Assest Allocation between Sheltered/Non-Sheltered accounts

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
kiki
Posts: 36
Joined: Tue Sep 04, 2007 12:57 am

Assest Allocation between Sheltered/Non-Sheltered accounts

Post by kiki »

Hello,

I'm putting together my AA and have come up with something similiar to the coffeehouse portfolio, excluding the bonds and slice and dice for international. Here's what I have:

15% - S&P 500 Index - VIIIX (Both)
15% - Large-Cap Value Index - VIVIX (Both)
10% - Small Cap Index - NAESX (Sheltered) or VB (Both)
10% - Small Cap Value Index - VISVX (Sheltered) or VBR (Both)
10% - International Value - EFV (Both)
10% - European Stock Index - VEURX or VGK (Both)
10% - Pacific Stock Index - VPACX or VPL (Both)
10% - Emerging Markets Index - VEIEX or VWO (Both)
10% - REIT Index - VGSIX or VNQ (Sheltered)

I attempted to find funds that are available in both an open ended fund and ETF. This way maintaining an allocation between 401/403 and other (brokerage) accounts is a bit easier, at least, that's what I'm hoping.

My primary question is: out of the investments above, which should I keep in a sheltered account and which are safe to have in either a brokerage or sheltered account?

My knowledge here is very limited, so any help is appreciated. For example, I'm not sure if there's a benefit to holding an ETF over an open ended fund in an unsheltered account (such as VEIEX over VWO).

In parentheses above, I included where I think it's ok to have the asset. In some cases, I did differentiate between the open ended fund and ETF, but as I mentioned, I'm not sure if there's a benefit.

Also, if anyone has any general comments on my AA, please let me know.

Thanks.
InvestingMom
Posts: 503
Joined: Mon Aug 20, 2007 2:45 pm

Post by InvestingMom »

This is a common question on the forum. I was just searching for this information myself yesterday and found the information below in an older post.

I will let someone else answer the ETF question, although I believe they would follow the same guidelines below.


These are guidelines, courtesy of Mr. Taylor Larimore.

4-Step Rule for Tax Efficient Fund Placement:
1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..
2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full-
3. Put what's left into your taxable account.
4. Try to use only tax-efficient funds in taxable accounts.

List of securities in approximate order of their tax-efficiency. (Least tax efficient at the top.):
Hi-Yield Bonds
Taxable Bonds
TIPS
REIT Stocks
Stock trading accounts
Small-Value stocks
Small-Cap stocks
Large Value stocks
International stocks
Large Growth Stocks
Most stock index funds
Tax-Managed Funds
EE and I-Bonds
Tax-Exempt Bonds
User avatar
Doc
Posts: 9935
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Post by Doc »

InvestingMom wrote:This is a common question on the forum. I was just searching for this information myself yesterday and found the information below in an older post.
Some of Taylor's guidelines are controversial because there are exceptions that may apply to a large percentage of investors.

A more universally applicable four step approach might be:

1) Put you most tax-inefficient funds in tax sheltered accounts.

2) Low tax rates often make the ROTH more useful and high tax rate investors often favor a Traditional IRA/401k.

3) and 4) as above.

Some of the details in the "List of Securities" depend on one's personal tax situation but never the less the list is a useful starting point.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
User avatar
grabiner
Advisory Board
Posts: 29155
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Assest Allocation between Sheltered/Non-Sheltered accoun

Post by grabiner »

kiki wrote:15% - S&P 500 Index - VIIIX (Both)
15% - Large-Cap Value Index - VIVIX (Both)
10% - Small Cap Index - NAESX (Sheltered) or VB (Both)
10% - Small Cap Value Index - VISVX (Sheltered) or VBR (Both)
10% - International Value - EFV (Both)
10% - European Stock Index - VEURX or VGK (Both)
10% - Pacific Stock Index - VPACX or VPL (Both)
10% - Emerging Markets Index - VEIEX or VWO (Both)
10% - REIT Index - VGSIX or VNQ (Sheltered)

My primary question is: out of the investments above, which should I keep in a sheltered account and which are safe to have in either a brokerage or sheltered account?
Here's an approximate order for your funds; put funds at the top of this list in your taxable account until it is full.

European Index (probably no capital gains, foreign tax credit)
Pacific Index (ditto)
500 Index or Total Stock Market Index (probably no capital gains)
Emerging Markets Index (possible small gains, foreign tax credit)
Tax-Managed Small-Cap (instead of Small-Cap Index in taxable)

All five of these are close; if you have institutional shares available in your 401(k), that should be the deciding factor for which funds to hold there, as it will save you about 15 basis points.

