Asset allocation: how does it work?

[jjcem]

I'm a new grad. This is the first year that I'll have retirement investment accounts, and I'd really appreciate help on how to do asset allocation. Let's say I want to create a Vanguard 4 fund portfolio with 80% in stocks and 20% in bonds, but I have 3 investment accounts: IRA, 401k, and a regular investment account. To do the 80/20 allocation, does it mean each of my 3 investment accounts need to have this 80/20 allocation, or does it mean that just the sum of all my accounts need to have this 80/20 allocation, but within each account, the distribution can be anything?

Also, any recommendations on websites/books that will teach me step by step how to do asset allocation? Thanks in advance!

 

[janettebournes]

jjcem wrote:

I’m a new grad. This is the first year that I’ll have retirement investment accounts, and I’d really appreciate help on how to do asset allocation. Let’s say I want to create a Vanguard 4 fund portfolio with 80% in stocks and 20% in bonds, but I have 3 investment accounts: IRA, 401k, and a regular investment account. To do the 80/20 allocation, does it mean each of my 3 investment accounts need to have this 80/20 allocation, or does it mean that just the sum of all my accounts need to have this 80/20 allocation, but within each account, the distribution can be anything?

Also, any recommendations on websites/books that will teach me step by step how to do asset allocation? Thanks in advance!

 

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You can have all 3 investment accounts have an 80/20 allocation but the better way to do it would be to have an 80/20 allocation across the sum of all 3 accounts

Within each account, the distribution can be anything and you want to place more tax efficient funds within your taxable investment account. You can place less tax efficient funds within the tax-advantaged IRA and 401k

This article has a nice walkthrough = https://www.whitecoatinvestor.com/how-to-be-a-do-it-yourself-investor/

[jjcem]

Fantastic! Thank you very much!

[PhysicianOnFIRE]

I concur. Start a simple spreadsheet to track your investments, which will make balancing across multiple accounts much easier. Here's what mine looks like.

[PaperChaser]

How do you manage to have both a 401 and 457b?

Also did you create the spreadsheet yourself or did you get it online?

I haven't yet begun residency so my investments are small and in one investment platform so I just track it using the web platform.

[PhysicianOnFIRE]

PaperChaser wrote:

How do you manage to have both a 401 and 457b?

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It's pretty common among employed physicians. I made the spreadsheet in Excel, but it's nothing fancy. You could make your own pretty easily when you get to the point where you have more accounts and money to track.

Cheers!

-PoF

[Lithium]

PhysicianOnFIRE wrote:

I concur. Start a simple spreadsheet to track your investments, which will make balancing across multiple accounts much easier. Here’s what mine looks like.

Click to expand...

Interesting - any reason you only have 8% bonds?  It seems like a low number for someone who wants to retire soon, though you may be comfortable with it.  I thought I was low at 13 (number is odd because it changes every year according to the glide).

[Zaphod]

Lithium wrote:

PhysicianOnFIRE wrote:

I concur. Start a simple spreadsheet to track your investments, which will make balancing across multiple accounts much easier. Here’s what mine looks like.

Click to expand…

Interesting – any reason you only have 8% bonds?  It seems like a low number for someone who wants to retire soon, though you may be comfortable with it.  I thought I was low at 13 (number is odd because it changes every year according to the glide).

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Given his level of spending he could live off the dividend stream of an index fund and only draw 1-2% per year from principal, and that would likely decrease with time and growth of the account to where it could be dividends only. An increased proportion of stocks increases the likelihood your money lasts longer, which is especially important when retiring early. Bonds increase the sustainability of withdrawal rate in the beginning but as their percentage increases, it increases longevity risk, aka you outlive your money.

It seems counter intuitive, but that seems true about a lot of finance.

I dont know if I'll have any real allocation to bonds until we hike a couple times more, though I dont think its terribly warranted.

[PhysicianOnFIRE]

What @Zaphod said.

My IPS calls for 5 years worth of expenses in bonds when retired, or about $400,000. In the event of a stock market crash or prolonged bear market, I should be able to access the bonds to avoid having to sell equity funds when they're low. Most years, my portfolio will be expected to grow larger, so I anticipate bonds becoming a smaller percentage of my total portfolio over time.

I've read Rick Van Ness' Why Bother With Bonds, which was a good read, but I'm not in the camp of holding at least 25% in bonds (like WCI) or any formula based on age. When looking at a lengthy retirement, a stock-heavy portfolio is very likely going to perform better over the long haul. ERN's SWR series supports this and explains it in great detail.

Another caveat with my retirement is that it will be a retirement from clinical medicine only. While I couldn't have predicted it a year ago, it does appear that I will continue to earn income from online endeavors. That's another factor that allows me to be particularly comfortable with an aggressive allocation.

 

 

[BurnedoutDoc]

I like the bond "bucket" in preparation for retirement similar to POF.  The OP probably is way to far away from retirement to start doing this.  But I am planning on similar 5-7 years of bond funds available in taxable account when I retire.  And planning on using muni bonds for most of this.  This should create a 5-10 year period of low taxes during which I can do some conversions.

[artemis]

janettebournes wrote:

You can have all 3 investment accounts have an 80/20 allocation but the better way to do it would be to have an 80/20 allocation across the sum of all 3 accountsWithin each account, the distribution can be anything and you want to place more tax efficient funds within your taxable investment account. You can place less tax efficient funds within the tax-advantaged IRA and 401k

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I'd also suggest investing more aggressively in your taxable account and more conservatively in your retirement accounts, because the existence of RMDs on retirement accounts other than Roths and the yearly contribution limits on all retirement accounts limits your ability to make up for any losses in those accounts by just shoveling in more money.  Because the government isn't going to start making you spend your taxable accounts at age 70 1/2 and places no limits on how much you can invest in taxable each year, you've got more room to recover from any mistakes in a taxable account.

[StarTrekDoc]

To add to artemis -- Hopefully NO losses incurred in any account, but losses in tax deferred hurts twice over IMHO.   Also consider tax efficiency if using funds -- high turnover or gains/distributions, place those in tax sheltered vehicles.

@Burned and POF - when you say several years of bonds -- do you mean years of principal burn in case of a market crash?  ie: yearly expenditures is $100k you have 400-500k of bonds in the taxable portfolio?    Trying to get a feel of where we need to be on this too.  Currently only holding 100k in MUNIs at 45 yo and planning a potential 55yo RE scenario if wanted.

 

[Lithium]

I kinda wish the next bear market would hurry up and get here already so I can say I lived through one and then justify going more aggressive like you guys!

[artemis]

Lithium wrote:

I kinda wish the next bear market would hurry up and get here already so I can say I lived through one and then justify going more aggressive like you guys!

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You'll get your wish, probably sooner rather than later.  And not all of us are aggressive; I'm at 50:50 stocks:bonds in my retirement accounts, largely because at my age (54) I feel I need to conserve principle in those accounts more than I need aggressive growth.  (I am aggressive in my personal investments, currently running 75:25 stocks:bonds, but I have more margin for error there.  And eventually I'll shift to a more conservative ratio there, too.)

[CM]

PhysicianOnFIRE wrote:

PaperChaser wrote:

How do you manage to have both a 401 and 457b?

Click to expand…

It’s pretty common among employed physicians. I made the spreadsheet in Excel, but it’s nothing fancy. You could make your own pretty easily when you get to the point where you have more accounts and money to track.

Cheers!

-PoF

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