treating all investment accounts as one pool of money

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hudson4351
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treating all investment accounts as one pool of money

Post by hudson4351 » Fri Sep 12, 2014 11:32 pm

I have read on here before that one should treat all investment accounts as a single pool of money for the purposes of asset allocation. Some even say that "all" accounts, even a cash savings account, should also be lumped into this single pool of money. I am having trouble understanding how this makes sense unless one assumes that all of the money is invested for the single purpose of retirement.

For example, let's assume I have already maxed out my tax-deferred retirement accounts (401k and Roth IRA) but would like to continue investing more money in a taxable account. This money will be used for some purpose other than retirement with a goal nearer in the future. Let's also assume that my tax-deferred accounts contain 100% stocks, but the taxable account will need to contain some bonds because its goal is sooner in the future. Finally, let's also assume that I am not going to raid my tax-deferred accounts to fund this non-retirement goal that is nearer in the future.

Now based on what I have read here, bonds are better held in tax-deferred accounts if possible due to the taxable dividends they produce. In the scenario I have outlined above, it would seem that I would have to hold the bonds in a taxable account because I need that money sooner than my retirement. Is that correct, or am I missing something here? I'm really just trying to understand the rationale behind factoring in all investment and/or savings accounts when calculating AA.

livesoft
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Re: treating all investment accounts as one pool of money

Post by livesoft » Fri Sep 12, 2014 11:46 pm

I often see on the forum folks asking where to save for non-retirement goals such as (a) a car, (b) home down payment, (c ) remodeling, (d) private K-12 school, and so on. The general answer is to take less risk with these near-term goals and often a savings account or CD is recommeneded.

There is also this for folks with LARGE taxable accounts: http://www.bogleheads.org/wiki/Placing_ ... ed_account and a thread on experiences with this: http://www.bogleheads.org/forum/viewtop ... =1&t=98002

Many folks will hold bonds in taxable, too. If they are in a high tax bracket, then those will likely be tax-exempt muni bond funds.
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Re: treating all investment accounts as one pool of money

Post by placeholder » Fri Sep 12, 2014 11:52 pm

hudson4351 wrote:I have read on here before that one should treat all investment accounts as a single pool of money for the purposes of asset allocation.
When people say that they are generally referring to retirement savings only.

retiredjg
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Re: treating all investment accounts as one pool of money

Post by retiredjg » Sat Sep 13, 2014 10:50 am

I too believe that people are talking about retirement money when they say "consider all accounts as one portfolio". If money in a taxable account is for a shorter term goal, it does not make sense to consider it all one portfolio.

An exception is the example livesoft posted the links for. But this exception is only for people who have a large taxable account and the emotional ability to overcome the fear of selling stocks (followed by rebalancing) in a downturn.

I think most people would do better just considering the shorter term money as a separate bucket. And if that means some bonds or CDs in the taxable account, so be it.

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Re: treating all investment accounts as one pool of money

Post by berntson » Sat Sep 13, 2014 10:58 am

This is just a matter of personal preference. Lumpers like to think of their investments as one big portfolio. Splitters like to have dedicated accounts for different purposes. Lumpers need to take into account the fact that their one big portfolio is aimed at multiple goals. So a lumper portfolio aimed at both retirement and buying a house needs a different asset allocation than a lumper portfolio aimed only at retirement.

I'm a lumper myself. But there's no right or wrong way to do this.

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Re: treating all investment accounts as one pool of money

Post by Lafder » Sat Sep 13, 2014 11:16 am

I do consider $ I am saving for shorter term goals as part of my networth, but I do not count it in my asset allocation.

When I needed/wanted a larger amount of $ than I had in such an shorter term/not in my asset allocation account (for a bigger down payment on a house) I did pull $ from our taxable long term accounts. Which did effect our asset allocation. So I made some changes in the next few months to get the AA back where we wanted them.

I don't think there is any problem keeping some pools of $ out of your asset allocation. And because they are for shorter term goals, they are likely in more conservative places anyway. But if those accounts are for more vague purposes, it might make sense to include them in case your plans change.

I always thought it was strange people do not count the cash of their emergency funds in their allocation, which is basically what you are asking about.

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ruralavalon
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Re: treating all investment accounts as one pool of money

Post by ruralavalon » Sat Sep 13, 2014 11:33 am

placeholder wrote:
hudson4351 wrote:I have read on here before that one should treat all investment accounts as a single pool of money for the purposes of asset allocation.
When people say that they are generally referring to retirement savings only.
That's when talking about saving and investing for retirement.

