Allocation of Total PORTFOLIO or by Taxable/Retirement?

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Investor1287
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Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by Investor1287 »

I am relatively new to the forum, and as I've been gathering information to obtain a portfolio review (man, I need to cut down on the number of funds!), I have a potentially elementary question: when people indicate their desired AA, are they stating it as a percentage of their total portfolio, net worth or based on taxable/retirement separately?

For example, if I indicated by desired AA is 80% stocks/20% bonds, am I stating that I want 80% of my total portfolio to be comprised of stocks?

Apologies for the potentially basic question. Thanks!
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Taylor Larimore
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by Taylor Larimore »

For example, if I indicated my desired AA is 80% stocks/20% bonds, am I stating that I want 80% of my total portfolio to be comprised of stocks?
Investor1287:

Answer: "Yes"

Best wishes.
Taylor
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sycamore
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by sycamore »

I agree with Taylor.

It brings up an important point. Keeping the focus on your portfolio rather than one account can help you avoid some problems, like:

1. Mental accounting: "The tendency for people to put their money into separate accounts based on a variety of subjective criteria, like the source of the money and intent for each account. According to the theory, individuals assign different functions to each asset group, which has an often irrational and detrimental effect on their consumption decisions and other behaviors. For example, people often have a special "money jar" or fund set aside for a vacation or a new home, while still carrying substantial credit card debt."

2. Getting overly worried about how one account is performing (e.g., a Roth that's all stocks when the market is crashing). That could lead a person to panic sell.

Best to keep your eyes on the whole portfolio, not just for AA purposes but also for cost or expense ratio, performance, and volatility.
JDSwim3
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by JDSwim3 »

I would generally say Yes, but I've been having some internal debate on the topic since I want my Roth to essentially stand apart from my AA since we're hoping not to touch it.

Check out some of the later comments in this thread: viewtopic.php?f=1&t=367487
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by pizzy »

An important part of determining an AA is time horizon which is why many people (for example) exclude a 529 from their total portfolio AA and give it its own AA.

Does your taxable account has a separate goal besides “help fund retirement”?
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by abuss368 »

Investor1287 wrote: Tue Jan 11, 2022 8:21 pm
For example, if I indicated by desired AA is 80% stocks/20% bonds, am I stating that I want 80% of my total portfolio to be comprised of stocks?
Welcome to the forum!

In answer to your question, yes, this is correct.

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by abuss368 »

Investor1287 wrote: Tue Jan 11, 2022 8:21 pm
For example, if I indicated by desired AA is 80% stocks/20% bonds, am I stating that I want 80% of my total portfolio to be comprised of stocks?
Welcome to the forum!

In answer to your question, yes, this is correct.

For simplicity purposes, and what we found worked best for our individual circumstances, we hold the same asset allocation in each individual account. It is important that each investor finds what works best for their circumstances.

Best.
Tony
John C. Bogle: “Simplicity is the master key to financial success."
Fortitude
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by Fortitude »

Yes, the AA applies to the entire portfolio assuming that the accounts in question are funding the same/similar goals with similar time horizons. For example, one can have taxable and tax deferred accounts as part of their “retirement portfolio”. As someone posted above, time horizon is an influencer of AA.

With that said, you’ll want to next emphasize asset location to maximize tax efficiency. That means you’ll want to fill up your taxable accounts with equities and your tax deferred accounts with bonds. Use your tax deferred accounts for rebalancing to maintain the overall 80/20 AA in your example. Using tax deferred accounts for rebalancing prevents capital gains that would otherwise be incurred if taxable accounts were used.

Two exceptions. First is a Roth account. You’ll want to fill that up with 100% equities to take advantage of the growth and resulting tax efficiency.

The other exception is that if you’re faced with having to hold bonds in a taxable account, choose a muni bond fund for the tax efficiency.

Take both of these exceptions into account when getting the entire portfolio to roll up to an 80/20 AA.

As others have alluded to, any other account(s) with different goals and time horizons could be treated as a separate portfolio(s) with a different AA. As someone mentioned, a 529 being used to fund a child’s education is a good example of this. Saving for large purchases and emergency cash are other examples that would also be segregated as separate “portfolios”.
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by FestiveKnight »

Fortitude wrote: Tue Jan 11, 2022 10:50 pm With that said, you’ll want to next emphasize asset location to maximize tax efficiency. That means you’ll want to fill up your taxable accounts with equities and your tax deferred accounts with bonds. Use your tax deferred accounts for rebalancing to maintain the overall 80/20 AA in your example. Using tax deferred accounts for rebalancing prevents capital gains that would otherwise be incurred if taxable accounts were used.

Two exceptions. First is a Roth account. You’ll want to fill that up with 100% equities to take advantage of the growth and resulting tax efficiency.

