Does Lifestrategy make sense in Roth IRA's

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Cody
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Does Lifestrategy make sense in Roth IRA's

Post by Cody » Sat Jul 29, 2017 8:06 am

As I age I am considering moving to a Lifestratey fund (for a number of reasons.) But currently almost all of our Equity is placed in our Roths and almost all of our bond funds are placed in Tax deferred.

Does it make sense to consider moving to a Lifestratey fund with a 40/60 AA in my situation? So in the end I would have some bonds in taxable and some equity in tax deferred.

Thanks,
cody

aristotelian
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Re: Does Lifestrategy make sense in Roth IRA's

Post by aristotelian » Sat Jul 29, 2017 8:10 am

Absolutely, bonds are fine in Roth, particularly if your Traditional are already full and you need to increase your bond allocation.

indexonlyplease
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Re: Does Lifestrategy make sense in Roth IRA's

Post by indexonlyplease » Sat Jul 29, 2017 8:16 am

I have heard this before to make investment simple in retirement years. Also, easy for wife when the man is gone. I really like the lifestyle and target funds, just makes investing easy.

The one question I would ask is what does someone do in a down market years and needs to take money from investments for income?? With separate funds you can just take from the fixed or bonds funds. If you have the lifestyle or target fund you are selling shares of all.

So I would also like to see this question answered. I would think maybe doing the same in 10 plus years.

Also, are you in retirement now??

I don't think bonds in the Roth IRA are considered taxable. Since you don't pay taxes on dividends.

Cody
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Re: Does Lifestrategy make sense in Roth IRA's

Post by Cody » Sat Jul 29, 2017 8:26 am

Good catch on the "taxable" - Roths are not in "taxable".

Yes I am retired, am "paying" for my own Social Security delay (rather than take SS I'm taking money from our portfolio).

As far as taking money from various funds during down, or up, markets I'm not sure how effective people are at even doing that well. Personal bias is nasty stuff. I would like to think I could pick the right fund to withdraw from but not always, and if thats the case do I hurt my own cause.

Hopefully other will be able to add to that, or correct it.

Best,
cody

Cody
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Re: Does Lifestrategy make sense in Roth IRA's

Post by Cody » Sat Jul 29, 2017 8:32 am

PS - I have not taxable (most went to paying to fund my Social Security.)
cody

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grabiner
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Re: Does Lifestrategy make sense in Roth IRA's

Post by grabiner » Sat Jul 29, 2017 3:30 pm

LifeStrategy and Target Retirement funds are intended to be your whole portfolio, as they manage themselves; you lose the simplicity advantage if you hold these funds in one account and individual funds in other accounts.

Therefore, it makes a lot of sense to use LifeStrategy Conservative Growth in your Roth IRA if you have it, or a similar fund, in your traditional IRA or 401(k).
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Re: Does Lifestrategy make sense in Roth IRA's

Post by ruralavalon » Sat Jul 29, 2017 3:36 pm

Cody wrote:As I age I am considering moving to a Lifestratey fund (for a number of reasons.) But currently almost all of our Equity is placed in our Roths and almost all of our bond funds are placed in Tax deferred.

Does it make sense to consider moving to a Lifestratey fund with a 40/60 AA in my situation? So in the end I would have some bonds in taxable and some equity in tax deferred.

Thanks,
cody
Yes, I think that makes sense.

With everything in tax-advantaged accounts, there is little downside to using the fund unless you strongly disagree with the asset allocation in a LifeStrategy fund. A good balanced index fund does greatly simplify portfolio management as you age.

I am thinking along the same lines as we get older.
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Re: Does Lifestrategy make sense in Roth IRA's

Post by delamer » Sat Jul 29, 2017 3:42 pm

An advocate for not using Target Date or other all-in-one funds once withdrawals begin:

"Even though I love target-date funds for accumulators,” says Christine Benz, director of personal finance at Morningstar, “most all-in-one funds are suboptimal when it comes to retirement withdrawals because the investor doesn’t have discretion over where those withdrawals come from.”

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Re: Does Lifestrategy make sense in Roth IRA's

Post by retiredjg » Sat Jul 29, 2017 3:43 pm

I think it makes fine since to hold a LS or TR fund in both accounts.