We used to have two separate taxable accounts. One was a part of our retirement portfolio along with the 401k and the IRAs. The other was for shorter term issues such as quarterly income taxes, real estate taxes, emergency fund, childrens' college tuition, car purchase, etc.
Last edited by ruralavalon on Sat Sep 13, 2014 11:42 am, edited 1 time in total.
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Mike Scott
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Re: treating all investment accounts as one pool of money

Post by Mike Scott » Sat Sep 13, 2014 11:41 am

Call me a lumper because I think of total net worth and potential cash flow as what is most important (not just financial investments). Some of it is more liquid or has more risk or has lower return etc than others but it is all available if needed. Day to day life is based on budgeted income and everything else is "invested" in one form or fashion. The pile of scrap metal behind my barn is probably one of my fastest growing value investments right now. :)

retiredjg
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Re: treating all investment accounts as one pool of money

Post by retiredjg » Sat Sep 13, 2014 12:30 pm

Lafder wrote:I always thought it was strange people do not count the cash of their emergency funds in their allocation, which is basically what you are asking about.
Here's one reason - small portfolio. If your emergency fund is $20k and your portfolio is $50k, but you want your portfolio to be at 90/10....both of these things can't happen at the same time.

But I'd agree - later on in life, when your portfolio is large, a $20k EF wouldn't make a bit of difference.

hudson4351
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Re: treating all investment accounts as one pool of money

Post by hudson4351 » Sat Sep 13, 2014 12:35 pm

livesoft wrote:I often see on the forum folks asking where to save for non-retirement goals such as (a) a car, (b) home down payment, (c ) remodeling, (d) private K-12 school, and so on. The general answer is to take less risk with these near-term goals and often a savings account or CD is recommeneded.

There is also this for folks with LARGE taxable accounts: http://www.bogleheads.org/wiki/Placing_ ... ed_account and a thread on experiences with this: http://www.bogleheads.org/forum/viewtop ... =1&t=98002

Many folks will hold bonds in taxable, too. If they are in a high tax bracket, then those will likely be tax-exempt muni bond funds.
I believe this was the example I was vaguely remembering when I created this thread. So the example I gave, i.e. saving for a goal other than retirement with a shorter time horizon, is a completely different scenario than what is outlined in your links.

Would it even be possible to implement a strategy like you have outlined above for the situation I described? For example, let's say I am already maxing out my 401k and Roth IRA with a 100% stock AA but need to invest more money for a non-retirement goal with a shorter timeline. This would entail buying some bond funds. I could sell some of the stock fund shares in my 401k and use the proceeds to buy the amount of bond fund shares I need to fund my non-retirement goal, and buy stock funds in my taxable account to offset the stock funds I sold in my 401k to buy the bond funds. New money would be used to purchase stock funds in the taxable account, and stock fund shares in the 401k could be sold to purchase more bond fund shares if I needed more bonds. This would ensure maximum tax efficiency. As I grew closer to my goal, I would increase the percentage of bonds held in the tax-deferred accounts.

The problem I see with the above approach is: what happens when it's time to sell to realize the non-retirement goal I was investing for? At this point the taxable account will contain 100% stocks and the tax-deferred accounts will contain some percentage of bonds. Raiding the tax-deferred accounts to fund the non-retirement goal is not an option; I would only be able to raise money by selling the stock in the taxable account. The problem is that all the bonds I am holding are in the tax-deferred account, and are therefore not really reducing the volatility of my non-retirement investment. Based on this, it would seem like I need to save for the non-retirement goal entirely within a taxable account.

Am I missing something here or is my analysis correct?

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Re: treating all investment accounts as one pool of money

Post by ogd » Sat Sep 13, 2014 1:01 pm

hudson4351 wrote:The problem I see with the above approach is: what happens when it's time to sell to realize the non-retirement goal I was investing for? At this point the taxable account will contain 100% stocks and the tax-deferred accounts will contain some percentage of bonds. Raiding the tax-deferred accounts to fund the non-retirement goal is not an option; I would only be able to raise money by selling the stock in the taxable account. The problem is that all the bonds I am holding are in the tax-deferred account, and are therefore not really reducing the volatility of my non-retirement investment. Based on this, it would seem like I need to save for the non-retirement goal entirely within a taxable account.

Am I missing something here or is my analysis correct?
Yes. The boundary between taxable accounts and tax-advantaged is more permeable than you think.

If you need to raise money in a deep crash, you can sell stock in your taxable account and buy it back in tax-advantaged using bond money. The net effect is as if you sold bonds, while not requiring you to keep bonds in the taxable account for that purpose.