The other exception is that if you’re faced with having to hold bonds in a taxable account, choose a muni bond fund for the tax efficiency.
May I barge in and ask for clarifications? The answers might help OP as well as myself:

- Is the goal to (A) fill one’s Roth with 100% equities, or (B) to have 100% of one’s equities in the Roth? I’ve read stuff that was ambiguous on that point.

- If you do all your rebalancing in the traditional, does that mean you never sell anything that’s in your Roth?

If it’s too much for this thread, maybe someone could suggest a resource for further reading.
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AnnetteLouisan
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by AnnetteLouisan »

Yes, on BH the denominator appears to be your investment securities portfolio, taxable, tax deferred and tax free, plus cash and cash equivalents. Not net worth.

They don’t count SS, rental income, antiques, metals, crypto, artwork, home equity or pension as portfolio components but they do count them when calculating residual expenses in retirement.

Hope that helps.
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by Fortitude »

FestiveKnight wrote: Tue Jan 11, 2022 11:05 pm
May I barge in and ask for clarifications? The answers might help OP as well as myself:

- Is the goal to (A) fill one’s Roth with 100% equities, or (B) to have 100% of one’s equities in the Roth? I’ve read stuff that was ambiguous on that point.

- If you do all your rebalancing in the traditional, does that mean you never sell anything that’s in your Roth?

If it’s too much for this thread, maybe someone could suggest a resource for further reading.
If a person has established a Roth account, he/she would want to have it contain 100% equities. If there are equities already in a traditional IRA, that’s not to imply that all of those holdings should be converted to a Roth and hold ALL of the equities in tax deferred accounts solely in a Roth. That could be done, but the tax liability could be significant. I, myself, convert a portion of my IRA to my Roth every year to fill up the tax bracket that I’m in. Whatever ends up in the Roth from the conversions is held in equities.

Bottom line is that however and whatever you decide to contribute/rollover/convert to a Roth, you’ll want all equities in it.

That’s correct…I never sell anything in my Roth. I guess one could move from one equity fund to another, but I keep it simple by having it in a total stock market ETF and leave it there. With the Roth holding nothing but equities, I want that to maximize the growth in the account since all draws will be entirely tax free even by my heirs. Therefore, all rebalancing in order to maintain the overall portfolio AA is done within the traditional IRA.
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by FestiveKnight »

Thank you, very helpful.
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Fortitude
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by Fortitude »

FestiveKnight wrote: Tue Jan 11, 2022 11:39 pm Thank you, very helpful.
My pleasure!
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by BogleBuddy12 »

abuss368 wrote: Tue Jan 11, 2022 10:07 pm
Investor1287 wrote: Tue Jan 11, 2022 8:21 pm
For example, if I indicated by desired AA is 80% stocks/20% bonds, am I stating that I want 80% of my total portfolio to be comprised of stocks?
Welcome to the forum!

In answer to your question, yes, this is correct.

For simplicity purposes, and what we found worked best for our individual circumstances, we hold the same asset allocation in each individual account. It is important that each investor finds what works best for their circumstances.

Best.
Tony
As do I! I’ve just struggled with picking the right bond funds in my taxable account. I’m in a high tax bracket so I should probably be 100% Muni bonds, however I’m 50% Muni bonds, 50% treasuries in taxable. I need that safety. I’ve looked at the history in Muni bonds and there was a time the intermediate term bonds dropped 25%. I don’t consider that safe enough in times of market turmoil.
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by sycamore »

Fortitude wrote: Tue Jan 11, 2022 11:37 pm
FestiveKnight wrote: Tue Jan 11, 2022 11:05 pm
May I barge in and ask for clarifications? The answers might help OP as well as myself:

- Is the goal to (A) fill one’s Roth with 100% equities, or (B) to have 100% of one’s equities in the Roth? I’ve read stuff that was ambiguous on that point.

- If you do all your rebalancing in the traditional, does that mean you never sell anything that’s in your Roth?

If it’s too much for this thread, maybe someone could suggest a resource for further reading.
If a person has established a Roth account, he/she would want to have it contain 100% equities. If there are equities already in a traditional IRA, that’s not to imply that all of those holdings should be converted to a Roth and hold ALL of the equities in tax deferred accounts solely in a Roth. That could be done, but the tax liability could be significant. I, myself, convert a portion of my IRA to my Roth every year to fill up the tax bracket that I’m in. Whatever ends up in the Roth from the conversions is held in equities.

Bottom line is that however and whatever you decide to contribute/rollover/convert to a Roth, you’ll want all equities in it.