Cody
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Re: Does Lifestrategy make sense in Roth IRA's

Post by Cody » Tue Oct 16, 2018 8:22 am

Since Lifestrategy funds are rebalanced daily? does Christine Benz idea still hold water? It would seem perhaps not.

She said: "Even though I love target-date funds for accumulators,” says Christine Benz, director of personal finance at Morningstar, “most all-in-one funds are suboptimal when it comes to retirement withdrawals because the investor doesn’t have discretion over where those withdrawals come from.”

Does the frequent rebalancing "compensate" for not having a choice of which funds to withdraw from (presumably you withdraw from the least successful fund).

Best,
Cody

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David Jay
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Re: Does Lifestrategy make sense in Roth IRA's

Post by David Jay » Tue Oct 16, 2018 8:28 am

I am in the process of lining up accounts for retirement in January. I like LifeStrategy funds (like TargetDate, except they hold the asset allocation instead of having a glideslope) and I use LS Growth (80/20) for my Roth. I transferred $50,000 to a Short Term Bond fund so I have ready cash for any special needs in retirement. That brings me down closer to 70/30 in that account but I can live with that.
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rkhusky
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Re: Does Lifestrategy make sense in Roth IRA's

Post by rkhusky » Tue Oct 16, 2018 8:36 am

Cody wrote:
Tue Oct 16, 2018 8:22 am
She said: "Even though I love target-date funds for accumulators,” says Christine Benz, director of personal finance at Morningstar, “most all-in-one funds are suboptimal when it comes to retirement withdrawals because the investor doesn’t have discretion over where those withdrawals come from.”
That is not relevant if you intend to maintain a given asset allocation. She might have been thinking that if stocks have dropped significantly, perhaps one should withdraw from bonds and wait for the stocks to recover. But that can result in changing your asset allocation. For example, if you have a $1M 60/40 portfolio and stocks drop by 50%, then you end up with a $700K 43/57 portfolio. If you don't rebalance and just withdraw from bonds, then your portfolio is much more conservative than your original 60/40 target. If you rebalance back to a $700K 60/40 portfolio, then there is little difference from using a target date fund.

There are tax inefficiencies to holding a target date or balanced fund in a taxable account, so one has to decide whether the simplicity is worth the extra cost.

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Re: Does Lifestrategy make sense in Roth IRA's

Post by Cody » Tue Oct 16, 2018 9:04 am

No one has been able to tell me exactly what the cost (for the inefficiency) would be.

It would nice if I could find out. Everyone (including me) says that a given portfolio is efficient. And I believe that.

But how does one figure out how much $$ is lost with putting bonds in Roths (with Lifestrategy for example). Is it .1%, .2% saved?

Best,
Cody

retiredjg
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Re: Does Lifestrategy make sense in Roth IRA's

Post by retiredjg » Tue Oct 16, 2018 10:45 am

It would depend on many things - mostly which fund you put in taxable and your tax brackets. A person in a very high tax bracket would be paying unnecessary taxes at their top rate for the dividends the bonds in such an account would produce. A person in a lower tax bracket, not so much.

But you only have tax-deferred accounts and Roth IRA, right? So you would not be affected anyway.
But how does one figure out how much $$ is lost with putting bonds in Roths (with Lifestrategy for example).
I think you have misunderstood. There is no money lost by putting bonds (or LifeStrategy) in Roth IRA. A Roth IRA is not a "taxable account".

A taxable account is an ordinary account that has no tax-advantage. Something that is not part of an IRA, Roth IRA, 401k, etc. Many people call a taxable account a "brokerage account", but even your ordinary savings account is a taxable account.

Or have I misunderstood your question?

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Re: Does Lifestrategy make sense in Roth IRA's

Post by Taylor Larimore » Tue Oct 16, 2018 11:56 am

Cody wrote:
Sat Jul 29, 2017 8:06 am
As I age I am considering moving to a Lifestratey fund (for a number of reasons.) But currently almost all of our Equity is placed in our Roths and almost all of our bond funds are placed in Tax deferred.

Does it make sense to consider moving to a Lifestratey fund with a 40/60 AA in my situation? So in the end I would have some bonds in taxable and some equity in tax deferred.

