Treating your portfolio as a whole
Treating your portfolio as a whole
I have recently made adjustments to my portfolio to get out of actively managed funds and embraced the 3 fund boglehead strategy. For a little background on me, I have a TSP account, Roth IRA and taxable account. There has been a lot of discussion over the past few days about 100% equities and as I have read those threads it brought up some questions. Mainly these questions stem from using bond money in the event of a stock market drop to rebalance my porfolio. If these questions have come up in the recent past, I apologize in advance.
If I treat my porfolio as a whole as opposed to breaking up each account into the 3 fund approach, won't I loose some options when it comes to rebalancing my accounts? Say for example my AA was something like this without percentages:
Roth IRA - Total International
TSP - C + S Fund to represent Total Stock Market
- G Fund for bond exposure
Taxable - Total Stock Market
If the market were to drop 50%, I would only be able to use my TSP bond money to adjust my portfolio in the TSP. If one of the goals of my AA is to be able to rebalance my portfolio and buy low and sell high, wouldn't I want to have that option in each account individually? I can add money to the taxable account to buy low (if I had it), but I won't be able to adjust my Roth IRA if I have reached the limit for the year.
Maybe I am missing some fundamental concept here, I just feel that treating the whole portfolio as one investment limits my options. Does anyone else feel this way or does everyone treat their portfolio as a whole?
If I treat my porfolio as a whole as opposed to breaking up each account into the 3 fund approach, won't I loose some options when it comes to rebalancing my accounts? Say for example my AA was something like this without percentages:
Roth IRA - Total International
TSP - C + S Fund to represent Total Stock Market
- G Fund for bond exposure
Taxable - Total Stock Market
If the market were to drop 50%, I would only be able to use my TSP bond money to adjust my portfolio in the TSP. If one of the goals of my AA is to be able to rebalance my portfolio and buy low and sell high, wouldn't I want to have that option in each account individually? I can add money to the taxable account to buy low (if I had it), but I won't be able to adjust my Roth IRA if I have reached the limit for the year.
Maybe I am missing some fundamental concept here, I just feel that treating the whole portfolio as one investment limits my options. Does anyone else feel this way or does everyone treat their portfolio as a whole?
Re: Treating your portfolio as a whole
I see no problem using your G fund to rebalance into equities in your TSP.
Furthermore, after a 50% drop, you will be selling any losing positions in your taxable acount anyways in a tax-loss harvesting move. For example, you may exchange total stock market index into large-cap index (but only those shares with unrealized losses and maybe minor gains for simplicity).
You might do the math with real numbers and even your real number of shares to see how this works out.
OTOH, not everyone treats their portfolio as a whole. There are many mental accounting and psychological issues with doing that.
Furthermore, after a 50% drop, you will be selling any losing positions in your taxable acount anyways in a tax-loss harvesting move. For example, you may exchange total stock market index into large-cap index (but only those shares with unrealized losses and maybe minor gains for simplicity).
You might do the math with real numbers and even your real number of shares to see how this works out.
OTOH, not everyone treats their portfolio as a whole. There are many mental accounting and psychological issues with doing that.
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Re: Treating your portfolio as a whole
And there are some very valid reasons to have separate portfolios, including convenience, early retirement, and asset protection. You can have separate tax-advantaged and taxable portfolios and still maintain good tax efficiency.livesoft wrote: OTOH, not everyone treats their portfolio as a whole. There are many mental accounting and psychological issues with doing that.
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Re: Treating your portfolio as a whole
I would have some fixed income in your Roth to make rebalancing simple and put some international in taxable if needed. I would consider some fixed income in taxable also or use contributions to re balance whenever possible.
Re: Treating your portfolio as a whole
It seems that it would make sense to me to treat my taxable account as one portfolio and tax-advantaged accounts as another. That way, if early retirement were an option, I would be able to utilize the funds in the taxable account immediately. However, everything I read about where to put certain funds (taxable or tax-advantaged) for tax reasons differs from this idea. I'm guessing that is because it is assuming the individual will be retiring after 59.5.