Value Index (higher dividend yield, probably still no capital gains)
Small-Cap Value Index (probably some capital gains in the future)
International Value (active fund, high turnover means high capital gains)
REIT Index (most gains are taxable and non-qualified)

The portfolio plan is fine but needs to be offset with the appropriate bond holding (in tax-deferred) for your own risk tolerance. Unless you were already 100% stock in 2000-2002 and thus know your risk tolerance, I wouldn't recommend taking this much risk. (I have a portfolio very close to yours with 10% bonds added, and even I didn't hold anything close to it until I had five years of experience in 2002.)
Topic Author
kiki
Posts: 36
Joined: Tue Sep 04, 2007 12:57 am

Re: Assest Allocation between Sheltered/Non-Sheltered accoun

Post by kiki »

Thanks for the feedback! This is exactly the help I was hoping for.
grabiner wrote: International Value (active fund, high turnover means high capital gains)
I was planning on using EFV, which an EAFE Value Index. Or am I mistaken? (I'm trying to avoid active funds).
grabiner wrote: The portfolio plan is fine but needs to be offset with the appropriate bond holding (in tax-deferred) for your own risk tolerance. Unless you were already 100% stock in 2000-2002 and thus know your risk tolerance, I wouldn't recommend taking this much risk. (I have a portfolio very close to yours with 10% bonds added, and even I didn't hold anything close to it until I had five years of experience in 2002.)
I went through 2000-2002 a 100% in one or two individual stocks. Not fun, but I really didn't lose any sleep. More bummed out than anything else and at the end of it I was fed up, dumped everything into an S&P500 Index and didn't think about again until earlier this year. At the time, I figured if Buffet used the S&P500 as his benchmark, it's probably not a bad place to put my money. :D

But recently I decided I should probably be a bit more proactive and diversify into other asset classes.

I should mention that I am planning on adding a 10% bond fund, but right now my portfolio is about 75% split between S&P500 and LCV with no other options available in my 401k (well, there is a SCG - yuk). My plan is to focus on the other equity asset classes and once they hit their allocation percentage, then I'll add 10% of a total bond index and further decrease the S&P500/LCV to 10%. This will leave me with 10% in all asset classes and 90/10 equity/bond split.
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 7:40 pm

Your plan

Post by Laura »

kiki,

Your asset allocation plan may be OK if you are in your early 20s with a fairly low portfolio balance but, if you don't meet that profile, you should seriously rethink things. With the number of funds you are considering you would want to have at least a 6 figure portfolio. I also don't think you should skip the bonds. Take what you have now, put it into the asset allocation you want, and then go on from there. The S&P 500 only covers one tiny part of the market. Look at the Callan Table. You want your portfolio to cover all of these boxes so as one sector is out performing you know you will benefit.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
kiki
Posts: 36
Joined: Tue Sep 04, 2007 12:57 am

Re: Your plan

Post by kiki »

Laura wrote:Your asset allocation plan may be OK if you are in your early 20s with a fairly low portfolio balance but, if you don't meet that profile, you should seriously rethink things. With the number of funds you are considering you would want to have at least a 6 figure portfolio. I also don't think you should skip the bonds. Take what you have now, put it into the asset allocation you want, and then go on from there. The S&P 500 only covers one tiny part of the market. Look at the Callan Table. You want your portfolio to cover all of these boxes so as one sector is out performing you know you will benefit.
Laura
Hi Laura, your comment confuses me. You say that I my asset allocation plan is OK if I am young with a low portfolio balance, but then you say that with the number of funds I have, I'd need at least a 6 figure portfolio. Am I misreading your comment?

We currently have around $200k, with about $180k in sheltered accounts. $150k is evenly split between an S&P500 and LCV, with the other $50k evenly divided among the other asset classes. As of this year, we're saving around $50k/year between a 401k/403b/roth ira/brokerage (before it was mostly my 401k). Our plan now is to gradually bring up the balance of the underweighted assets in our portfolio - up to their target percentage. I suspect this will take about 5 years.

In thinking about it, what are your thoughts if I drop international value - I'd really prefer to keep all vanguard funds/etfs - and add their total bond index for:

15% - S&P 500 Index - VIIIX (Both)
15% - Large-Cap Value Index - VIVIX (Both)
10% - Small Cap Index - NAESX (Sheltered) or VB (Both)
10% - Small Cap Value Index - VISVX (Sheltered) or VBR (Both)
10% - European Stock Index - VEURX or VGK (Both)
10% - Pacific Stock Index - VPACX or VPL (Both)
10% - Emerging Markets Index - VEIEX or VWO (Both)
10% - REIT Index - VGSIX or VNQ (Sheltered)
10% - Total Bond Index - VBMFX or BND (Sheltered)

Thanks again for the feedback!
User avatar
Doc
Posts: 9935
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Post by Doc »

Grabiner wrote:
if you have institutional shares available in your 401(k), that should be the deciding factor for which funds to hold there, as it will save you about 15 basis points.
That is a very good point. It is the first time I have seen this factor mentioned.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
Post Reply