Thanks,
cody
Cody:

Assuming all your investments are in tax-advantaged accounts, I think it makes sense to move to a simple, expertly designed, low-cost Vanguard Target Retirement Fund. Compared with Vanguard LifeStrategy Funds, Target funds offer 8 more choices; automatically become more conservative with age; and offer slightly more diversification at older ages. Both type funds are among the best.

Knowledgeable investors select Target and LifeStrategy funds based on their stock/bond allocation (not on the Target Date). Both type funds can be exchanged without cost or tax in tax-advantaged accounts.

To help determine your best stock/bond allocation, use this Vanguard calculator:

Investor Questionnaire

If you want information about "Optimizing Asset Location," read this:

https://www.advisorperspectives.com/new ... cation.pdf

Best wishes.
Taylor
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John Z
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Re: Does Lifestrategy make sense in Roth IRA's

Post by John Z » Tue Oct 16, 2018 1:06 pm

Cody wrote:
Sat Jul 29, 2017 8:06 am
As I age I am considering moving to a Lifestratey fund (for a number of reasons.) But currently almost all of our Equity is placed in our Roths and almost all of our bond funds are placed in Tax deferred.

Does it make sense to consider moving to a Lifestratey fund with a 40/60 AA in my situation? So in the end I would have some bonds in taxable and some equity in tax deferred.

Thanks,
cody
Yes I agree with your strategy: placing higher return securities in Roth and lower return securities in IRA. Your RMDs will be fairly constant and hopefully your higher return securities will give you larger gains that will not be taxed on withdrawal.

If you want to research a bit deeper into maximizing your withdrawals during retirement, go to:
http://livingoffyourmoney.com/
Where author McClung has written one of the best books of withdrawal strategies during retirement. He let's you download the TofC (so you can see what's in the entire book) and the first 3 chapters free, with chapter 3 being one of the best. I am currently using the Prime Harvesting Strategy and have been in retirement for several years. Basically yes, you should have individual stock and bond funds so you can maximize withdrawals of stocks and bonds, depending on what strategy you use and how they are performing.

I am currently slicing and dicing but as I age, and wanting to keep things simple I am planning on using 2 Life Strategy funds, one stock heavy and one bond heavy (LS Growth and LS Income) to mimic a pure stock and bond set of funds where I can still use my Prime Harvesting Strategy but with a bit of the other in the funds. By that point I don't think the inefficiencies in mixing stocks/bonds (20%) in one fund will make a difference.

Good luck.

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Re: Does Lifestrategy make sense in Roth IRA's

Post by megabad » Tue Oct 16, 2018 3:01 pm

Cody wrote:
Tue Oct 16, 2018 9:04 am
No one has been able to tell me exactly what the cost (for the inefficiency) would be.

It would nice if I could find out. Everyone (including me) says that a given portfolio is efficient. And I believe that.

But how does one figure out how much $$ is lost with putting bonds in Roths (with Lifestrategy for example). Is it .1%, .2% saved?

Best,
Cody
The answer is simple, one can figure out the "loss" (I don't view it this way) by calculating the return for bonds and other asset classes and multiplying by the tax rate on that dollar and then calculating the difference between holding bonds in traditional vs Roth. In your case, this requires an exact prediction of your future bond portfolio returns, your future equity portfolio returns and your future tax rate. The answer could be zero in some cases and ranges up from there. Actually the answer could theoretically be negative, but I don't want to go down the rabbit hole...

The amount you invest each year and the choice of which account type to invest in initially (between Roth and Traditional) are typically much more important factors. This is why you see so many threads covering that topic.

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Re: Does Lifestrategy make sense in Roth IRA's

Post by heyyou » Tue Oct 16, 2018 3:52 pm

As soon as future returns are known, we can then calculate what would have been the best allocation to have been in. Welcome to the risk portion of risk and reward. This seeking of the best or the optimal, is a form of greed. When we give it up and just accept something that is near enough to being adequate, our lives are more pleasant due to less stress.

Yes, keep mostly equities in the Roth IRA due to equities higher expected returns, but that could be just a higher equity balanced or life strategy fund. Store more of your bonds in the traditional IRA since any growth there adds a sliver of more tax later, so a lower equity balanced or life strategy fund could go there.

Whatever you do choose will eventually be not as good as the known-afterwards optimal allocation, likely all stocks in RIRA and all bonds in tIRA for less taxes, but almost all stocks in both for more risk, more returns, and more tax.