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Re: Treating your portfolio as a whole
Those are general guidelines, and are generally applicable. But they do not account for all variables. For example, let's say you decide on an 50-50 AA. Let's also assume you have equal tax-advantaged and taxable space. The conventional wisdom would have you buy stock (index) funds in taxable, and bond funds in tax-advantaged. While doing so might be better for tax efficiency, I would rather hold a balanced AA in tax-deferred in order to expand that space at a faster rate, providing me much greater assets that have strong asset protection. In the taxable account, I can use municipal bonds to improve tax efficiency.gte939h wrote:It seems that it would make sense to me to treat my taxable account as one portfolio and tax-advantaged accounts as another. That way, if early retirement were an option, I would be able to utilize the funds in the taxable account immediately. However, everything I read about where to put certain funds (taxable or tax-advantaged) for tax reasons differs from this idea. I'm guessing that is because it is assuming the individual will be retiring after 59.5.
Best regards, -Op |
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Re: Treating your portfolio as a whole
That was just an example of what I typically see as recommendations on here or how I read it on the wiki.Dandy wrote:I would have some fixed income in your Roth to make rebalancing simple and put some international in taxable if needed. I would consider some fixed income in taxable also or use contributions to re balance whenever possible.
Here is what I have:
Roth IRA: TSM, TISM, TBM
TSP: C + S fund, I fund, F fund, G fund
Taxable: TSM, TISM
I was thinking about getting rid of my I fund in TSP since there EM are not represented and increase the amount of TISM in my roth IRA (which would basically remove TSM from IRA). I was also going to get rid of TBM in Roth IRA and increase F and G fund in TSP. The dilema this brings up is if my Roth IRA drops significantly, I don't have bond money to use to buy more TISM so would have to buy I fund in my TSP (which is not the end of the world).
Then in my taxable, I don't have any bond money to use to rebalance in the event TSM and TISM drops. I would have to use my retirement investments to rebalance the overall portfolio. If I wanted to treat the taxable as it's own portfolio I should really add some bonds to allow me to rebalance. However, this goes against all the tax advice I have gotten on here.
I know this is nitpicky stuff, but I want to make sure I set these accounts up properly now so I won't have to mess with it much in the future and set me up for long term success.
Re: Treating your portfolio as a whole
Where does this 59.5 myth come from? One can withdraw from tax-advantaged accounts without penalty before age 59.5 if one follows the rules.gte939h wrote:It seems that it would make sense to me to treat my taxable account as one portfolio and tax-advantaged accounts as another. That way, if early retirement were an option, I would be able to utilize the funds in the taxable account immediately. However, everything I read about where to put certain funds (taxable or tax-advantaged) for tax reasons differs from this idea. I'm guessing that is because it is assuming the individual will be retiring after 59.5.
Let me say this: If stock markets drop 50% then one is going to be rethinking about retiring early unless they have a pension or lots and lots of money. If they have lots and lots of money, then they will have no problems. Otherwise, if stock markets drop 50%, then I think one will be rethinking their idea of retiring early and will wait and see what happens. So there really is no problem whatsoever with all equities in taxable and retiring early.
Re: Treating your portfolio as a whole
I don't see this as nitpicky stuff at all, one should understand why they are doing what they are doing, its the best way to stay the course as we the say.gte939h wrote: I know this is nitpicky stuff, but I want to make sure I set these accounts up properly now so I won't have to mess with it much in the future and set me up for long term success.
"Out of clutter, find simplicity” Albert Einstein
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Re: Treating your portfolio as a whole
Maybe, but I think a much more important question is whether you have properly gauged your personal risk tolerance.gte939h wrote:...There has been a lot of discussion over the past few days about 100% equities and as I have read those threads it brought up some questions. Mainly these questions stem from using bond money in the event of a stock market drop to rebalance my portfolio....