That’s correct…I never sell anything in my Roth. I guess one could move from one equity fund to another, but I keep it simple by having it in a total stock market ETF and leave it there. With the Roth holding nothing but equities, I want that to maximize the growth in the account since all draws will be entirely tax free even by my heirs. Therefore, all rebalancing in order to maintain the overall portfolio AA is done within the traditional IRA.
One other thing to keep in mind is that for some people the primary objective is not to maximize after-tax return, it's to maintain the right balance of stocks and bonds. Sticking with the target AA is important for their ability to stick with their plan. For them, whether Roth is 100% stocks or 50% stocks or only 10% stocks is beside the point.

Example: You're retired with an AA of 40/60 stocks/bonds, with all US stocks
Your portfolio is $1 million, so 400k in US stocks, 600k in bonds.
Your account sizes are 500k in Roth, 400k in Trad, 100k in taxable.

Following the guidelines in https://www.bogleheads.org/wiki/Tax-eff ... _placement, you would:

- "Step 2: Place your least tax efficient funds first"
Fill up Trad with 400k of the 600k bonds, leaving 200k bonds unplaced, 400k stocks unplaced

- "Step 3: Placing international stock funds in the taxable account" - not applicable in this example

- "Step 4: Place high growth stock funds"
Put 400k stocks into Roth, leaving $200k bonds unplaced

You're left with $200k bonds to place, with room for $100k in Roth and $100k in taxable, so that's where the remaining bonds go.

(Note that the guidelines are not perfect; the article offers some criticisms.)

Ending up with bonds in Roth is reasonable given an investor's main desire to stick to a targeted asset allocation.

FestiveKnight, what are your objectives for your retirement portfolio? Do you have an Investment Policy Statement to help guide your investing decisions?
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by FestiveKnight »

sycamore wrote: Wed Jan 12, 2022 1:02 pm Example: You're retired with an AA of 40/60 stocks/bonds, with all US stocks
Your portfolio is $1 million, so 400k in US stocks, 600k in bonds.
Your account sizes are 500k in Roth, 400k in Trad, 100k in taxable.

Following the guidelines in https://www.bogleheads.org/wiki/Tax-eff ... _placement, you would:

- "Step 2: Place your least tax efficient funds first"
Fill up Trad with 400k of the 600k bonds, leaving 200k bonds unplaced, 400k stocks unplaced

- "Step 3: Placing international stock funds in the taxable account" - not applicable in this example

- "Step 4: Place high growth stock funds"
Put 400k stocks into Roth, leaving $200k bonds unplaced

You're left with $200k bonds to place, with room for $100k in Roth and $100k in taxable, so that's where the remaining bonds go.
One part I don’t understand: Why are the Roth and tIRA account sizes fixed?
sycamore wrote: Wed Jan 12, 2022 1:02 pm FestiveKnight, what are your objectives for your retirement portfolio? Do you have an Investment Policy Statement to help guide your investing decisions?
I do not have an IPS. (The one in my head doesn’t count.) Thanks for that suggestion!
53yo divorced freelancer, working to fill my knowledge gaps.
sycamore
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by sycamore »

FestiveKnight wrote: Thu Jan 13, 2022 12:11 am
sycamore wrote: Wed Jan 12, 2022 1:02 pm Example: You're retired with an AA of 40/60 stocks/bonds, with all US stocks
Your portfolio is $1 million, so 400k in US stocks, 600k in bonds.
Your account sizes are 500k in Roth, 400k in Trad, 100k in taxable.

Following the guidelines in https://www.bogleheads.org/wiki/Tax-eff ... _placement, you would:

- "Step 2: Place your least tax efficient funds first"
Fill up Trad with 400k of the 600k bonds, leaving 200k bonds unplaced, 400k stocks unplaced

- "Step 3: Placing international stock funds in the taxable account" - not applicable in this example

- "Step 4: Place high growth stock funds"
Put 400k stocks into Roth, leaving $200k bonds unplaced

You're left with $200k bonds to place, with room for $100k in Roth and $100k in taxable, so that's where the remaining bonds go.
One part I don’t understand: Why are the Roth and tIRA account sizes fixed?
The accounts sizes aren't meant to be fixed. The above was just an example of a person who happened to end up with more Roth space than needed for stock allocation. For sure, as the stock & bond markets go or up, the account sizes will also go up and down. When an investor makes a withdrawal (for spending) the account size will also drop. Does that answer your question?
FestiveKnight
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by FestiveKnight »

sycamore wrote: Thu Jan 13, 2022 7:10 am Does that answer your question?
Yes. Thanks very much!
53yo divorced freelancer, working to fill my knowledge gaps.
Topic Author
Investor1287
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Re: Allocation of Total PORTFOLIO or by Taxable/Retirement?

Post by Investor1287 »

Great responses, appreciate it!
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