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Re: Does Lifestrategy make sense in Roth IRA's

Post by JBTX » Tue Oct 16, 2018 10:28 pm

Cody wrote:
Tue Oct 16, 2018 9:04 am
No one has been able to tell me exactly what the cost (for the inefficiency) would be.

It would nice if I could find out. Everyone (including me) says that a given portfolio is efficient. And I believe that.

But how does one figure out how much $$ is lost with putting bonds in Roths (with Lifestrategy for example). Is it .1%, .2% saved?

Best,
Cody
If you are referring to the tax efficiency of bonds in tax advantaged vs having high growth in tax advantaged, and which is better, the answer is it really depends.

I just took a very simplistic example, over 20 years, stocks earning 7%, and bonds earning 3.25%. Assume 2% qualified dividends every year, and all other gains are capital gains and are taxed at the end of 20 years at 15% (if in taxable), and interest is taxed at 22% every year (if bonds are in taxable). Compare it to a Roth IRA (which is the easiest comparison) where tax rate of course is 0%.

In the above example, stocks in the Roth, and bonds in taxable, gives you a total of 4.65% MORE than bonds in Roth and stocks in taxable.

Now if your cap gain tax rate goes down to zero in 20 years, assuming you are retiring early, stocks in taxable and bonds in tax deferred will give you a total of 0.62% more than stocks in Roth and bonds in taxable.

So in that scenario, if you very optimally manage your taxable gains until retirement and at that point you have a zero pct cap gains rate, having stocks in taxable gives a slight advantage. Otherwise stocks in tax advantaged will get you marginally better result.

If bonds rates go up to say 4%, and stocks stay at 7%, then if your terminal cap gains rate stays at 15%, the stocks in Roth gives you about 2.5% more. If terminal cap gains rate is zero, then stocks in taxable gives you about 2.2% more.

And none of this addresses the often touted "livesoft" example of having all of your money in traditional ira/401k and roth converting at zero or low income tax rates in early retirement, which would presumably give even greater advantage to stocks in tax deferred traditional.

For this reason, I have often said that the case made here about bonds being better in tax advantaged is greatly exaggerated - if it even exists at all.

note: I started out 50/50 stocks bonds, but I didn't rebalance - so the examples are simplistic from that standpoint, but I don't think it changes the answer all that much.

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Re: Does Lifestrategy make sense in Roth IRA's

Post by grabiner » Tue Oct 16, 2018 11:06 pm

Cody wrote:
Tue Oct 16, 2018 8:22 am
Since Lifestrategy funds are rebalanced daily? does Christine Benz idea still hold water? It would seem perhaps not.

She said: "Even though I love target-date funds for accumulators,” says Christine Benz, director of personal finance at Morningstar, “most all-in-one funds are suboptimal when it comes to retirement withdrawals because the investor doesn’t have discretion over where those withdrawals come from.”

Does the frequent rebalancing "compensate" for not having a choice of which funds to withdraw from (presumably you withdraw from the least successful fund).
It does, as it has the same effect. When a balanced fund rebalances, it keeps its asset allocation even as you make withdrawals. If you have separate funds, you will rebalance on your own, by withdrawing from the overweighted fund, or selling if necessary.

Suppose that you have $40K in stock and $60K in bonds, and the stock market drops 10%. You need to withdraw $6K, so you take the withdrawal from the bond fund, to get back to your target allocation with $36K in stock and $54K in bonds.

Now, suppose that you instead have a balanced fund with 40% stock. When the stock market drops 10%, the fund sells $2400 in bonds to rebalance. You now sell $6K of the fund, which is $2400 in stock and $3600 in bonds. You now have $36K in stock and $54K in bonds.

If the stock market declines by more than 10%, you would have to rebalance on your own, just as the balanced fund does.
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Re: Does Lifestrategy make sense in Roth IRA's

Post by jalbert » Wed Oct 17, 2018 12:38 am

delamer wrote:
Sat Jul 29, 2017 3:42 pm
An advocate for not using Target Date or other all-in-one funds once withdrawals begin:

"Even though I love target-date funds for accumulators,” says Christine Benz, director of personal finance at Morningstar, “most all-in-one funds are suboptimal when it comes to retirement withdrawals because the investor doesn’t have discretion over where those withdrawals come from.”
This is good advice for a taxable account (where Target date funds are in fact a problem in both accumulation and retirement) but it does not apply to a tax-qualified account such as a Roth account, which is what the OP asked about. If you rebalance after a withdrawal, it is irrelevant where the withdrawal came from, and rebalances are not taxable events in a tax-qualified account.