The one problem is if the taxable account actually runs out. I'd say that this is a fairly slim time window; after a longer period of heavy saving / growth, you should have enough in taxable for that not to happen. But there are still ways to transfer money out of tax-advantaged:
1) if you see a definite large spend / insufficient taxable on the horizon, adjust your contributions ahead of time
2) loans, hardship withdrawals
3) Roth contributions
4) if all else fails, a 10% penalty is not the end of the world (considering the taxes you've saved meanwhile). In the really bad scenarios your tax rate has dropped quite a bit due to unemployment.

An absolute refusal to withdraw from tax-advantaged accounts is not productive if it means you don't use them to their full potential as a result, by either not holding the most tax inefficient assets or (as I've heard from other people) not contributing to the max. Ultimately, they are both under your control and reasonably flexible, which is why we recommend viewing them as a single portfolio.

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Re: treating all investment accounts as one pool of money

Post by leonard » Sat Sep 13, 2014 1:03 pm

hudson4351 wrote:I have read on here before that one should treat all investment accounts as a single pool of money for the purposes of asset allocation. Some even say that "all" accounts, even a cash savings account, should also be lumped into this single pool of money. I am having trouble understanding how this makes sense unless one assumes that all of the money is invested for the single purpose of retirement.

For example, let's assume I have already maxed out my tax-deferred retirement accounts (401k and Roth IRA) but would like to continue investing more money in a taxable account. This money will be used for some purpose other than retirement with a goal nearer in the future. Let's also assume that my tax-deferred accounts contain 100% stocks, but the taxable account will need to contain some bonds because its goal is sooner in the future. Finally, let's also assume that I am not going to raid my tax-deferred accounts to fund this non-retirement goal that is nearer in the future.

Now based on what I have read here, bonds are better held in tax-deferred accounts if possible due to the taxable dividends they produce. In the scenario I have outlined above, it would seem that I would have to hold the bonds in a taxable account because I need that money sooner than my retirement. Is that correct, or am I missing something here? I'm really just trying to understand the rationale behind factoring in all investment and/or savings accounts when calculating AA.
There is no reason to assume that accounts in your portfolio align to goals.

Whenever you need to fund a goal - assuming you can afford it - you should access the lowest cost dollars to fund that goal period. Depending on access to various accounts - that could be any of the accounts that you own. Different accounts will have different "costs" (both tax, penalties) to access funds.

Depending on the goal and the cost of fund access - you might fund from an IRA, 401k, HSA, Education account, Taxable, I-Bond redemption, etc. etc. etc.

The point being - all accounts should be managed together to meet goals.
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Re: treating all investment accounts as one pool of money

Post by retiredjg » Sat Sep 13, 2014 1:23 pm

hudson4351 wrote:Am I missing something here or is my analysis correct?
Yes, you are missing something.

Here's an example. You start with this:
  • Taxable
    $100k in stocks

    IRA
    $100k in stocks
    $200k in bonds

Let's say you want $50k out of your bonds to buy a nice new car.
  • Taxable
    $100k in stocks <--Sell $50k and buy the car

    IRA
    $100k in stocks
    $200k in bonds <--Sell $50k and buy stocks with that money

If you do that, you end up with this and it is the same as having sold $50k in bonds in the IRA.
  • Taxable
    $50k in stocks

    IRA
    $150k in stocks
    $150k in bonds

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Re: treating all investment accounts as one pool of money

Post by grabiner » Sat Sep 13, 2014 3:29 pm

You can have one portfolio for each goal, but the portfolios do not correspond to accounts. If you have $500K invested, and plan to make a $100K down payment on a home next year, you might have $400K for retirement invested 80% in stock and 20% in bonds, and $100K for the house invested in cash or CDs. If you have a $200K taxable account, then $100K of that taxable account is counted as part of the retirement portfolio.
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Re: treating all investment accounts as one pool of money

Post by avenger » Sat Sep 13, 2014 5:29 pm

I'm a lumper. Anything else just seems like mental accounting. But some people probably can't (for any number of reasons) handle managing multiple goals with one asset allocation.
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Re: treating all investment accounts as one pool of money

Post by TRC » Sat Sep 13, 2014 6:11 pm

With the exception of our kid's 529 accounts, all of our retirement accounts (401k, 403B, his Roth IRA, her Roth IRA, and our joint taxable) are all considered "1 account". Allows for fewer mutual funds required and easier to rebalance and keep track of. I do agree that if you have a specific time horizon for something (ie. house downpayment, college funds, whatever) then keep it separate and allocate accordingly.

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Re: treating all investment accounts as one pool of money

Post by cfs » Sat Sep 13, 2014 6:37 pm

All-in-one.

