Treating multiple accounts as 1 portfolio

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Treating multiple accounts as 1 portfolio

Postby mikeportfolio » Thu May 02, 2013 9:18 pm

Hi all. Beginner investor and newbie to the forum here. (see financial specifics below in case it helps)

The common wisdom is that you should consider all your accounts as a single portfolio, and place asset classes into the appropriate accounts: tax-inefficient ones into non-taxable accounts (e.g. non-muni bonds, REIT, high turnover stocks, etc.), and the rest can be put into either taxable or non-taxable. However, does this assume that all the accounts in question have the same time horizon? And if so, do they have be identical or at least nearly-identical time horizons? What if the time horizon of one of the accounts is a bit fuzzy or unknown?

To make this more concrete, I have 401ks with old employers and a Roth IRA that I obviously can't touch for many years (35+). But I also want to invest a sizable chunk into a taxable account for long-term purposes. But I can't say with any certainty that the time horizon is really for retirement or not. Maybe I want to tap into it in 15 years for a large purchase (or maybe I don't, who knows). In my mind, because of this uncertainty it doesn't make much sense to consider the taxable and non-taxable accounts as part of the same portfolio, and therefore I should balance each account type independently. Am I thinking about this correctly? What other considerations are there? Is my lack of definition of the time horizon on the taxable account the real problem here?

========

Emergency funds: Yes
Debt: $250k mortgage @ 4.25% 30-year fixed (27 years left)
Tax Filing Status: Single
Tax Rate: 28% Federal, 6.37% State
State of Residence: NJ
Age: 29
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 30% of stocks

Current retirement assets

401k @ Fidelity (can no longer contribute)
$8,500 - Fidelity Freedom 2050

401k @ Mercer (can no longer contribute)
$65,000 - Lifepath 2050

Roth IRA @ Vanguard
$5,500 - Vanguard Target Retirement 2050

Taxable
$60,000 cash - for investing in a taxable account for long-term goals but not necessarily retirement

Contributions

New annual Contributions
$5,550 IRA -> Roth backdoor conversion
$6,000 taxable
mikeportfolio
 
Posts: 23
Joined: Wed May 01, 2013 10:26 pm

Re: Treating multiple accounts as 1 portfolio

Postby grabiner » Thu May 02, 2013 9:39 pm

Welcome to the forum!

mikeportfolio wrote:The common wisdom is that you should consider all your accounts as a single portfolio, and place asset classes into the appropriate accounts: tax-inefficient ones into non-taxable accounts (e.g. non-muni bonds, REIT, high turnover stocks, etc.), and the rest can be put into either taxable or non-taxable. However, does this assume that all the accounts in question have the same time horizon? And if so, do they have be identical or at least nearly-identical time horizons? What if the time horizon of one of the accounts is a bit fuzzy or unknown?


Wiki article link: Placing Cash Needs in a Tax-Advantaged Account

As long as your taxable account is enough to meet your needs, you can treat everything as one portfolio. (And you actually have some room beyond that; if you exhaust your taxable account, you can withdraw all your Roth IRA contributions, and all your Roth IRA conversions from at least five years ago, free of tax and penalty. There are other exceptions for certain needs, such as $10,000 withdrawn from an IRA for a first-time home purchase.) If you want to spend $10,000 of bonds from your taxable account and don't have any bonds in your taxable account, you can sell $10,000 of stocks in your taxable account, and sell bonds to buy stocks in your IRA, keeping the same stock allocation.

To make this more concrete, I have 401ks with old employers and a Roth IRA that I obviously can't touch for many years (35+).


You might want to roll the 401(k)s to your new employer plan if it is good. (Rolling them into IRAs would block the backdoor Roth IRA contribution, unless you convert the rollover IRAs to Roths and use your taxable account to pay the taxes on the conversion. This might be a good idea, because you can then withdraw the converted amount penalty-free after five years.)
David Grabiner
User avatar
grabiner
Advisory Board
 
Posts: 13128
Joined: Wed Feb 21, 2007 12:58 am
Location: Columbia, MD

Re: Treating multiple accounts as 1 portfolio

Postby mikeportfolio » Fri May 03, 2013 12:06 am

Thanks for the link. I hadn't thought of that type of strategy. I'm assuming the money-market aspect is simply to gain more interest on an emergency fund than have it sit in savings? Or is that necessary to the strategy to keep part of the money "safe"?

