Adding a fourth leg - good idea

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Splais
Posts: 106
Joined: Tue Mar 12, 2013 11:33 am

Adding a fourth leg - good idea

Post by Splais »

I'm working on an asset allocation as much as a learning tool for myself as an actuality. The holder of the below allocation is not eligible for a tax-advantaged account. Portfolio value $100K. Could anyone please help with the following.

A three fund portfolio allocated as follows:

40% Intermediate Tax Exempt (VIPSX)
25% Total Stock Market (VTSAX)
15% Total Intl Market (VTIAX)

If I wanted to use the remaining 20% to balance the above allocation what kind of fund would you suggest for additional diversity? Is adding a fourth fund something beneficial at this level of funding ($100K).

My thinking in the above AA is that because the owner is not eligible for a tax-advantaged fund that using a three or four fund portfolio would be better than just a single Target Retirement or LifeStrategy fund from a tax standpoint. Do you agree?
Alex Frakt
Founder
Posts: 11589
Joined: Fri Feb 23, 2007 12:06 pm
Location: Chicago
Contact:

Re: Adding a fourth leg - good idea

Post by Alex Frakt »

Small Value. But rather than 20% SV, I'd go either 30% TSM, 15% SV, 15% Int'l or 30% TSM, 10% SV, 20% Int'l.
stlutz
Posts: 5585
Joined: Fri Jan 02, 2009 12:08 am

Re: Adding a fourth leg - good idea

Post by stlutz »

If you want a fourth fund, what Alex said.
Spiffs
Posts: 224
Joined: Sat Jan 19, 2013 10:33 pm

Re: Adding a fourth leg - good idea

Post by Spiffs »

REITs seem to be a pretty popular "fourth leg," too. For instance, see the Core Four portfolios on this page on the wiki.
rkhusky
Posts: 17765
Joined: Thu Aug 18, 2011 8:09 pm

Re: Adding a fourth leg - good idea

Post by rkhusky »

By over-weighting SV and/or REIT, you are probably making the stock portion more volatile. You may want to compensate by increasing the bond portion to 50-60%.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Adding a fourth leg - good idea

Post by retiredjg »

Splais wrote:If I wanted to use the remaining 20% to balance the above allocation what kind of fund would you suggest for additional diversity? Is adding a fourth fund something beneficial at this level of funding ($100K).
I don't think a "4th leg" sounds particularly appropriate in this situation. The only thing you can really add in a taxable account is small cap value and a 20% slice of that probably takes the portfolio too far from "neutral" for a person who apparently knows nothing about investing. Better to use just the basics.

As for adding "diversity", small cap value is already included in the total stock market, so there is no added diversity.

Most things that you would add to the basic 3 don't belong in a taxable account for most people. For example, REIT should probably not be in the taxable account of people in accumulation, but it could be fine in a portfolio from which withdrawals are being made.
My thinking in the above AA is that because the owner is not eligible for a tax-advantaged fund that using a three or four fund portfolio would be better than just a single Target Retirement or LifeStrategy fund from a tax standpoint. Do you agree?
Only to the extent that a tax-exempt bond fund can be used.

With this little information, you are not going to get very reliable answers. What is appropriate for a 80 year old might not be appropriate for an 20 year old. And tax bracket matters as well.
User avatar
Raybo
Posts: 2244
Joined: Tue Feb 20, 2007 10:02 am
Location: San Francisco
Contact:

Re: Adding a fourth leg - good idea

Post by Raybo »

VIPSX is Vanguard's TIPs fund, not the Intermediate Tax Exempt, which is VWITX.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.
User avatar
Random Musings
Posts: 6771
Joined: Thu Feb 22, 2007 3:24 pm
Location: Pennsylvania

Re: Adding a fourth leg - good idea

Post by Random Musings »

To balance the proposed 50/50 allocation (cause that's where it's at right now) implies that you want 10% more equity and 10% more bond. From the OP, I don't see that the incremental 20% is supposed to be all equities. And right now the equity look is roughly 60/40 domestic int'l. Since in taxable, I would avoid REIT's since they are not as tax efficient as other choices.

Hence, I would go

50% Intermediate Tax Exempt
22.5% TSM
7.5% SCV - domestic
15% TISM
5% Int'l small cap value (if there is a relatively tax-efficient one)

Still a 50/50 equity bond split and 60/40 domestic/int'l. Some small-value exposure, but not crazy loadings.

However, this does not consider if the person in question has other holdings (either in taxable and tax-deferred). If they do, this $100K can not be done in isolation.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ
User avatar
Clearly_Irrational
Posts: 3087
Joined: Thu Oct 13, 2011 3:43 pm

Re: Adding a fourth leg - good idea

Post by Clearly_Irrational »

You really need to define the metric you're going to use for "better" before deciding to add something to improve the mix. Once you do, the choice should become a lot more obvious.
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Adding a fourth leg - good idea

Post by YDNAL »

Splais wrote:I'm working on an asset allocation as much as a learning tool for myself as an actuality. The holder of the below allocation is not eligible for a tax-advantaged account. Portfolio value $100K. Could anyone please help with the following.
Most important is to increase the $100K.
  • If you achieved 5% nominal return compounded annually, you have $163K (excluding taxes) in 10 years.
  • If you save $10K annually, just from savings, you add $100K before any return.

Code: Select all

100,000
105,000
110,250
115,763
121,551
127,628
134,010
140,710
147,746
155,133
162,889
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Post Reply