All in one here, keeping a 35-40% equities/60-65% bonds and cash reserves--large emergency withdrawals (if any) will come from the taxable side of the house, doing fine with our pensions and our all-in-one imperfect SWAN portfolio is in auto-pilot. As requested, by popular demand, my old "Thanks for reading" closing statement is now part of my signature.
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Re: treating all investment accounts as one pool of money

Post by john94549 » Sat Sep 13, 2014 6:44 pm

I do not count monies set aside for dedicated and planned near-term (five year or less) expenses in AA. I also don't count the "ready cash" fund (some refer to it as the EF). Stated another way, I've already assumed those monies are "spent" (or will be), so they don't qualify as "investments".

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Re: treating all investment accounts as one pool of money

Post by placeholder » Sun Sep 14, 2014 11:32 am

I just think the OP made a leap from the typical statements made in portfolio reviews which is to not look at a particular account in isolation but to include all the others include spouses that are for the same purpose and isn't meant to be some big lifestyle guidance.

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Re: treating all investment accounts as one pool of money

Post by Sheepdog » Sun Sep 14, 2014 12:01 pm

Before retirement, I did have separate pools of funds, but after retirement all accounts became one pool of money. However, I have accounts for short term needs (next 1 to 5 years) where I will obtain funds for every day expenses, but also our next auto, home maintenance, medical needs, etc. I have other accounts which I don't have any plans for outside of bequeaths in the long run.
All accounts, though, are within one overall asset allocation.
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Re: treating all investment accounts as one pool of money

Post by LongerPrimer » Sun Sep 14, 2014 12:51 pm

Mostly.
There are some gray money that can we can use either way.
We have some retirement money that can be used either way too, in that We will be in excess of what we will need. How much in excess is not exactly known. Our VAs are laddered by time, amounts, guaranteed periods. Our qualified accounts are Roths, tIRA. I got a bit of juggling to do now since our first RMD is in 3 years.

hudson4351
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Re: treating all investment accounts as one pool of money

Post by hudson4351 » Sun Sep 14, 2014 3:18 pm

retiredjg wrote:
hudson4351 wrote:Am I missing something here or is my analysis correct?
Yes, you are missing something.

Here's an example. You start with this:
  • Taxable
    $100k in stocks

    IRA
    $100k in stocks
    $200k in bonds

Let's say you want $50k out of your bonds to buy a nice new car.
  • Taxable
    $100k in stocks <--Sell $50k and buy the car

    IRA
    $100k in stocks
    $200k in bonds <--Sell $50k and buy stocks with that money

If you do that, you end up with this and it is the same as having sold $50k in bonds in the IRA.
  • Taxable
    $50k in stocks

    IRA
    $150k in stocks
    $150k in bonds
OK, this is along the lines of what I was vaguely remembering when I created the thread. Are there any drawbacks to this approach? It seems that this method allows for maximum tax efficiency (i.e. bonds in tax-deferred, stocks in taxable) while still allowing one to save for different goals with different time horizons, yet something about it still doesn't seem quite right to me.

Suppose I start with this:
  • Taxable
    $50k in stocks

    IRA
    $100k in stocks
Now let's say I want to save up a total of $100k for some non-retirement goal (house down payment, college tuition, whatever). I decide that 80% stocks and 20% bonds is appropriate for the time horizon. To get my asset allocation in line using your method, I make the following modifications to my original portfolio:

  • Taxable
    $50k in stocks

    IRA
    $87.5k in stocks
    $12.5k bonds
Now I have 50k stocks in taxable and 12.5k bonds in my IRA. This gives me my desired 80/20 asset allocation (50/(50 + 12.5) = 0.8). Now suppose that over some period of time, bonds do very well and stocks tread water, leaving me with this:
  • Taxable
    $50k in stocks

    IRA
    $87.5k in stocks
    $50k bonds
Here I have assumed an unreasonably large increase in bonds and have ignored additional contributions, but it serves as an example for my question: if I use your approach, what happens if the assets I hold in the tax-deferred accounts grow faster than the ones in the taxable account? I could get into a situation like the one above in which I would have had the money to meet my goal had all assets been held in the taxable account. Because I can't actually sell the assets in the tax-deferred account, at least not without penalty, it doesn't really do me any good in this case. Your strategy only seems to work if the balance of the taxable account exceeds the goal amount.

Similarly, what happens if stocks suffer a decline but bonds increase in value? The whole point of my using bonds for the non-retirement goal is to reduce volatility. If stocks decline and my taxable account value is below the goal amount, having bonds in the tax-deferred account doesn't really help me because their value is not directly contributing to what I have available to actually sell and spend the proceeds of.