You might want to roll the 401(k)s to your new employer plan if it is good. (Rolling them into IRAs would block the backdoor Roth IRA contribution, unless you convert the rollover IRAs to Roths and use your taxable account to pay the taxes on the conversion. This might be a good idea, because you can then withdraw the converted amount penalty-free after five years.)


I don't have a current 401k unfortunately. So right now I'm only doing the backdoor Roth conversions, which is exactly why I don't want to roll over the old 401ks into an IRA yet. I figure whenever I get another 401k I would roll the old ones into it, if it's any good.
mikeportfolio
 
Posts: 23
Joined: Wed May 01, 2013 10:26 pm

Re: Treating multiple accounts as 1 portfolio

Postby letsgobobby » Fri May 03, 2013 2:36 am

You should refi your mortgage. The going rate is down to 3.25%, possibly even less, for a thirty year loan.
letsgobobby
 
Posts: 7006
Joined: Fri Sep 18, 2009 2:10 am

Re: Treating multiple accounts as 1 portfolio

Postby YDNAL » Fri May 03, 2013 6:47 am

mikeportfolio wrote:To make this more concrete, I have 401ks with old employers and a Roth IRA that I obviously can't touch for many years (35+). But I also want to invest a sizable chunk into a taxable account for long-term purposes. But I can't say with any certainty that the time horizon is really for retirement or not. Maybe I want to tap into it in 15 years for a large purchase (or maybe I don't, who knows). In my mind, because of this uncertainty it doesn't make much sense to consider the taxable and non-taxable accounts as part of the same portfolio, and therefore I should balance each account type independently. Am I thinking about this correctly? What other considerations are there? Is my lack of definition of the time horizon on the taxable account the real problem here?

Welcome, Mike!

If your overall portfolio needs to be tapped for this "unkown large purchase" in [say] 15 years, then you rebalance at that time. For illustration,
    $100K Taxable (Stocks)
    $100K 401K (25/75 Stocks/Bonds)
    $50K Roth IRA (Stocks)
    70/30 overall AA

    -- after --

    $50K Taxable (Stocks)
    $100K 401K (40/60 Stocks/Bonds)
    $50K Roth IRA (Stocks)
    70/30 overall AA
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
YDNAL
 
Posts: 13525
Joined: Tue Apr 10, 2007 5:04 pm
Location: Biscayne Bay

Re: Treating multiple accounts as 1 portfolio

Postby mikeportfolio » Fri May 03, 2013 9:30 am

If your overall portfolio needs to be tapped for this "unkown large purchase" in [say] 15 years, then you rebalance at that time.


That makes sense to me. I guess I am also struggling with the specifics of needing to manage different funds across 4 accounts (two 401, 1 Roth, 1 taxable), and keeping it balanced properly over time. Everyone seems to love the simplicity of a 3 or 4 fund portfolio, but having to manage 7 or 8 across 4 different accounts doesn't seem very simple to me. I guess I just need to sit down and come up with a proposal based on the fund choices I have. I will probably start a separate thread to get some advice on that once I have something.

I do think life would be easier if I rolled my 401k's into a Traditional IRA at Vanguard, as the fund choices are superior, and everything is in one place, making it much easier to manage, both mentally and with regard to rebalancing. But I wanted to keep doing a backdoor Roth conversion each year, hence no Traditional rollover for now. Do you think the $5500 going towards Roth each year (at least until the backdoor is closed, if it ever gets closed) is worth not being able to manage all my non-taxables in 1 account?
mikeportfolio
 
Posts: 23
Joined: Wed May 01, 2013 10:26 pm

Re: Treating multiple accounts as 1 portfolio

Postby markcoop » Fri May 03, 2013 9:55 am

Your thinking does show, to me, the biggest disadvantage of a one portfolio view. In the example above, it had $100K in a taxable account. If you needed $50K at some point, no problem because you have double that amount in your taxable. But what happens if the market takes a bad turn and you lose $60K, leaving $40K. At that point, you'd have to liquidate some retirement funds, or take a loan, to meet that $50K need. You'd also be left with no money in your taxable. In other words, although your overall AA might have been correct, and you were tax-efficient by putting all your taxable in stock, you still hit a problem because you had too much risk in your taxable assets.