The all-in-one fund is rebalanced for you. You have to rebalance separate funds yourself, and this should be done after a withdrawal from a tax-qualified account holding separate funds.
Risk is not a guarantor of return.

delamer
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Re: Does Lifestrategy make sense in Roth IRA

Post by delamer » Wed Oct 17, 2018 11:27 am

jalbert wrote:
Wed Oct 17, 2018 12:38 am
delamer wrote:
Sat Jul 29, 2017 3:42 pm
An advocate for not using Target Date or other all-in-one funds once withdrawals begin:

"Even though I love target-date funds for accumulators,” says Christine Benz, director of personal finance at Morningstar, “most all-in-one funds are suboptimal when it comes to retirement withdrawals because the investor doesn’t have discretion over where those withdrawals come from.”
This is good advice for a taxable account (where Target date funds are in fact a problem in both accumulation and retirement) but it does not apply to a tax-qualified account such as a Roth account, which is what the OP asked about. If you rebalance after a withdrawal, it is irrelevant where the withdrawal came from, and rebalances are not taxable events in a tax-qualified account.

The all-in-one fund is rebalanced for you. You have to rebalance separate funds yourself, and this should be done after a withdrawal from a tax-qualified account holding separate funds.
If bonds have fallen in price and stocks have increased (for example), you’d ideally want to sell only stocks for your withdrawal. If you sell shares of an all-in-one-fund, you inevitably sell some bonds. The rebalancing isn’t the core issue.

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Re: Does Lifestrategy make sense in Roth IRA

Post by grabiner » Wed Oct 17, 2018 8:47 pm

delamer wrote:
Wed Oct 17, 2018 11:27 am
jalbert wrote:
Wed Oct 17, 2018 12:38 am
delamer wrote:
Sat Jul 29, 2017 3:42 pm
An advocate for not using Target Date or other all-in-one funds once withdrawals begin:

"Even though I love target-date funds for accumulators,” says Christine Benz, director of personal finance at Morningstar, “most all-in-one funds are suboptimal when it comes to retirement withdrawals because the investor doesn’t have discretion over where those withdrawals come from.”
This is good advice for a taxable account (where Target date funds are in fact a problem in both accumulation and retirement) but it does not apply to a tax-qualified account such as a Roth account, which is what the OP asked about. If you rebalance after a withdrawal, it is irrelevant where the withdrawal came from, and rebalances are not taxable events in a tax-qualified account.

The all-in-one fund is rebalanced for you. You have to rebalance separate funds yourself, and this should be done after a withdrawal from a tax-qualified account holding separate funds.
If bonds have fallen in price and stocks have increased (for example), you’d ideally want to sell only stocks for your withdrawal. If you sell shares of an all-in-one-fund, you inevitably sell some bonds. The rebalancing isn’t the core issue.
The reason you want to sell only stocks after stocks have risen is that you were above your target allocation in stocks. When the all-in-one fund rebalanced, it removed the need to do that; you were already at your target allocation.
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Re: Does Lifestrategy make sense in Roth IRA's

Post by jalbert » Wed Oct 17, 2018 10:24 pm

If bonds have fallen in price and stocks have increased (for example), you’d ideally want to sell only stocks for your withdrawal. If you sell shares of an all-in-one-fund, you inevitably sell some bonds. The rebalancing isn’t the core issue.
Rebalancing is the reason you are inclined to sell the appreciated asset. This strategy is used in a taxable account to limit the realization of capital gains to what is generated by the withdrawal, and tax considerations may preclude bringing the account fully into the proportions of one’s asset allocation. Tax-qualified accounts have no such limitation.

If you want to hold the asset allocation offered by a LifeStrategy fund you can hold the LifeStrategy fund or can hold separate funds. Either way, in a tax-qualified account there is no tax penalty for rebalancing. A withdrawal can be processed from any fund, and then the assets rebalanced. Once rebalanced there is no difference in holdings whether or not you withdrew from all funds or one fund. Hence a LifeStrategy fund does not present a withdrawal liability in a tax-qualified account.

