Help with asset allocation for two different goals

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Topic Author
yosemite_mountain
Posts: 94
Joined: Tue Oct 02, 2018 8:44 pm

Help with asset allocation for two different goals

Post by yosemite_mountain » Thu Jan 10, 2019 3:42 pm

Goal 1: Financial independence/retirement in 15 years
Goal 2: Buy a home in 6-7 years

Questions
-Should I have two different asset allocations for the two different goals? For instance, have: 80% stocks / 20% bonds for goal 1(financial independence) and 30% stocks / 70% bonds for goal 2 (buying a home), or should I have just one asset allocation that encompasses both goals? At the moment I just have one asset allocation that is 80% stocks / 20% bonds.

Stats
Emergency funds: yes (3 months)
Debt: 0
Tax Filing Status: Single, no kids
Tax Rate: 32% Federal, 9.2% State
State of Residence: California
Age: 30
Income: 200k a year before taxes. This includes RSUs and bonuses.

Current retirement assets: $300k

Taxable at Vanguard
70% Vanguard Total Stock Market Index Fund Admiral Shares (ER =0.04%)
Roth IRA at Vanguard
10% Vanguard Total Stock Market Index Fund Admiral Shares (ER =0.04%)
401k with employer
20% Vanguard Institutional Total Bond Market Index Trust (ER = 0.029%)
Company match? YES

Annual Contributions
maxing out 401k to annual limit: 18.5k
maxing out back door Roth to annual limit: 5.5k
maxing out mega back door Roth to annual limit: 13k
10% of paycheck: 13k
ESPP: 13k
Annual bonus: 70k
Employer 401k match: 7.6k
Total annual contributions: 141k

Questions
-Should I have two different asset allocations for the two different goals? For instance, have: 80% stocks / 20% bonds for goal 1(financial independence) and 30% stocks / 70% bonds for goal 2 (buying a home), or should I have just one asset allocation that encompasses both goals?

alex_686
Posts: 4940
Joined: Mon Feb 09, 2015 2:39 pm

Re: Help with asset allocation for two different goals

Post by alex_686 » Thu Jan 10, 2019 3:47 pm

The technically correct answer is to integrate your goals into a single AA. It will get your either lower risk, higher returns, or some combination of the 2. The other choice leads you to "mental accounting", which will be less efficient.

Integrating your goals is a bit more intellectually demanding, requiring you to specif preferences for your goals, market expectations, and risk tolerances. And maybe some liner algebra.

delamer
Posts: 8888
Joined: Tue Feb 08, 2011 6:13 pm

Re: Help with asset allocation for two different goals

Post by delamer » Thu Jan 10, 2019 3:56 pm

I always had different allocations for different goals. And kept the money in separate accounts.

Whatever you decide to do, you need to be able to access the money that you need for the downpayment in 6/7 years. So if your bonds are going to fund the downpayment, you don’t want them in an retirement account.

pasadena
Posts: 333
Joined: Sat Jul 02, 2016 1:23 am
Location: Washington State

Re: Help with asset allocation for two different goals

Post by pasadena » Thu Jan 10, 2019 10:36 pm

Bogleheads in general do not "bucket". However,
delamer wrote:
Thu Jan 10, 2019 3:56 pm
I always had different allocations for different goals. And kept the money in separate accounts.

Whatever you decide to do, you need to be able to access the money that you need for the downpayment in 6/7 years. So if your bonds are going to fund the downpayment, you don’t want them in an retirement account.
I do the same thing :

* Retirement (401(k) and future megabackdoor Roth IRA #2). I am ~16 to 18 years away from my desired retirement date, and allocation is 62/18/20 (US Stocks / Intl Stocks / US Bonds).

* Downpayment (Roth IRA #1 and Taxable). This goal is rather flexible in terms of horizon, so my allocation is 48/12/40.
alex_686 wrote:
Thu Jan 10, 2019 3:47 pm
The other choice leads you to "mental accounting", which will be less efficient.
See, for me it's the other way around. In my head, the two things are so differentiated that if I had just one big bucket with a global AA, I would do mental accounting until my head exploded. Not to mention different rates of contribution in different types of accounts, ouch.

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bertilak
Posts: 6800
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Help with asset allocation for two different goals

Post by bertilak » Fri Jan 11, 2019 2:46 pm

I believe in Two Goals = Two AAs.

If the investments are all in one institution, that institution will not separate things out for you so you will need to track them separately. Practically speaking, this is no big deal. (Not meeting your goals is a big deal, but tracking it is not.) You need to:
  1. Be sure there is enough projected to meet your shortest-term goal, and
  2. If not, decide what you want to do about it. This is something you need to be aware of and deal with, no matter how you conceptualize things. No amount of fiddling with a spreadsheet will alter the fact that you do (or do not) have enough to meet both goals. You will need to the make the same decisions (trade-offs) either way.
  3. If it is all in one account you will need to re-calculate the overall AA every time thee is a contribution to be made.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet (AKA S.O.B.)

alex_686
Posts: 4940
Joined: Mon Feb 09, 2015 2:39 pm

Re: Help with asset allocation for two different goals

Post by alex_686 » Fri Jan 11, 2019 3:03 pm

pasadena wrote:
Thu Jan 10, 2019 10:36 pm
alex_686 wrote:
Thu Jan 10, 2019 3:47 pm
The other choice leads you to "mental accounting", which will be less efficient.
See, for me it's the other way around. In my head, the two things are so differentiated that if I had just one big bucket with a global AA, I would do mental accounting until my head exploded. Not to mention different rates of contribution in different types of accounts, ouch.
All of what you are saying makes intuitive sense, but is rationally wrong. I am not a math teach but I know the math behind this, so please bear with me.

Imagine a 2 dimensional plane, where X is the required return, and Y is risk. Draw 2 segments, one for each goal. Now add those 2 segments together. Now, run a 3rd segment from the start of the 1st segment to the end of the 2nd segment, so you get a triangle. Are there any cases where the lengths of the of the first 2 segments are longer than the 3rd segment?

Give me any set of parameters and I can construct a more efficient portfolio by combining the goals rather than keeping them separate.

pasadena
Posts: 333
Joined: Sat Jul 02, 2016 1:23 am
Location: Washington State

Re: Help with asset allocation for two different goals

Post by pasadena » Fri Jan 11, 2019 8:51 pm

alex_686 wrote:
Fri Jan 11, 2019 3:03 pm
pasadena wrote:
Thu Jan 10, 2019 10:36 pm
alex_686 wrote:
Thu Jan 10, 2019 3:47 pm
The other choice leads you to "mental accounting", which will be less efficient.
See, for me it's the other way around. In my head, the two things are so differentiated that if I had just one big bucket with a global AA, I would do mental accounting until my head exploded. Not to mention different rates of contribution in different types of accounts, ouch.
All of what you are saying makes intuitive sense, but is rationally wrong. I am not a math teach but I know the math behind this, so please bear with me.

Imagine a 2 dimensional plane, where X is the required return, and Y is risk. Draw 2 segments, one for each goal. Now add those 2 segments together. Now, run a 3rd segment from the start of the 1st segment to the end of the 2nd segment, so you get a triangle. Are there any cases where the lengths of the of the first 2 segments are longer than the 3rd segment?

Give me any set of parameters and I can construct a more efficient portfolio by combining the goals rather than keeping them separate.
Oh, I know. Mathematically (and probably financially), you are absolutely right. That's why I only quoted your last sentence. This is the irrational, emotional, part of investing. It makes me feel better, and I don't think the "cost" is too high for that.

My name is Pasadena, and I'm a bucketer :)

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