And this isn't a good time to be doing it. A good time to be doing it would have been, say, in 2011, after a 2000-point drop in the Dow that didn't look any different from the drop that occurred in 2008 a few months before the big plunge.
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Re: Treating your portfolio as a whole
I remember both of those times and was invested aggressively then like I am now, just with actively managed funds. And, money still went into those accounts and none came out. I have properly judged my risk tolerance and know it is high but that isn't the question at hand. I am not in 100% equities and it was only that discussion and arguments of using fixed income money to rebalance that brought me to this question. The ability or inability to move money between the accounts is the problem. In the next few years, my IRA will have significantly less percentage and will be shadowed by my TSP due to the amount I am able to invest each year. I am just looking for a good argument as to why the whole portfolio should be treated as one. I love the ability to move money around in my TSP or Roth IRA to rebalance without having any fees/charges/taxes. That isn't the case in the taxable account due to tax considerations so I want to make sure I get that account right for the long term. Maybe I should just post my currrent portfolio and ask for inputs, may cover it... Thanks for all the inputs so far, it has just made me think more about keeping the taxable and tax-deferred accounts as seperate portfolios but with the same AA.
Re: Treating your portfolio as a whole
However, this goes against all the tax advice I have gotten on here.
Ah yes we usually all share a basic view but there is often a healthy difference getting to the finer points. There is a trusted money manager that posts on this board that keeps his client's equity/bond allocation the same in taxable and non taxable. Now he probably uses muni bonds in taxable. I know this second hand from a client of his.
I think the general advice is to try to manage your portfolio as a whole and to keep it as simple as possible. You have to decide if having some fixed income in all three accounts makes sense for you. A lot depends on avoiding taxes when you need to rebalance. When the equity market drops I rebalance taxable into equities and when it drops I rebalance equity rebalance out of equities in my IRA. So far I have not incurred any taxes due to re balancing prior to and in retirement.
Ah yes we usually all share a basic view but there is often a healthy difference getting to the finer points. There is a trusted money manager that posts on this board that keeps his client's equity/bond allocation the same in taxable and non taxable. Now he probably uses muni bonds in taxable. I know this second hand from a client of his.
I think the general advice is to try to manage your portfolio as a whole and to keep it as simple as possible. You have to decide if having some fixed income in all three accounts makes sense for you. A lot depends on avoiding taxes when you need to rebalance. When the equity market drops I rebalance taxable into equities and when it drops I rebalance equity rebalance out of equities in my IRA. So far I have not incurred any taxes due to re balancing prior to and in retirement.
Re: Treating your portfolio as a whole
If somebody is willing to use the 72(t) option, I think this is true. For an early retiree that wants to avoid that scenario, the size of the taxable account is an important factor for whether 100% equities is acceptable or not. A series of bad return years could deplete the taxable account before planned.livesoft wrote:So there really is no problem whatsoever with all equities in taxable and retiring early.
Re: Treating your portfolio as a whole
feh,
If I didn't want to use 72t I could use the roth IRA contributions without penalty if I wanted to retire early. I assumed this is what livesoft was referring to and figure by then I would have put in upwards of $200k+ between myself and my wife. So, that could cover us for a few years depending on what our spending rate in retirement was.
If I didn't want to use 72t I could use the roth IRA contributions without penalty if I wanted to retire early. I assumed this is what livesoft was referring to and figure by then I would have put in upwards of $200k+ between myself and my wife. So, that could cover us for a few years depending on what our spending rate in retirement was.
Re: Treating your portfolio as a whole
Yes, Roth IRA contributions are another source of money that could be used.gte939h wrote:feh,
If I didn't want to use 72t I could use the roth IRA contributions without penalty if I wanted to retire early. I assumed this is what livesoft was referring to and figure by then I would have put in upwards of $200k+ between myself and my wife. So, that could cover us for a few years depending on what our spending rate in retirement was.
However, the success of that plan still rests on the size of non-72t monies available (taxable and Roth contributions). Depending on that balance and the number of years before 59.5, it could be a dicey situation.
