Which fund first for multiple accounts allocation?

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ConstantlyLearning57
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Which fund first for multiple accounts allocation?

Post by ConstantlyLearning57 » Wed Dec 06, 2017 10:41 am

Hi there, I'm following the wiki page on "Asset allocation in multiple accounts" ( https://www.bogleheads.org/wiki/Asset_a ... _accounts ). I've targeted my pre-tax 401k as the first account to handle. But Under Start with problematic account, Selecting the fund, the first step is "Find the lowest fee fund. In most cases, this fund will be an S&P 500 index fund." This is indeed true for my 401k choices. The fee is for the S&P 500 option is 0.1%. But nonetheless was a little surprised that finding the fund with the lowest fee is the first step. I was expecting the article to walk me through choosing bonds
funds since the article on tax efficiency: (https://www.bogleheads.org/wiki/Tax-eff ... _placement), states how important it is to place bond funds in a tax deferred 401k account first. And that same article shows under step 5 shows that US funds are fairly flexible... that they can be placed in taxable, tax free, or tax deferred.

I guess the question is, shouldn't I place the bond funds first in the 401k, before the S&P 500 fund? Or should I do S&P 500 first before bonds because the low expense ratio benefits of the S&P500 outweigh the tax efficiency benefits of placing the bonds first?

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mhc
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Re: Which fund first for multiple accounts allocation?

Post by mhc » Wed Dec 06, 2017 11:11 am

Take the two requirements together. There is not a one size fits all due to varying expense ratios, funds available, and tax considerations.

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ruralavalon
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Re: Which fund first for multiple accounts allocation?

Post by ruralavalon » Wed Dec 06, 2017 11:30 am

ConstantlyLearning57 wrote:
Wed Dec 06, 2017 10:41 am
Hi there, I'm following the wiki page on "Asset allocation in multiple accounts" ( https://www.bogleheads.org/wiki/Asset_a ... _accounts ). I've targeted my pre-tax 401k as the first account to handle. But Under Start with problematic account, Selecting the fund, the first step is "Find the lowest fee fund. In most cases, this fund will be an S&P 500 index fund." This is indeed true for my 401k choices. The fee is for the S&P 500 option is 0.1%. But nonetheless was a little surprised that finding the fund with the lowest fee is the first step. I was expecting the article to walk me through choosing bonds
funds since the article on tax efficiency: (https://www.bogleheads.org/wiki/Tax-eff ... _placement), states how important it is to place bond funds in a tax deferred 401k account first. And that same article shows under step 5 shows that US funds are fairly flexible... that they can be placed in taxable, tax free, or tax deferred.

I guess the question is, shouldn't I place the bond funds first in the 401k, before the S&P 500 fund? Or should I do S&P 500 first before bonds because the low expense ratio benefits of the S&P500 outweigh the tax efficiency benefits of placing the bonds first?
You do have to make judgment calls balancing issues of diversification, expense ratios and tax-efficiency.

First decide on a desired asset allocation for bonds, international stocks, and domestic stocks.

What I suggest as a next step is -- for each work-based account like a 401k create a menu of the best fund (best combination of most diversified + lowest expense ratio) offered in each core asset type. In other words for each work-based account make a list consisting of the (1) best domestic stock fund, (2) the best international stock fund, and (3) the best bond fund.

Sometimes at that point the choice may be obvious. Sometimes there is only one decent choice offered in the work-based account. Sometimes the work-based account is so large that you need to put 2 or 3 funds in it anyway.

The rest depends on what accounts you have and their sizes relative to the desired asset allocation. This is why it is not possible to list next steps that will apply to everyone in in general.

So next make a list of all of your accounts, with their sizes a percent of the total portfolio.

In general it's better to have the bond allocation in a tax-advantaged account, preferably a tax-deferred account. If the 401k is large enough to hold the bond allocation and a decent bond fund is offered, then consider placing the bond fund there. If not, then consider a bond fund in a Roth or traditional IRA if you have an IRA.

Stock index funds are tax-efficient so can be used in a taxable account if you have one. Stock index funds are also suitable for any type of account.

If you want to post your detailed information in the "asking portfolio questions" format, then I will try to walk you through process.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

ConstantlyLearning57
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Joined: Thu Nov 30, 2017 1:42 am

Re: Which fund first for multiple accounts allocation?

Post by ConstantlyLearning57 » Thu Dec 07, 2017 2:44 am

Thanks ruralavalon, I have posted my details here: viewtopic.php?f=1&t=233926

I think I understand your reply but I wrote the details in that post to get more clarity. Thanks again for your help, I really appreciate it.

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FiveK
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Re: Which fund first for multiple accounts allocation?

Post by FiveK » Thu Dec 07, 2017 3:57 am

ConstantlyLearning57 wrote:
Thu Dec 07, 2017 2:44 am
Thanks ruralavalon, I have posted my details here: viewtopic.php?f=1&t=233926

I think I understand your reply but I wrote the details in that post to get more clarity. Thanks again for your help, I really appreciate it.
Saw that post first.

As noted there, when one has multiple good options (as it appears you do), various approaches may provide equally satisfying portfolios. The guidance to Start with problematic account is most apt when there is only one decent fee option in that account.

ConstantlyLearning57
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Joined: Thu Nov 30, 2017 1:42 am

Re: Which fund first for multiple accounts allocation?

Post by ConstantlyLearning57 » Thu Dec 07, 2017 1:02 pm

Got it... I am a bit new to the Boglehead philosophy, so I didn't know what's considered, a "good" fund. I saw expense ratios higher than 0.20% and thought, "oh I don't think that's good."

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