Rethinking asset allocation

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Topic Author
m@ver1ck
Posts: 345
Joined: Fri Sep 14, 2018 2:18 pm

Rethinking asset allocation

Post by m@ver1ck »

Age: 44
Here's my current asset allocation:

Retirement: Stock/Bonds: 75/25 for a total of 850K
Think VTSAX/VBTLX for the most part with 7% of so in international.

Taxable:
Stocks/Bonds: 90/10 for a total of 322K.
Out of this most of it was in Microsoft stock - which did great. And about 100K in VTSAX.
The bond position is about 30K - it's in Certificate of Deposits.

Income now is around 300K/year.

Now - I probably have taken on more risk than required/prudent on the taxable side and have been rewarded for it. I'm wondering if it's a good time to take money off the table on the taxable side - just in case things go really south - I should have about a years $$ saved up. Right now, it's probably 3 months worth. Not necessarily selling low.

I could totally make up for that derisking on the taxable side by taking on more risk on the retirement side. Don't need that money and can't get to it in any case for another 20 years. It was actually at 100/0 for many years - just went to 77/23 mid last year.

Thoughts?

Home worth 1M, I still need to pay 225K - could've written a check, but prefer the liquidity for safety.
lakpr
Posts: 6717
Joined: Fri Mar 18, 2011 9:59 am

Re: Rethinking asset allocation

Post by lakpr »

Paying off the house is a form of de-risking. By keeping the mortgage and using the money to invest, you are essentially leveraging. Leverage is risk.

With a mortgage balance of $225k, unless you are a chap that regularly contributes $15k or more to charity every year, the interest paid on the mortgage is not tax deductible. In other words, you are paying a fully after-tax rate on your mortgage. By paying off the mortgage, you get a guaranteed return at the rate of your mortgage. Outside of your mortgage, the only guaranteed zero risk interest rate you can get are on treasuries. Even long term (10 year) treasuries are yielding only 1%, and at a 24% tax rate (the tax bracket you are in), that is worth only 0.76% after tax. I bet your mortgage rate is at least 3 to 3.5 times that rate, if not even 4 times.

Basically: payoff that mortgage. You can build up your taxable account over time. Just as you were going to pay off the mortgage over time.
Stick5vw
Posts: 160
Joined: Sun Dec 18, 2016 6:46 am

Re: Rethinking asset allocation

Post by Stick5vw »

I wouldnt sell any stock, if that’s what you’re thinking of doing to de-risk - in this market you may end up crystallising losses.

The suggestion re: paying off your mortgage is a good one. For your investment portfolio, since Your income is high, I would just channel upcoming contributions into bonds and let the a.a. gradually shift to a level you are more comfortable with.
Topic Author
m@ver1ck
Posts: 345
Joined: Fri Sep 14, 2018 2:18 pm

Re: Rethinking asset allocation

Post by m@ver1ck »

I was actually thinking of moving 30k from stocks to bonds in taxable and moving 30K from bonds to stocks in retirement. So nothing changes all up / but if things go bad - I’ll have liquidity in taxable...

In fact, before stocks went up 30% last year - I moved 30knfe binds to sticks accidentally in taxable - chose the wrong a/c.... and didn’t bother fixing it...
The Broz
Posts: 242
Joined: Tue Feb 11, 2020 5:09 pm

Re: Rethinking asset allocation

Post by The Broz »

I agree - pay off the house. With your income and no payments, your investment accounts will balloon wonderfully and you would be hard-pressed to screw it up as long as you did the basics as recommended on this site (i.e. three fund portfolio or a variant of it).
lakpr
Posts: 6717
Joined: Fri Mar 18, 2011 9:59 am

Re: Rethinking asset allocation

Post by lakpr »

Stick5vw wrote: Sun Mar 08, 2020 9:36 pm I wouldnt sell any stock, if that’s what you’re thinking of doing to de-risk - in this market you may end up crystallising losses.

The suggestion re: paying off your mortgage is a good one. For your investment portfolio, since Your income is high, I would just channel upcoming contributions into bonds and let the a.a. gradually shift to a level you are more comfortable with.
Crystallizing losses may not be a bad thing. Those losses, since they would have occurred in a taxable account, can be carried forward for years, and can be used to offset ordinary income $3k a pop.

You can alternatively increase stock allocation within the 401k if you desire to be at the same position as before the sale, risk wise.
tdmp
Posts: 81
Joined: Sat Mar 09, 2019 10:12 am

Re: Rethinking asset allocation

Post by tdmp »

m@ver1ck wrote: Sun Mar 08, 2020 10:04 pm I was actually thinking of moving 30k from stocks to bonds in taxable and moving 30K from bonds to stocks in retirement. So nothing changes all up / but if things go bad - I’ll have liquidity in taxable...

In fact, before stocks went up 30% last year - I moved 30knfe binds to sticks accidentally in taxable - chose the wrong a/c.... and didn’t bother fixing it...
There is no change in asset allocation. I think that's fine. Bond yield will be lower. I think 10-year treasury just went down to 0.5%. Only $30K move so tax-efficiency won't be affected much either.
lakpr
Posts: 6717
Joined: Fri Mar 18, 2011 9:59 am

Re: Rethinking asset allocation

Post by lakpr »

m@ver1ck wrote: Sun Mar 08, 2020 10:04 pm I was actually thinking of moving 30k from stocks to bonds in taxable and moving 30K from bonds to stocks in retirement. So nothing changes all up / but if things go bad - I’ll have liquidity in taxable...

In fact, before stocks went up 30% last year - I moved 30knfe binds to sticks accidentally in taxable - chose the wrong a/c.... and didn’t bother fixing it...
Never bonds in taxable, especially in high tax brackets. The "bonds" allocation meant to be in taxable should go into your mortgage instead. The next best solution if you are worried about liquidity is to increase bonds percentage in 401k. If there is a need to raise money, sell stocks in taxable, even if beaten down; simultaneously sell bonds in 401k and buy the exact amount of stocks you sold. In the end the money did come out from selling bonds.

The only time you should buy bonds in taxable is when your 401k is completely saturated with only bond funds, and you have no more room to buy more bonds. Even then, you should consider buying municipal bonds at such high tax rates as yours.
Topic Author
m@ver1ck
Posts: 345
Joined: Fri Sep 14, 2018 2:18 pm

Re: Rethinking asset allocation

Post by m@ver1ck »

lakpr wrote: Sun Mar 08, 2020 10:23 pm
m@ver1ck wrote: Sun Mar 08, 2020 10:04 pm I was actually thinking of moving 30k from stocks to bonds in taxable and moving 30K from bonds to stocks in retirement. So nothing changes all up / but if things go bad - I’ll have liquidity in taxable...
If there is a need to raise money, sell stocks in taxable, even if beaten down; simultaneously sell bonds in 401k and buy the exact amount of stocks you sold. In the end the money did come out from selling bonds.
This makes sense / no need to do anything preemptively. Might as well take a TLH if things actually do go south.

Thanks again to this forum. I was going to unnecessarily prepare for the worst case - and going to pay the taxman for that.
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