Personally, as a future early-retiree, I'm gonna have 3-5 years of expenses available in short-term vehicles (I-bonds, CDs, short-term munis). I will sleep better at night.
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Re: Treating your portfolio as a whole
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Last edited by pastafarian on Mon Feb 24, 2014 7:56 pm, edited 1 time in total.
Re: Treating your portfolio as a whole
gte939h: Maybe this will help. I have the following accounts/funds…
His TSP: G, C, S, I (C&S held at 3:1 ratio)
Her TSP: G
Roth IRA: Total Stock Market, Total International
Taxable: Total Stock Market, Total International, and some others (Savings Bonds, Muni’s)
I treat my portfolio as a whole and use His TSP account for all our rebalancing. I have a spreadsheet that tells me what % I need in each of the 4 funds to rebalance our entire portfolio. One TSP interfund transfer and I'm done. Rebalancing is a breeze!
I realize the TSP I Fund is not a total international fund but it is only about 20% of my international stock holdings.
His TSP: G, C, S, I (C&S held at 3:1 ratio)
Her TSP: G
Roth IRA: Total Stock Market, Total International
Taxable: Total Stock Market, Total International, and some others (Savings Bonds, Muni’s)
I treat my portfolio as a whole and use His TSP account for all our rebalancing. I have a spreadsheet that tells me what % I need in each of the 4 funds to rebalance our entire portfolio. One TSP interfund transfer and I'm done. Rebalancing is a breeze!
I realize the TSP I Fund is not a total international fund but it is only about 20% of my international stock holdings.
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Re: Treating your portfolio as a whole
Very well said.Call_Me_Op wrote:And there are some very valid reasons to have separate portfolios, including convenience, early retirement, and asset protection. You can have separate tax-advantaged and taxable portfolios and still maintain good tax efficiency.livesoft wrote: OTOH, not everyone treats their portfolio as a whole. There are many mental accounting and psychological issues with doing that.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Treating your portfolio as a whole
I prefer the "equal location" approach rather than "asset location" approach as recommended by Rick Ferri.
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John C. Bogle: “Simplicity is the master key to financial success."
Re: Treating your portfolio as a whole
You can increase any asset class regardless of which account holds the new money. If you want to buy $10,000 in bonds but you prefer to hold bonds in the TSP rather than the taxable account (probably a good idea because the G fund is much better than any bond fund you can hold elsewhere), you can make a new stock investment in the taxable account, and sell $10,000 worth of C and S funds in the TSP to buy more bonds. The net effect is that your portfolio is $10,000 larger and holds the same amount of stock and $10,000 more bonds.gte939h wrote:If the market were to drop 50%, I would only be able to use my TSP bond money to adjust my portfolio in the TSP. If one of the goals of my AA is to be able to rebalance my portfolio and buy low and sell high, wouldn't I want to have that option in each account individually? I can add money to the taxable account to buy low (if I had it), but I won't be able to adjust my Roth IRA if I have reached the limit for the year.
Similarly, if you want to sell $10,000 in bonds but don't have any bonds in your taxable account, you can sell $10,000 from taxable stock, and move $10,000 from the G fund into a stock fund in the TSP.
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Re: Treating your portfolio as a whole
Right on. I find holding only one or two investments per account to be elegant and soothing.grabiner wrote:You can increase any asset class regardless of which account holds the new money. If you want to buy $10,000 in bonds but you prefer to hold bonds in the TSP rather than the taxable account (probably a good idea because the G fund is much better than any bond fund you can hold elsewhere), you can make a new stock investment in the taxable account, and sell $10,000 worth of C and S funds in the TSP to buy more bonds. The net effect is that your portfolio is $10,000 larger and holds the same amount of stock and $10,000 more bonds.gte939h wrote:If the market were to drop 50%, I would only be able to use my TSP bond money to adjust my portfolio in the TSP. If one of the goals of my AA is to be able to rebalance my portfolio and buy low and sell high, wouldn't I want to have that option in each account individually? I can add money to the taxable account to buy low (if I had it), but I won't be able to adjust my Roth IRA if I have reached the limit for the year.
