Need Help Breaking Through a Mental Accounting Block

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BarDownHockey
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Need Help Breaking Through a Mental Accounting Block

Post by BarDownHockey »

I've been trying to wrap my head around what seems like it should be a very simple concept, but I've got my head completely wrapped around the axle on this one. What do you consider your portfolio? There's thousands of threads on here about asset allocation, where posters says things like "my portfolio is 80/20 stocks to bonds", "you should apply a more conservative 60/40 stock bond to your portfolio split in your situation", etc. But where I'm stuck is defining what's 'in' and what's 'out' of my "portfolio". Here's what I mean:

People save / invest for different reasons. There's emergency funds, retirement funds (in retirement vehicles like 401k's, IRA's, etc.), retirement funds (in non-tax advantaged vehicles, like brokerage accounts, when someone maxes out their tax advantaged space), college funds, home down payments, do stuff now funds (vacations, splurges), savings for medium term (5-10 yrs) things (home improvements, cars, etc.), and on and on.

I'm struggling with if / where to draw the line on what's in my "portfolio" and where to apply my asset allocation %'s to. On one extreme, you could just add everything up, and apply your allocation % against that number and off you go. But where I get stuck is that seems to fail to take into account the different time horizons / goals for each of those buckets. Take for example, money saved for a family member's college. That has a much different time horizon then retirement, and maybe the college money should be in a 50/50 allocation. So should I pull that amount out of my "portfolio" and a separate asset allocation to the college money? And if so, where do people typically draw the line on what's in "the portfolio" and what's out?

I get that this is all a giant exercise in mental accounting (complicated by the fact that the money is in different accounts, different account types and at different institutions). But I keep going in circles on how to think about this and it's causing me to pause my annual rebalancing review until I wrap my head around this better.. Thanks in advance for ideas on how to think about this.
GMT-8
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Re: Need Help Breaking Through a Mental Accounting Block

Post by GMT-8 »

I consider everything except my checking account in the asset allocation. I can't be bothered trying to hit all those different savings targets.

For example, my wife and I each have an IRA. We have two trust (taxable) accounts, so 4 in all at VG. I calculate asset allocation against the totals.

IRA #1 1200 bonds 750 stocks 85 cash
IRA #2 350 bonds

Trust #1 275 bonds 75 stocks
Trust #2 50 bonds 450 stocks 45 cash

Totals 1875 bonds 1275 stocks 130 cash

Allocation 57% bonds 39% stocks 4% cash

I'm almost 70, have been retired for 8 years. I aim for 60% bonds, 40% stocks. Our checking account is 50 because that's where I keep most of my day-to-day and emergency funds. Anything we expect to spend in the next year is at Vanguard in cash.
Last edited by GMT-8 on Thu Sep 03, 2020 11:31 am, edited 2 times in total.
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Sandi_k
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Re: Need Help Breaking Through a Mental Accounting Block

Post by Sandi_k »

I think of it as

- cash planned to be spent (emergency fund).
- Cash for college (index funds, in Coverdell accounts, so not "mine.")
- Portfolio - specifically for long term savings/retirement.

My asset allocation is only applied to the portfolio.

- The purpose of the emergency fund is to spend it when needed, regardless of our age.

- The purpose of the college fund will be gone and graduated in 8 years. This was absolutely invested in an S&P Index fund. The oldest goes to college next year, so it's time to move it to a 50/50 allocation.

- The purpose of the portfolio is to support us in retirement. This portfolio is already 65%/35%, so we have 10 years of spending already in hand. I therefore don't need to pay attention to anything the stock market does, as we already have the "bridge funds" from retirement age to SocSec claiming age at 70 set aside.
dbr
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Re: Need Help Breaking Through a Mental Accounting Block

Post by dbr »

You get to choose what is your portfolio. You choose according to why you care how much risk you are taking with certain assets in order to hope for what return. What that choice is can vary widely. It is a question of which of your assets you want information on regarding what is going to happen in the long term.

An emergency fund is a perfect example. Early on when you don't have a lot of money and would need most of it if you lost your job or had a major health or injury setback you want that asset safely saved where a need and a large downturn in the market don't coincide. Late on when you have a lot of money invested most setbacks are not that significant as expenditures and you may not have an emergency fund.