If you want to hold a different asset allocation than the LifeStrategy funds offer, such as a lower percentage of non-US equities, then they may not be the best choice.
Risk is not a guarantor of return.

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Re: Does Lifestrategy make sense in Roth IRA

Post by rkhusky » Thu Oct 18, 2018 7:18 am

delamer wrote:
Wed Oct 17, 2018 11:27 am
If bonds have fallen in price and stocks have increased (for example), you’d ideally want to sell only stocks for your withdrawal. If you sell shares of an all-in-one-fund, you inevitably sell some bonds. The rebalancing isn’t the core issue.
Rebalancing is the core issue, because before you sold the all-in-one-fund, it would have rebalanced by selling stocks and buying bonds. In fact, unless you sold enough stocks in your individual funds to reblance back to your original asset allocation, the all-in-one-fund would have sold more stocks than you did by only selling stocks in your individual funds.

A modification of Grabiner's example from above:
Individual accounts: You have $40K in a stock fund and $60K in a bond fund (40/60 asset allocation). Stocks rise to $60K. You withdraw $20K from the stock fund, leaving you with $40K in stocks, $60K in bonds and $20K in cash. Your AA is still 40/60.

Balanced fund: You have $100K in a 40/60 balanced fund ($40K in stocks and $60K in bonds). Balanced fund increases to $120K (stock portion increased to $60K, but the fund immediately rebalanced to have $48K in stocks and $72K in bonds). You withdraw $20K from the balanced fund, leaving you with $100K in the balanced fund ($40K in stocks and $60K in bonds) and $20K in cash.

The results are exactly the same if you maintain the 40/60 AA in the individual accounts.

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Re: Does Lifestrategy make sense in Roth IRA's

Post by Cody » Thu Oct 18, 2018 8:41 am

A modification of Grabiner's example from above:
Individual accounts: You have $40K in a stock fund and $60K in a bond fund (40/60 asset allocation). Stocks rise to $60K. You withdraw $20K from the stock fund, leaving you with $40K in stocks, $60K in bonds and $20K in cash. Your AA is still 40/60.

Balanced fund: You have $100K in a 40/60 balanced fund ($40K in stocks and $60K in bonds). Balanced fund increases to $120K (stock portion increased to $60K, but the fund immediately rebalanced to have $48K in stocks and $72K in bonds). You withdraw $20K from the balanced fund, leaving you with $100K in the balanced fund ($40K in stocks and $60K in bonds) and $20K in cash.

The results are exactly the same if you maintain the 40/60 AA in the individual accounts.
krhusky

So in this example then the only difference "might" be that an individual might play a bit of the moment game and (if in individual equity funds) not let the portfolio ride whereas LS is always rebalancing (perhaps daily).

But other that there is no difference between separate funds and LS? We already discussion tax efficiency a bit. There is some minor lose to inefficiency with LS across the board. Do I have that correct.

Thanks,
cody

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Re: Does Lifestrategy make sense in Roth IRA's

Post by jalbert » Fri Oct 19, 2018 2:10 am

So in this example then the only difference "might" be that an individual might play a bit of the moment game and (if in individual equity funds) not let the portfolio ride whereas LS is always rebalancing (perhaps daily).
I doubt Vanguard rebalances daily. It is most likely that Vanguard will do a more effective job of rebalancing than many individual investors, and get a slightly higher return than the individual trying to manage the same portfolio with individual funds. This is the main benefit of a LifeStrategy fund.

The LifeStrategy fund holds investor share classes of the underlying funds. If you have a large enough balance to hold the funds as admiral shares, you will save a little bit of admin cost, but Vanguard is still likely to beat many individual investors because the emotion is taken out of the rebalancing process.
But other that there is no difference between separate funds and LS? We already discussion tax efficiency a bit. There is some minor lose to inefficiency with LS across the board. Do I have that correct.
No inefficiency with LS, and the tax issue does not apply to a Roth account. With The LS fund you pay investor class expense ratios. With individual index funds, each fund qualifies for admiral class expense ratios at a balance of $10K. It will take a much larger overall balance to get all of the underlying funds at $10K.
Risk is not a guarantor of return.

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