Similarly, if you want to sell $10,000 in bonds but don't have any bonds in your taxable account, you can sell $10,000 from taxable stock, and move $10,000 from the G fund into a stock fund in the TSP.
20% Roth/HSA - small cap value, international small
40% traditional - fixed income
40% taxable - TSM, TISM, I bonds
I've never had a problem rebalancing. If I need more stocks I sell fixed income in traditional or use new money to buy stocks in taxable. If I need more bonds I buy I bonds or muni bonds in taxable. I won't waste Roth or HSA space on fixed income, and I won't share my future stock market gains with the government in my traditional. Call me irrational.
Re: Treating your portfolio as a whole
Thank you for that, this idea makes good sense and not sure why it wasn't clear in the first place. I think one of the major issues I have is that most of the money I treat as my bond allocation (about 10% of my portfolio) is in a Roth IRA holding a flexible premium deferred annuity that I started when I was younger. It is great in the sense that it guarantees a minimum of 4% interest but I won't use that cash to rebalance my portfolio.grabiner wrote:You can increase any asset class regardless of which account holds the new money. If you want to buy $10,000 in bonds but you prefer to hold bonds in the TSP rather than the taxable account (probably a good idea because the G fund is much better than any bond fund you can hold elsewhere), you can make a new stock investment in the taxable account, and sell $10,000 worth of C and S funds in the TSP to buy more bonds. The net effect is that your portfolio is $10,000 larger and holds the same amount of stock and $10,000 more bonds.
Similarly, if you want to sell $10,000 in bonds but don't have any bonds in your taxable account, you can sell $10,000 from taxable stock, and move $10,000 from the G fund into a stock fund in the TSP.
What I am going to do now is move the international portion of my TSP to my IRA to take advantage of the EM piece missing from the TSP I fund and add some more F/G funds in the TSP to allow for future rebalancing. I appreciate all the advice and discussion on this thread.
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Re: Treating your portfolio as a whole
This is one problem with "asset location" compared to "equal location". Granted there are advantages and disadvantages to both strategies. With "asset location", you are constantly selling and incurring additional tax that is not necessary. Over a lifetime of investing this adds up. Compound that with regular changes to the tax code.grabiner wrote: You can increase any asset class regardless of which account holds the new money. If you want to buy $10,000 in bonds but you prefer to hold bonds in the TSP rather than the taxable account (probably a good idea because the G fund is much better than any bond fund you can hold elsewhere), you can make a new stock investment in the taxable account, and sell $10,000 worth of C and S funds in the TSP to buy more bonds. The net effect is that your portfolio is $10,000 larger and holds the same amount of stock and $10,000 more bonds.
Similarly, if you want to sell $10,000 in bonds but don't have any bonds in your taxable account, you can sell $10,000 from taxable stock, and move $10,000 from the G fund into a stock fund in the TSP.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Treating your portfolio as a whole
despite using asset location, I have never had to incur tax by selling a gain in taxable.abuss368 wrote:This is one problem with "asset location" compared to "equal location". Granted there are advantages and disadvantages to both strategies. With "asset location", you are constantly selling and incurring additional tax that is not necessary. Over a lifetime of investing this adds up. Compound that with regular changes to the tax code.grabiner wrote: You can increase any asset class regardless of which account holds the new money. If you want to buy $10,000 in bonds but you prefer to hold bonds in the TSP rather than the taxable account (probably a good idea because the G fund is much better than any bond fund you can hold elsewhere), you can make a new stock investment in the taxable account, and sell $10,000 worth of C and S funds in the TSP to buy more bonds. The net effect is that your portfolio is $10,000 larger and holds the same amount of stock and $10,000 more bonds.
Similarly, if you want to sell $10,000 in bonds but don't have any bonds in your taxable account, you can sell $10,000 from taxable stock, and move $10,000 from the G fund into a stock fund in the TSP.