College saving is similar. Because the amount can be large and the need on a known schedule it makes sense to set aside a specific asset allocation for that. Also the funds might be in a dedicated account for the purpose. At the opposite extreme there may be no special saving for college. We actually paid college costs out of current income, but that would depend on individual situation. We were not an especially high income couple either, but our spending ex college was very low.

Saving for a house downpayment is another case where a person might best just put that money in a savings account and not even tally it with "the portfolio."

One thing I have a hard time relating to is setting aside buckets of cash as if they aren't in the portfolio but they are actually being used for the same purpose as all the rest of it. A variation where one sets aside money in a TIPS ladder and converts the whole thing to income is a different thing.

One thing to keep in mind is that your assets are your assets no matter what you call them. It would probably be wise to at least look at what the whole thing looks like for risk and return at some point, if only for perspective on what you are doing.
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gr7070
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Re: Need Help Breaking Through a Mental Accounting Block

Post by gr7070 »

My portfolios are based on what they're invested for, which largely comes down to investment duration.

Retirement 75:25
College, glide fund
Emergency fund 30:70 (35 is cash)

That's about it for me. All three have a different allocations. One of those is far larger, far more important, and scrutinized far more.

If one does not specify in discussions I'd assume they're talking retirement.

One could look at their entire net worth or entire investments as one portfolio, but I don't.

None of it's that critical that I'd spend much time trying to figure this aspect out. Just make it work for you and move on.
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ruralavalon
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Re: Need Help Breaking Through a Mental Accounting Block

Post by ruralavalon »

BarDownHockey wrote: Thu Sep 03, 2020 11:10 am I've been trying to wrap my head around what seems like it should be a very simple concept, but I've got my head completely wrapped around the axle on this one. What do you consider your portfolio? There's thousands of threads on here about asset allocation, where posters says things like "my portfolio is 80/20 stocks to bonds", "you should apply a more conservative 60/40 stock bond to your portfolio split in your situation", etc. But where I'm stuck is defining what's 'in' and what's 'out' of my "portfolio". Here's what I mean:

People save / invest for different reasons. There's emergency funds, retirement funds (in retirement vehicles like 401k's, IRA's, etc.), retirement funds (in non-tax advantaged vehicles, like brokerage accounts, when someone maxes out their tax advantaged space), college funds, home down payments, do stuff now funds (vacations, splurges), savings for medium term (5-10 yrs) things (home improvements, cars, etc.), and on and on.

I'm struggling with if / where to draw the line on what's in my "portfolio" and where to apply my asset allocation %'s to. On one extreme, you could just add everything up, and apply your allocation % against that number and off you go. But where I get stuck is that seems to fail to take into account the different time horizons / goals for each of those buckets. Take for example, money saved for a family member's college. That has a much different time horizon then retirement, and maybe the college money should be in a 50/50 allocation. So should I pull that amount out of my "portfolio" and a separate asset allocation to the college money? And if so, where do people typically draw the line on what's in "the portfolio" and what's out?

I get that this is all a giant exercise in mental accounting (complicated by the fact that the money is in different accounts, different account types and at different institutions). But I keep going in circles on how to think about this and it's causing me to pause my annual rebalancing review until I wrap my head around this better.. Thanks in advance for ideas on how to think about this.
I count long-term investments as our "portfolio" .

So I would not count any emergency fund, savings for a home downpayment, college savings, or savings for vacations, etc. as part of of our "portfolio".

In my opinion the asset allocation decision is intended primarily as risk control, and so varies according to the time frame.

Under this view savings for spending in 5 years or less should all be fixed income like savings accounts, money market funds, CDs, or short-term bond funds.

Under this view investments for retirement (in say 20-40 years) can be mostly in stock funds which are more risky than fixed income.

