Asset Allocation when way off target

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Topic Author
Flapper
Posts: 5
Joined: Thu Nov 07, 2019 12:39 pm

Asset Allocation when way off target

Post by Flapper » Thu Nov 14, 2019 1:05 pm

I am a 36 year old health care professional making about 210K year as a contract 1099. I set up a solo 401k from my own single member S corp. Thinking of changing to a sole prop to max out the 56K employer portion and increase my QBI deduction (need to do some math so see if this would be a good move). Married filing jointly with 2 kids, live in NC. Have just re-read the entire Bogleheads book twice, and am on my way to being a boglehead on top of my education with the White Coat Investor folks. My goal is to retire as early as possible (50 at the latest), and make my money work harder for me than it has been tax and cost efficient.
I have always tried to save for retirement, but have been sidetracked by financial salesmen, and am ready to really do this myself in the most efficient, low cost, and tax efficient manner on my way to FI.
Just filled out all the info for Personal Capital and now see a bit more of the big picture. Trying to get to the allocation mix advised by the book and tweeked by me (I know there are many roads to Dublin) of:
50% VTSAX
10% international stocks
20% bonds
15% TIPS
5% REIT

As of now I am investing 235K as
64% US Stocks (48K in taxable accounts, 91K in non-taxable accounts)
10% International stocks (900 bucks tax, 22K non tax)
0.8% international bonds (1.8K non tax)
11% US bonds (17K tax, 9k non tax)
4% REIT (2K tax, 9k non tax)
1% TIPS (2.5K tax)

This is the breakdown of what I have invested (235K). I also have a major cash drag of 160K in money market. So how do I get to this proper asset allocation? I do not want to sell anything if I don't have to (to keep taxes lower). But I can invest 100-130K of the cash into the bond markets to get me to the more balanced plan (30-60K emergency fund feels right). BUT I know bonds are better in tax deferred retirement accounts (exception of muni bonds). I also see many of you treat bonds as the emergency fund. How can I reconcile this? If it's an emergency fund, then it can't be in the retirement account with the early withdrawl penalty. Should I just change all new funding to go towards bond funds in the retirement accounts from here on out and let the cash drag be there as it slowly tapers in? Put more bonds in taxable accounts? My 401k space is limited. Also started using the all weather portfolio for last year's IRA.
Also, what bond funds do you recommend to have a diversified bond portfolio? Straight total bond fund, some international?
Thank you in advance!

bloom2708
Posts: 6970
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Asset Allocation when way off target

Post by bloom2708 » Thu Nov 14, 2019 2:01 pm

Selling inside the Solo 401k has no tax ramifications.

You could dump the International Bonds and TIPS. Just keep your REIT tilt. Just know that Total US has the market cap of REIT.

International Bonds add nothing that US Bonds don't already add and TIPS are best in retirement/preservation/longevity mode. At 36 you do not need the drag of TIPS for 30 years.

Taxable could have Total US, Total International and maybe a Bond index. Depending on your marginal tax rate (24% and up) you might use Int-Term Tax-Exempt index in taxable. In the lower brackets Int-Term Bond index or Int-Term Treasury Index are 2 good funds. There are others. Stick Intermediate or Short term. You could also keep all your bonds in your Solo 401k. Buy more Total US and Total International (or Total World) in taxable.

Set aside your Emergency Fund and near term spending funds. Invest the rest. Figure out how much new money you can invest. Calc your total and then split up the new money to get you to your stock/bond/REIT mix.

If you decide REIT is your tilt of choice, then stick with that, but not in taxable. That should only be in your Solo 401k.
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words. Whole food, plant based. Bing it.

Jack FFR1846
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Re: Asset Allocation when way off target

Post by Jack FFR1846 » Thu Nov 14, 2019 2:06 pm

I'd even go one step farther and say to get rid of REITs, TIPS and int bonds. Then you have 3 asset classes to juggle. Make your buys/sells in tax advantaged accounts only. I actually rebalanced today. My order was "sell $ and use proceeds to buy another fund". I plopped in my sell fund ticker, buy fund ticker and $ amount. 10 seconds of my time. Bam!
Bogle: Smart Beta is stupid

Topic Author
Flapper
Posts: 5
Joined: Thu Nov 07, 2019 12:39 pm

Re: Asset Allocation when way off target

Post by Flapper » Thu Nov 14, 2019 2:40 pm

Thanks for the advise! So if I just started putting some taxable bonds in my taxable account in the last 2 years, should I sell while at my high tax rate, or just stop funding them and let them grow as is until retirement (while adding a new int or short term tax exempt bond fund to my taxable)?
Glad to be reminded about selling within the 401k not being a big deal.
Thanks!

bloom2708
Posts: 6970
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Asset Allocation when way off target

Post by bloom2708 » Thu Nov 14, 2019 4:06 pm

Flapper wrote:
Thu Nov 14, 2019 2:40 pm
Thanks for the advise! So if I just started putting some taxable bonds in my taxable account in the last 2 years, should I sell while at my high tax rate, or just stop funding them and let them grow as is until retirement (while adding a new int or short term tax exempt bond fund to my taxable)?
Glad to be reminded about selling within the 401k not being a big deal.
Thanks!
See what your gain/loss is on your bond fund in taxable. If it is a smaller amount and the gain isn't too much, cap gains tax will just be a blip. Bonds had a good run with interest rates dropping and NAV going up, so you likely have a gain on the shares. Assume ~20% tax on long term gains.

24% bracket and up, Int-Term Tax-Exempt bond index is a good choice. I used it when my wife was working and we were in a higher bracket. Now we have one income and I switched to an Int-Term Treasury Index.
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words. Whole food, plant based. Bing it.

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