Asset Allocation for HSA

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bad78andy
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Asset Allocation for HSA

Post by bad78andy » Tue May 24, 2016 3:39 pm

I have, through my employer, a HSA account administered by BNY Mellon. The funds of $13,800 are in a money market fund collecting 0.05%, of which I will hold back the annual deductible of $2,600. Thus the investable amount is $11,200. Annual contribution is maxed.

My 401k, brokerage account, and variable annuity (transferred from NWMutual, thank you EmergDoc) are all with Vanguard, in a 3-4 fund lazy portfolio, in 70/30 S/B mix. Thank you for the Wiki.

I need help allocating with the following Vanguard funds in my HSA. (There are other funds, but they have higher ER, so ignored).

Vanguard Dividend Appreciation Index Investor VDAIX 0.20%
Vanguard Small Cap Index Admiral Class VSMAX 0.09%
Vanguard Developed Markets Index Admiral VTMGX 0.09%
Vanguard Emerging Markets Stock Index Admiral VEMAX 0.15%
Vanguard Long-Term Bond Index Investor VBLTX 0.20%
Vanguard LifeStrategy Conservative Growth Investor VSCGX 0.15%
Vanguard LifeStrategy Moderate Growth Investor VSMGX 0.16%

I don't want to add money to international funds. US (Domestic) funds only. I have enough international in 401k and brokerage accounts.

Backtesting with Portfolio Visualizer shows that 60%/40% VDAIX/VBLTX yielded better CAGR than 100% VSCGX or 100% VSMGX. Hence will ignore the LifeStrategy funds.

Question:
I want to replicate a total stock fund using VDAIX and VSMAX, which are benchmarked to Russell 1000 & 2000 respectively. What is the rule of thumb to allocate funds between the two stock funds? I would like 20% in the bond fund.

Thank you in advance.

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whodidntante
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Re: Asset Allocation for HSA

Post by whodidntante » Tue May 24, 2016 5:00 pm

It's 11 grand. You may be over thinking this.

Just buy the stock fund you like most and fits with your other investments. I had a similar situation and that's what I did.

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Artsdoctor
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Re: Asset Allocation for HSA

Post by Artsdoctor » Tue May 24, 2016 5:29 pm

Andy,

There are several ways to approach this. Overall, most people would look at their asset allocation as it relates to the entire portfolio. So in theory, your HSA would be just another account and you could just use the cheapest fund as long as it fits into your asset allocation needs.

It did that for years. We have two HSAs which were started about the time that HSAs became available. It was most efficient for me to simply put the maximum into the accounts and all money went into the Total Stock Market Fund Admiral shares. All along, my total portfolio (not the HSAs) was roughly 60/40.

Now that I'm in the "preretirement stage," I realize that HSAs are a special situation. They will ultimately be used for one thing only and that's medical expense. And they will be used starting at full retirement, which is really sooner than I would have imagined. Unlike other retirement accounts, HSAs really should be spent entirely during your (or your spouse's) lifetime; there is no benefit to inheriting a HSA.

This translated, for my needs, into keeping the account balanced in a safe way (i.e., switching out of a 100% equity holding into a more conservative mix). For me, a balanced fund now makes the most sense since it's easy and intuitive. I could easily make a 3-fund portfolio within the HSA but I like more of a fund-of-funds approach.

You're just starting out and the balance is relatively small. No matter what you do, you will be fine because you'll be contributing each year. When the fund contributions stop, or when you're closer to retirement, you might then consider the LifeStrategy funds, for example.

I would urge you to consider investing the entire amount each year, if you can afford it.

GMan82
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Re: Asset Allocation for HSA

Post by GMan82 » Tue May 24, 2016 6:01 pm

It looks like you have the same HSA that I'll have. Mine is through PayFlex and they're switching their platform to the BNY Mellon one, effective June 1st this year. Through my original platform with them, I just invested the whole thing in the Scwhab S&P 500 Index fund. However with BNY Mellon, no total market or S&P fund exists.

My asset allocation is 80/20, with 30% international. I'm in the midst of transitioning my profile to take up a small value allocation. The HSA overall is a small part of my portfolio (<5%), but like a Roth, one that I'd like to be aggressive with. So, I will invest it all in VSMAX (small cap index admiral) as of June 1. When I place my funds into Instant X-ray and compare against a total market portfolio, it over weights small caps by about 1-2% total across the Morningstar 3x3 box. Not too much of an effect. Its ER is 0.09, too, and I'm a fan of low expenses regardless.