We are age 75, and retired so we are not saving for a home, college expenses, or anything. Everything is is our "portfolio", we have no dedicated emergency fund or cash allocation.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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Re: Need Help Breaking Through a Mental Accounting Block

Post by LadyGeek »

This thread is now in the Investing - Theory, News & General forum (general question).
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sailaway
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Re: Need Help Breaking Through a Mental Accounting Block

Post by sailaway »

All institutional accounts are part of our portfolio. We chose our AA accordingly. This allows us to do all of our rebalancing in tax sheltered accounts. I don't mind paying LTCG (or even short, if that is appropriate) to use my money, but I don't like to pay to move it around if I can avoid it.

The important thing is to be honest with yourself. Even if you do decide to keep separate AA in separate buckets, it may be useful to add it all together and see what your overall allocation comes to.
dbr
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Re: Need Help Breaking Through a Mental Accounting Block

Post by dbr »

sailaway wrote: Thu Sep 03, 2020 1:36 pm The important thing is to be honest with yourself. Even if you do decide to keep separate AA in separate buckets, it may be useful to add it all together and see what your overall allocation comes to.
Yep, assets are assets no matter what a person wants to call them.
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Re: Need Help Breaking Through a Mental Accounting Block

Post by Steadfast »

Our IPS specifies:

1. Money for monthly bills covering about 2-3 months sits in our checking accounts, plus any cash specifically designated for an identified needed near-term purchase or expenditure (vacation, new car, property tax payment, whatever).

2. Cash to cover approximately 6-8 months of expenses sits in a separate joint account, invested in a money market fund. This is an emergency fund.

3. A 529 account for our kid is invested age-appropriately to fund their college.

4. Everything else is invested 70% equity, 30% bonds, for the long haul.

I always examine the asset allocation for both the "long haul" (retirement portfolio) AND our overall, total financial assets portfolio, just so I understand the big picture. But what I find counts most is that each financial need or goal is given its due attention and is allocated & funded appropriately. When that job is done, the overall total big picture is just interesting to look at, but matters little.
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KlangFool
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Re: Need Help Breaking Through a Mental Accounting Block

Post by KlangFool »

OP,


It depends on your annual savings and so on.


1) I have 2 years of expense in an emergency fund (CASH). I won't mind spending it for some expense and refill it later.

2) I have a 60/40 portfolio.


I do not need to save for the house downpayment, college education, new car, house renovation, and so on. My annual saving is big enough that I can spend down my emergency fund and refill the emergency fund in one to two years.

I save one year of expense every year.


It is very simple.


Keep a big emergency fund (CASH). Then, everything is easy and simple. Or, have one portfolio for each big expense. Then, it is a lot more complicated and less efficient.


Money is fungible. You could use the money to buy house, car, or college education. Usually, you do not need to do all of them at the same time. One big pile of CASH to handle them all is more efficient than multiple smaller piles of CASH.

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retiredjg
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Re: Need Help Breaking Through a Mental Accounting Block

Post by retiredjg »

BarDownHockey wrote: Thu Sep 03, 2020 11:10 am I've been trying to wrap my head around what seems like it should be a very simple concept, but I've got my head completely wrapped around the axle on this one.
What if you changed the word "portfolio" to "retirement portfolio" or "very long term portfolio". Would things be clearer?

When you are younger and/or your portfolio is smaller, it is probably important to have separate money for separate goals. Short term goals need a conservative allocation, long term goals do not.

For example, you would not want your $50k downpayment for a house, that you are keeping in high yield savings, to skew the stock to bond ratio for your $60k savings for retirement. That would make no sense for the house or for retirement.

Once your portfolio is larger, there is a good chance it does not matter if you continue to have these separate "buckets" for different purposes. At some point, it just all becomes "money" instead of money for emergencies, money for house, money for retirement....and so on.
Ferdinand2014
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Re: Need Help Breaking Through a Mental Accounting Block

Post by Ferdinand2014 »

BarDownHockey wrote: Thu Sep 03, 2020 11:10 am I've been trying to wrap my head around what seems like it should be a very simple concept, but I've got my head completely wrapped around the axle on this one. What do you consider your portfolio? There's thousands of threads on here about asset allocation, where posters says things like "my portfolio is 80/20 stocks to bonds", "you should apply a more conservative 60/40 stock bond to your portfolio split in your situation", etc. But where I'm stuck is defining what's 'in' and what's 'out' of my "portfolio". Here's what I mean:

People save / invest for different reasons. There's emergency funds, retirement funds (in retirement vehicles like 401k's, IRA's, etc.), retirement funds (in non-tax advantaged vehicles, like brokerage accounts, when someone maxes out their tax advantaged space), college funds, home down payments, do stuff now funds (vacations, splurges), savings for medium term (5-10 yrs) things (home improvements, cars, etc.), and on and on.