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Re: treating all investment accounts as one pool of money

Post by retiredjg » Mon Sep 15, 2014 7:49 am

Your example is incorrect because you have not kept the 80/20 asset allocation you decided was correct. However, your questions do point to the potential issues with this method.

1) What IS the right asset allocation if I'm mixing goals? I think this question is difficult for a small portfolio and/or a person with little experience.

2) If you are not adding to the taxable account, the plan probably will not work. Remember, this is money that you would ordinarily be adding to taxable (to save for a house or whatever).

3) If the taxable account is not much larger than the goal (twice as large or more) the plan may not work. Picture this. In a crash, your stocks may drop by half. If the taxable account is not at least twice as big as the goal, the plan won't work because there won't be enough money to meet the goal.

4) Many people would not have the emotional ability to sell their stocks which have lost half their value. If you turn around and buy stocks in another account, it is a wash. But likely to be very difficult to do.


I think it is possible to hold your short term goal money in bonds in a 401k or IRA instead of taxable and it is is more tax-efficient. But it is also more difficult and I'm not sure it is the best approach for most people. Tax-efficiency is a good thing, but it is not mandatory and it is not a fatal flaw if you hold some money in a not-very-tax-efficient-way. Separate buckets, even if CDs and bonds have to go into taxable, is likely better for a lot of people.

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Re: treating all investment accounts as one pool of money

Post by kaudrey » Mon Sep 15, 2014 9:08 am

retiredjg wrote: Tax-efficiency is a good thing, but it is not mandatory and it is not a fatal flaw if you hold some money in a not-very-tax-efficient-way. Separate buckets, even if CDs and bonds have to go into taxable, is likely better for a lot of people.

+1 Taxes shouldn't fully drive your investment plans. They are one aspect, but are not all-encompassing. I, for one, wouldn't incur penalties to raid my retirement accounts, and for many people, loans or hardship withdrawals are probably not the best options. If you need money in taxable, then put it in taxable. Invest it as a separate AA if that's what is easiest for you.

Having said that, I basically lump everything together. We have a fairly large taxable account because we are working toward retiring early retirement, but it is possible that some of the taxable account may get used for something else before then. Nothing specific planned, but you never know. Nonetheless, even though I can sell stuff and use the money at any time, it is still part of my overall AA.

And I count my EF toward the AA as well, even though that will be used for cars and other short term things. My AA is basically to keep a small portion in cash to account for the EF; so once I buy a car (or whatever), my cash will be low and I'll work to build it back up.

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Re: treating all investment accounts as one pool of money

Post by Call_Me_Op » Mon Sep 15, 2014 11:13 am

I hold two completely separate portfolios.

1.) A taxable portfolio to cover post-work expenses prior to age 70. I could start drawing on this tomorrow, or it could be many years.

2.) A 401k to cover expenses after age 70, in conjunction with social security.

The 401k is invested more aggressively, since it will not be tapped until age 70. This portfolio is on auto-pilot, meaning fixed AA rebalanced once per year.
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Re: treating all investment accounts as one pool of money

Post by hudson4351 » Mon Sep 15, 2014 11:35 am

retiredjg wrote:Your example is incorrect because you have not kept the 80/20 asset allocation you decided was correct.
Do you mean I did not keep the 80/20 asset allocation after my hypothetical rise in bond values? If so, then I would say that in my example I would have to sell bonds in my tax-deferred account and use the proceeds to buy stocks in my tax-deferred account. My 80/20 asset allocation is restored, but I still don't have enough money in my taxable account to realize my goals.
retiredjg wrote: 2) If you are not adding to the taxable account, the plan probably will not work. Remember, this is money that you would ordinarily be adding to taxable (to save for a house or whatever).
In reality I would be adding to both the taxable account and the tax-deferred account. I decided to omit contributions from my example for the sake of simplicity. My example was only to point out that any gains realized in the tax-deferred account do not contribute to the goal amount.

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Re: treating all investment accounts as one pool of money

Post by retiredjg » Mon Sep 15, 2014 1:08 pm

I think my example just won't work unless you are adding money and keeping the stock to bond ratio near target through the years. But it does show you how you can "sell stocks" in taxable when the net result is actually to "sell bonds" in tax-advantaged without taking money out of the tax-advantaged account.

And yes, any gains in tax-advantaged accounts don't add to your goal - that has to be done by adding to taxable.

It also shows the downside - how this whole idea won't work if the taxable account is not large enough to offset a drop in value during a crash.

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