So I'm going with VSMAX. It helps keep a small Account simple and exceedingly cheap, and won't skew my asset allocation much.

bad78andy
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Re: Asset Allocation for HSA

Post by bad78andy » Wed May 25, 2016 3:00 pm

whodidntante, you're right. I'm in analysis paralysis. I like to keep funds in a S&P 500 fund, but have only Russell 1000 and 2000 funds. 1st world problems. :oops:

Artsdoctor, yes, I'm planning on investing the entire amount annually. I realized a month back that for 2 years I had completely ignored asset allocation of my HSA funds. Mainly because I was dealing with moving wife's and my NW mutual annuities into Vanguard, getting term life 30 year fixed, moving parents' Ameriprise portfolio into Vanguard, opening UTMA accounts for kids at VG, and teaching brother about opening Vanguard accounts.

GMan82, thanks for a 'radical' viewpoint. I haven't invested in a small/mid-cap fund in my entire portfolio, only total stock, total world stock, and S&P 500 funds. I don't mind risking some into a Russell 2000 fund.

Thanks y'all! :beer

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grabiner
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Re: Asset Allocation for HSA

Post by grabiner » Wed May 25, 2016 8:44 pm

Since you are using both your HSA and your IRA for retirement savings, treat the HSA as part of your IRA for investment purposes. Any of the Vanguard Admiral funds which fits your investment needs would be a fine choice. You would use the small-cap fund if you want to overweight small-cap, or if you have a large-cap fund elsewhere (for example, an S&P 500 index in your 401(k)). If you use Total Stock Market for your US stock, then the developed or emerging markets are good; 75% developed/25% emerging is close to Total International, or you could hold emerging in the HSA and developed somewhere else.
David Grabiner

GMan82
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Re: Asset Allocation for HSA

Post by GMan82 » Wed May 25, 2016 10:09 pm

@Grabiner. Your advice is solid. In my situation, though, my Roth and Taxable are both with Vanguard and therefore have total stock and total international available. My 403b is with Fidelity (which offers Spartan total market and Spartan international which is really a developed market fund) with no-fee access to BrokerageLink and all the other Spartan funds, including my Spartan REIT index and the Spartan global ex-US. So for my HSA I'm not really wanting for any particular broad-market index fund. I plan on initiating a small tilt to small cap value (10% of stocks to be in the small value corner) using my 403b and therefore IJS. So VSMAX seems the best option because it'll help with the tilt to small.

Besides, I'm not too sure what to make of VDAIX (dividend appreciation), and the HSA won't offer an admiral version. Can it act as a surrogate to an S&P 500 index fund?

jmk
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Re: Asset Allocation for HSA

Post by jmk » Mon Jun 19, 2017 1:12 pm

grabiner wrote:Since you are using both your HSA and your IRA for retirement savings, treat the HSA as part of your IRA for investment purposes.
Follow up question: assuming I'm maximizing my IRAs, and am in relatively good health now, would one ever not want to lump the HSA into my IRA /Roth bucket when deciding asset allocation? I'm asking because in the 15% bracket I use my tax-protected space for Bonds since there is no capital gains on equities in taxable. I've not followed that rule with my HSAs, however, as (in my mind) I want them to grow larger in order to pay future (retirement) medical and health insurance bills. In other words, HSAs seem unique. But I'm having trouble figuring out if my logic is sound. If I treat them like IRAs they be all fixed income fund rather than mimicking my overall allocation (50/50) as they are now. I ahould also mention I have a $66 per year fee for investing in the HSA.

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grabiner
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Re: Asset Allocation for HSA

Post by grabiner » Mon Jun 19, 2017 11:42 pm

jmk wrote:
grabiner wrote:Since you are using both your HSA and your IRA for retirement savings, treat the HSA as part of your IRA for investment purposes.
Follow up question: assuming I'm maximizing my IRAs, and am in relatively good health now, would one ever not want to lump the HSA into my IRA /Roth bucket when deciding asset allocation? I'm asking because in the 15% bracket I use my tax-protected space for Bonds since there is no capital gains on equities in taxable. I've not followed that rule with my HSAs, however, as (in my mind) I want them to grow larger in order to pay future (retirement) medical and health insurance bills. In other words, HSAs seem unique. But I'm having trouble figuring out if my logic is sound. If I treat them like IRAs they be all fixed income fund rather than mimicking my overall allocation (50/50) as they are now. I ahould also mention I have a $66 per year fee for investing in the HSA.
If the HSA is being saved for medcial bills in retirement, then it should be part of your asset allocation. It doesn't need to be 50/50 if that is your overall allocation; you could keep the entire HSA in bonds if the bond options are better than the stock options (or if you hold TIPS in the HSA because you live in AL, CA, or NJ, which tax HSAs), and hold more stock than bonds in your IRA.
David Grabiner

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