I'm struggling with if / where to draw the line on what's in my "portfolio" and where to apply my asset allocation %'s to. On one extreme, you could just add everything up, and apply your allocation % against that number and off you go. But where I get stuck is that seems to fail to take into account the different time horizons / goals for each of those buckets. Take for example, money saved for a family member's college. That has a much different time horizon then retirement, and maybe the college money should be in a 50/50 allocation. So should I pull that amount out of my "portfolio" and a separate asset allocation to the college money? And if so, where do people typically draw the line on what's in "the portfolio" and what's out?

I get that this is all a giant exercise in mental accounting (complicated by the fact that the money is in different accounts, different account types and at different institutions). But I keep going in circles on how to think about this and it's causing me to pause my annual rebalancing review until I wrap my head around this better.. Thanks in advance for ideas on how to think about this.
This is one reason I don’t really have an allocation percent. I found I kept re-engineering to my detriment. I view my portfolio as one giant pile of liquid assets (except my checking account used for my monthly budget). I keep $X dollars in treasury bills/cash equal to 3 years expenses (In taxable accounts) and invest everything else in one equity mutual fund - in my case FXAIX (Fidelity 500 index fund). The cash portion I keep as an emergency fund (Whatever makes you comfortable) and enough extra to roughly account for anticipated larger purchases (that I cannot cash flow with my monthly budget/income) over the next 1-3 years. Everything else in every single account then goes into my one mutual fund. Some might say I am 100/0, others maybe 90/10 or 80/20 depending on how you include or not emergency funds, sinking funds, etc. All I care is the near term money is there when or if I need it. The only liquid asset I do not include is my checking account as virtually every dollar is accounted for during the month in my budget from groceries to tithing to savings. You could easily substitute FXAIX with an all in one fund or even VTWAX/VT for a global solution.
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alex_686
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Re: Need Help Breaking Through a Mental Accounting Block

Post by alex_686 »

BarDownHockey wrote: Thu Sep 03, 2020 11:10 am I get that this is all a giant exercise in mental accounting (complicated by the fact that the money is in different accounts, different account types and at different institutions). But I keep going in circles on how to think about this and it's causing me to pause my annual rebalancing review until I wrap my head around this better.. Thanks in advance for ideas on how to think about this.
The most correct way is to put all of your assets on one side of the ledger. Where the money is does not matter - or if it does it is for calculating tax drag. This includes social security. On the other side put in all of your goals, or pseudo-liabilities. Construct you market expectations of various asset classes, less tax drag. State you risk tolerance. Solve. This will always generate a more efficient portfolio. i.e. lowest risk for the highish return.

The only disadvantage is the cognitive load. That, you have to think very carefully about lots of different steps. For example, under this method you don’t have a emergency fund. That is a example of mental accounting. Rather, you have a goal of X months of liquidity.

If you notice I am not actually giving you a mathematical model, because I can’t with the information given. How do you define risk and market expectations? Common solutions range from Monte Carlo to mean variance.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Katietsu
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Re: Need Help Breaking Through a Mental Accounting Block

Post by Katietsu »

I view this as a many roads to Dublin scenario.

OP probably does not like this answer as it is yet another set of choices. :happy But some people like to think in buckets and some people like to look at everything as one big pot. This is true both with investing and with spending.

I also think it depends partially on where you are in life. When I was younger with less assets and far from retirement, the bucket approach made more sense to me. Near term spending, emergency fund, intermediate term goals like the next car or a house down payment and, finally, retirement. Where and what to put in each bucket was done individually. The retirement was invested much more aggressively and was of the same order of magnitude in size as the other buckets.

