« Reply #9 on: November 09, 2014, 10:45:24 AM »
i plan to have mine separately. taxable will have about $1k fixed income, bonds/dividends, then the rest capital gains/growth. roth ira i have as vanguard lifesytle fund 80/20 split because I plan to touch this last so i want most growth here and lifestyle fund keeps aa ratio consistent for me. 401k/trad ira I have with a vangaurd target 2055 so it grows and glides automatically as i get older. I'll roll 401k to roth to taxable for pipeline to cover what the $1k/month fixed income can't cover.

not sure if this is most efficient but i think i'd be more comfortable knowing i have at least rent covered with fix income in taxable. instead of all bonds in roth/401k where I won't have immediate access to it (i know transfering isnt hard but dont want to).

all said i'm only 2 years into me 18 year fi plan so things will change as time goes by.