Having said all that, I do view all my account as a single portfolio. I just think it's important to make sure you have enough taxable money to withstand the risk of the taxable portion alone. That means you manage your accounts to one view, but keep an eye of the taxable view as well.
Mark
markcoop
 
Posts: 497
Joined: Fri Mar 02, 2007 9:36 am

Re: Treating multiple accounts as 1 portfolio

Postby YDNAL » Fri May 03, 2013 10:17 am

markcoop wrote:Your thinking does show, to me, the biggest disadvantage of a one portfolio view. In the example above, it had $100K in a taxable account. If you needed $50K at some point, no problem because you have double that amount in your taxable. But what happens if the market takes a bad turn and you lose $60K, leaving $40K.

The "unknown large purchase with unknown timeframe" doesn't exist right now.
  • Before the money is needed - once the purchase/timeframe are identified - Mike (OP) should take necessary steps to make sure of the return OF the money and not ON the money.
  • I say... match your need for money with the appropriate investments.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
YDNAL
 
Posts: 13525
Joined: Tue Apr 10, 2007 5:04 pm
Location: Biscayne Bay

Re: Treating multiple accounts as 1 portfolio

Postby markcoop » Fri May 03, 2013 10:35 am

YDNAL wrote:
markcoop wrote:Your thinking does show, to me, the biggest disadvantage of a one portfolio view. In the example above, it had $100K in a taxable account. If you needed $50K at some point, no problem because you have double that amount in your taxable. But what happens if the market takes a bad turn and you lose $60K, leaving $40K.

The "unknown large purchase with unknown timeframe" doesn't exist right now.
  • Before the money is needed - once the purchase/timeframe are identified - Mike (OP) should take necessary steps to make sure of the return OF the money and not ON the money.
  • I say... match your need for money with the appropriate investments.


Let me give you my situation. I'm 47 and have maxed out my 401K and ROTH IRAs for close to 20 years. 20 years ago I felt I had a sufficient cushion in my taxable account. Over the past 20 years, my taxable account has slowly been depleted. Some for big purchases. At this point I feel a bit tax-deferred heavy. When I needed money when the market tanked, I simply sold stock in my taxable and made a corresponding shift in my 401K/ROTH accounts. So, overall I didn't lose money. In fact, it basically added more money to my 401K when the market rebounded. Great for my 401K but left me with less money than I prefer in my taxable.

Would I have done anything different with this knowledge? Not much because I really value the tax-deferred accounts. However, I think it would've been prudent to make sure I have a really safe cushion in my taxable, regardless if I've already identified the specific goals for my taxable assets.
Mark
markcoop
 
Posts: 497
Joined: Fri Mar 02, 2007 9:36 am

Re: Treating multiple accounts as 1 portfolio

Postby YDNAL » Fri May 03, 2013 11:05 am

markcoop wrote:
YDNAL wrote:
markcoop wrote:Your thinking does show, to me, the biggest disadvantage of a one portfolio view. In the example above, it had $100K in a taxable account. If you needed $50K at some point, no problem because you have double that amount in your taxable. But what happens if the market takes a bad turn and you lose $60K, leaving $40K.

The "unknown large purchase with unknown timeframe" doesn't exist right now.
  • Before the money is needed - once the purchase/timeframe are identified - Mike (OP) should take necessary steps to make sure of the return OF the money and not ON the money.
  • I say... match your need for money with the appropriate investments.


Let me give you my situation. I'm 47 and have maxed out my 401K and ROTH IRAs for close to 20 years. 20 years ago I felt I had a sufficient cushion in my taxable account. Over the past 20 years, my taxable account has slowly been depleted. Some for big purchases. At this point I feel a bit tax-deferred heavy. When I needed money when the market tanked, I simply sold stock in my taxable and made a corresponding shift in my 401K/ROTH accounts. So, overall I didn't lose money. In fact, it basically added more money to my 401K when the market rebounded. Great for my 401K but left me with less money than I prefer in my taxable.

Would I have done anything different with this knowledge? Not much because I really value the tax-deferred accounts. However, I think it would've been prudent to make sure I have a really safe cushion in my taxable, regardless if I've already identified the specific goals for my taxable assets.

That sounds to me like an Emergency Fund - "slowly depleted, some for big purchases" - but one that may not have been replenished over time.

Under certain (most?) circumstances, I believe we should have a clear separation between an EF and long-term investments. Again, the best feedback I can make is to match need for money with investments.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
YDNAL
 
Posts: 13525
Joined: Tue Apr 10, 2007 5:04 pm
Location: Biscayne Bay


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: anonforthis, emoore, Leeraar, Lifut, Logan T, notwerby, phil11, riptide and 74 guests