Now, as I near retirement, the asset allocation for retirement would be more conservative but the retirement funds would swamp the other buckets. So, now, no more buckets when it comes to overall asset allocation. The only bucket type thinking is for the pot of readily available safe money. But even then, I just throw that amount in with fixed income when rebalancing.
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Re: Need Help Breaking Through a Mental Accounting Block

Post by refinedchain »

BarDownHockey wrote: Thu Sep 03, 2020 11:10 am I get that this is all a giant exercise in mental accounting
I had this inspiration reading your post: instead of mental accounting, why don't you double-down and try actuarial accounting? I think this goes by Liability Matching?

For each of your savings goals, make a separate brokerage/retirement account. In each account, pick an AA, a glide path for that AA, and an initial actuarial reserve equal to the net present value of your savings goal. Accelerate along your glide paths as you find more money to save.

In this system, there is no mental accounting, only actual accounting. Thinking about your overall AA becomes pointless.

I think it's a cool idea and makes me rethink how I'm going to save money for things like a new roof. But I hope you find something that you don't like about this system and that it helps you find the answer you seek.
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Re: Need Help Breaking Through a Mental Accounting Block

Post by ruralavalon »

Katietsu wrote: Thu Sep 03, 2020 9:07 pm I view this as a many roads to Dublin scenario.

OP probably does not like this answer as it is yet another set of choices. :happy But some people like to think in buckets and some people like to look at everything as one big pot. This is true both with investing and with spending.

I also think it depends partially on where you are in life. When I was younger with less assets and far from retirement, the bucket approach made more sense to me. Near term spending, emergency fund, intermediate term goals like the next car or a house down payment and, finally, retirement. Where and what to put in each bucket was done individually. The retirement was invested much more aggressively and was of the same order of magnitude in size as the other buckets.

Now, as I near retirement, the asset allocation for retirement would be more conservative but the retirement funds would swamp the other buckets. So, now, no more buckets when it comes to overall asset allocation. The only bucket type thinking is for the pot of readily available safe money. But even then, I just throw that amount in with fixed income when rebalancing.
Age 75, retired, no pension or annuity, our asset allocation is 50/50 with no cash allocation.

During retirement in my opinion it is all one big "bucket", one all purpose "portfolio". Everything is available for an "emergency" .
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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Re: Need Help Breaking Through a Mental Accounting Block

Post by midareff »

There are lots of ways to do it ... I think the more important thing is maintaining the same method and if you are a numbers person tracking your first of the month, or last of the month if you prefer, data. I track $$ in IRA, $$ in Roth, $$ in regular taxable account and $$ in CDs as well as $$ in cash accounts each first of the month. I also include Dow, S&P and Nasdaq #'s, AA, and various distribution, aggregate duration, SEC and other data as well as other things. It just takes a few minutes once a month. If you asked to what end I couldn't answer you since my AA through balance band rebalancing has remained almost constant although a steadily declining SEC and distribution yield may push me into more cash and equities, perhaps just 5% or so of total more each.
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Re: Need Help Breaking Through a Mental Accounting Block

Post by aristotelian »

Does not matter. Whatever works for you is fine. If you hold cash separate from your portfolio, you may afford to be a little more aggressive with the portfolio. If the cash is included in your portfolio then you might want to be a little more conservative. As long as you are aware of what you are doing, either approach has the same net result.
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Re: Need Help Breaking Through a Mental Accounting Block

Post by dbr »

aristotelian wrote: Fri Sep 04, 2020 9:52 am Does not matter. Whatever works for you is fine. If you hold cash separate from your portfolio, you may afford to be a little more aggressive with the portfolio. If the cash is included in your portfolio then you might want to be a little more conservative. As long as you are aware of what you are doing, either approach has the same net result.
Yep, the summation of the whole thing is that you do what serves your need based on being informed about what you have.
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Re: Need Help Breaking Through a Mental Accounting Block

Post by fourwheelcycle »

I consider any form of money asset as being part our portfolio total. Anything that is not a money asset, our house (no mortgage), house contents, and cars, may be part of our total assets, but those things are not part of our portfolio.

For our portfolio AA, I separate checking and money market funds from bonds. I may say our AA is 80/20 stocks to bonds, but I know it is really 80% stocks, 17% bonds, and 3% cash.
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Re: Need Help Breaking Through a Mental Accounting Block

Post by pasadena »

There is nothing wrong with buckets. Yes, it's mental accounting, but there's nothing wrong with that either.

Some people consider anything with a $ sign on it as part as a global portfolio. Others have buckets. The only correct way to do it is the one that works for you.

I'm in the buckets team. My money is divided in buckets and each one of them has a different AA:

- Emergency Fund. About 6 months of living expenses, could pay for relocation for a new job if necessary instead, or a new car. This is in my brokerage account at Vanguard, 100% VMRXX (money market)

- Non-retirement bucket. Used to be Downpayment bucket. Timeframe is unknown, between 1 and 15 years. Either I buy a home with a mortgage in the coming years, or I buy a home with no mortgage upon retirement. Or something else. This bucket englobes my brokerage account, and my first Roth IRA, at Vanguard. AA is 70/30 (up from 60/40)

- Retirement bucket. Timeframe is... 10-15 years until first withdrawal, then hopefully 40 years beyond that. 401(k) and second Roth IRA at Fidelity. AA is 80/20.

- Play Money. Brokerage account at Fidelity. Individual stocks. I consider those $ already spent. Brokerage at Fidelity.

- Whenever I have a big expense coming up on the horizon that I can't cashflow, I bucket that one too until I have enough money for it.

Add to that a rolling one to two months of living expenses + upcoming non-monthly bills, coming and going in my checking and savings accounts. Those $ are my little front line workers doing their thing. Not really part of my mental accounting.

I don't have kids, but if I did, I suppose college savings would be another bucket.
alex_686
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Re: Need Help Breaking Through a Mental Accounting Block

Post by alex_686 »

refinedchain wrote: Thu Sep 03, 2020 10:06 pm
BarDownHockey wrote: Thu Sep 03, 2020 11:10 am I get that this is all a giant exercise in mental accounting
I had this inspiration reading your post: instead of mental accounting, why don't you double-down and try actuarial accounting? I think this goes by Liability Matching?

For each of your savings goals, make a separate brokerage/retirement account. In each account, pick an AA, a glide path for that AA, and an initial actuarial reserve equal to the net present value of your savings goal. Accelerate along your glide paths as you find more money to save.

In this system, there is no mental accounting, only actual accounting. Thinking about your overall AA becomes pointless.

I think it's a cool idea and makes me rethink how I'm going to save money for things like a new roof. But I hope you find something that you don't like about this system and that it helps you find the answer you seek.
This is the exact definition of mental accounting. Nor is it liability matching.

Let us consider a person who has 3 goals:
1. Required: 100k in 10 years for child's education
2. Required: 1,000k in 20 years for retirement
3. Desired: maximize retirement portfolio.

Liability Matching, strictly speaking, is when you would buy a zero coupon Treasury with a maturity date for each required cash flow. Practically you can relax this and use long dated Treasuries and TIPS. There is no glide path. It is focused on the downside. It is bond heavy.

Mental Accounting: You set up 2 accounts, each with their own goals and risk tolerance. However, both would have the same market expectations. Bonds offer predicable low-risk low-returns. Equities offer better long term risk-adjusted returns, but have high variability.

So let us think through the implications. What if in 10 years the education fund is underfunded but your retirement fund is over-funded. Can you transfer funds from one to the other? No. Each is independently funded, each with its own independent goals. Under any model the portfolio is going to skew towards more bonds, a lower expected return, higher risk, and higher contributions.

You always get a equal or better portfolio by combining your goals. i.e., required cash flow of 100k in 10 years, required cash flow of $1,000k in 20 years.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
MrDrinkingWater
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Re: Need Help Breaking Through a Mental Accounting Block

Post by MrDrinkingWater »

refinedchain wrote: Thu Sep 03, 2020 10:06 pm
BarDownHockey wrote: Thu Sep 03, 2020 11:10 am I get that this is all a giant exercise in mental accounting
I had this inspiration reading your post: instead of mental accounting, why don't you double-down and try actuarial accounting? I think this goes by Liability Matching?

For each of your savings goals, make a separate brokerage/retirement account. In each account, pick an AA, a glide path for that AA, and an initial actuarial reserve equal to the net present value of your savings goal. Accelerate along your glide paths as you find more money to save.

In this system, there is no mental accounting, only actual accounting. Thinking about your overall AA becomes pointless.

I think it's a cool idea and makes me rethink how I'm going to save money for things like a new roof. But I hope you find something that you don't like about this system and that it helps you find the answer you seek.
I like this idea: a separate brokerage account to organize a portfolio for each "time horizon": one for short-term investments, one for intermediate-term investments, and one for long-term investments. That could work very well for some people.

Some of us have fairly detailed spreadsheets to do this kind of separation, regardless of whether we have all of our investable assets at one or two institutions or spread among a dozen institutions. It is easy to create a "per institution" view and have another sheet configured to provide a "per time horizon" view.
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LilyFleur
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Re: Need Help Breaking Through a Mental Accounting Block

Post by LilyFleur »

MrDrinkingWater wrote: Fri Sep 04, 2020 11:58 am
refinedchain wrote: Thu Sep 03, 2020 10:06 pm
BarDownHockey wrote: Thu Sep 03, 2020 11:10 am I get that this is all a giant exercise in mental accounting
I had this inspiration reading your post: instead of mental accounting, why don't you double-down and try actuarial accounting? I think this goes by Liability Matching?

For each of your savings goals, make a separate brokerage/retirement account. In each account, pick an AA, a glide path for that AA, and an initial actuarial reserve equal to the net present value of your savings goal. Accelerate along your glide paths as you find more money to save.

In this system, there is no mental accounting, only actual accounting. Thinking about your overall AA becomes pointless.

I think it's a cool idea and makes me rethink how I'm going to save money for things like a new roof. But I hope you find something that you don't like about this system and that it helps you find the answer you seek.
I like this idea: a separate brokerage account to organize a portfolio for each "time horizon": one for short-term investments, one for intermediate-term investments, and one for long-term investments. That could work very well for some people.

Some of us have fairly detailed spreadsheets to do this kind of separation, regardless of whether we have all of our investable assets at one or two institutions or spread among a dozen institutions. It is easy to create a "per institution" view and have another sheet configured to provide a "per time horizon" view.
I'm retired and 60.

I set up a separate brokerage account to help one of my children through graduate school. I give her the money as needed for school fees, books, etc. She is the sole beneficiary, while both children are beneficiaries of my other accounts.

I keep a spreadsheet that helps me see my entire portfolio, which includes my 401k and my brokerage account. Whenever I update the balances (or buy/sell), I can see my new asset allocation automatically updated. I can also test what will happen to my asset allocation in a "what if" version of the spreadsheet for different buying scenarios. I did some rebalancing in my 401k last night and bought some stock in my brokerage account yesterday and today, and I increased my allocation to stock, which was my goal, as I had not rebalanced in March. I like the visibility of my spreadsheet that integrates both of my accounts. It also tells me what percentages I have in pre-tax and tax-deferred and Roth.
refinedchain
Posts: 27
Joined: Tue Feb 17, 2015 10:32 am

Re: Need Help Breaking Through a Mental Accounting Block

Post by refinedchain »

alex_686 wrote: Fri Sep 04, 2020 10:54 am Liability Matching, strictly speaking, is when you would buy a zero coupon Treasury with a maturity date for each required cash flow.
I am thinking back to an actuary manual I once read. Yes, the exact-match zero-coupon bond approach you describe was "Option 1" to matching a future liability. If you don't quite have that kind of money, Option 2 was to fund 80-90% of the liability in those zero-coupon bonds and invest what you have left in something riskier that will hit your need with a high probability. You switch the risky portion to bonds when you've "won."

I agree that picking a 2030 retirement fund for a known expense 10 years from now is not the same as liability matching. I clearly used the wrong words there.

I admit I missed the bigger picture and that what I described fits the wiki's definition of mental accounting. I mainly did not consider the wiki's example where someone might have outstanding credit card debt - in that case, you clearly can earn free money by tossing the buckets and cashing your bonds to pay off your debt.

Thanks for your insights.
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