Drastic change in asset allocation?

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sellthesedownfalls
Posts: 5
Joined: Mon May 22, 2017 7:42 am

Drastic change in asset allocation?

Post by sellthesedownfalls » Wed Dec 05, 2018 10:22 pm

Emergency funds: We have 3+ months of cash on hand
Debt: Primary mortgage (3.375%, 15 year), rental property (5%, 25 year), 1 car (2.49%)
Tax Filing Status: MFJ
Tax Rate: 32% Federal, 5.75+3.2% State+local
State of Residence: MD
Age: 34
Desired Asset allocation: 70% stocks / 30% bonds (currently ~95/5)
Desired International allocation: 40%

Invested assets are approaching 7 figures.

Current retirement assets:

Taxable
VTIAX - Vanguard Total International Index Admiral 6% (0.04%)
VTSAX - Vanguard Total Stock Market Index 5% (0.04%)

His 401k (1)
VIMAX - Vanguard Mid-Cap Index Fund Admiral 5% (0.04%)
VSMAX - Vanguard Small-Cap Index Fund Admiral 5% (0.04%)
Some company match, gets caught by HCE rules

His 401k(2) - can no longer contribute here
VTTHX - Vanguard Target Retirement 2035 Fund Investor 7% (0.14%)

His Roth IRA at Vanguard
VTIAX - Vanguard Total International Index Admiral 6% (0.04%)
VSAGX - Vanguard LifeStrategy Growth Fund Investor Shares 8% (0.04%)

Her 401k
FUSVX - Fidelity® 500 Index Fund 23% (0.04%)
FSGDX - Fidelity Global Ex-US Index 20% (0.11%)
Yes, company match.

Her Roth IRA at Vanguard
VTSAX - Vanguard Total Stock Market Index 14% (0.04%)

We also have some savings bonds - EE and iBonds - 1% of assets

Contributions:

New annual Contributions (2019 projected):
$8000 his 401k (+3000 from employer)
$19000 her 403b (+4000 from employer)
$6000 his IRA/Roth IRA
$6000 her IRA/Roth IRA
$17000 taxable (for retirement, not short term goals)

Available funds:

Funds available in his 401(k)
BCOIX (0.3%)

Bond Funds available in her 403(b)
PSHAX (0.82%)
FXNAX (0.025%)

I have brokerage accounts available at Fidelity and Vanguard, and have an existing TreasuryDirect account.

I have always considered myself an aggressive investor with a long time horizon, but as we enter our mid-30s with two young kids and are possibly looking at early-retiring in our early 50s, my 95%-ish stock allocation is making me quake in my boots a bit. I'd like to increase my bond holdings to approx. 30%. Given the limited bond fund options in our 401ks, should I be looking to switch some of our IRA holdings to bonds? What about new funds (into retirement and taxable accounts)? Should those go as my revised asset allocation per deposit, or should I switch entirely to purchasing bonds until my AA matches my target, then switch to 70/30 per deposit after that goal is reached?

mhalley
Posts: 6305
Joined: Tue Nov 20, 2007 6:02 am

Re: Drastic change in asset allocation?

Post by mhalley » Thu Dec 06, 2018 2:43 am

When to switch aa is the same as the age old dca vs lump sum investment question. There have been hundreds of those posts here. In general, Lump sum wins 66% of the time, which means that dca would win 66% of the time in the case of delaying the decrease in aa. But this is personal investing, and how you sleep at night is more important than the actual numbers.
https://www.bogleheads.org/wiki/Dollar_cost_averaging
. Lump sum investing will always carries a higher expected return, because it immediately moves your funds from asset classes with lower expected returns to ones with higher expected returns. Note that higher expected returns do not guarantee that your actual returns will be higher. According to an investopedia article,[5] studies indicate that lump sum investing has produced higher returns 66% of the time.
Certainly putting the bond funds in the account with the best fund is optimal, so switching to more bonds in trad Ira makes sense as bond funds seems to be the Achilles heel of many 401k plans. BUT, many prefer stock fund in Roth to have greater appreciation in the tax free account. Fxnax and bcoix seem fine.
https://obliviousinvestor.com/stocks-in ... ional-ira/

Chip
Posts: 2371
Joined: Wed Feb 21, 2007 4:57 am

Re: Drastic change in asset allocation?

Post by Chip » Thu Dec 06, 2018 5:56 am

If you think you are going to be retiring in your early 50s you should max your 401k rather than contributing that money to taxable. You will have plenty of low tax years after you retire to either pull that money out of IRAs via a 72(t) plan or convert to Roth.

HEDGEFUNDIE
Posts: 1217
Joined: Sun Oct 22, 2017 2:06 pm

Re: Drastic change in asset allocation?

Post by HEDGEFUNDIE » Thu Dec 06, 2018 6:33 am

It sounds like you are in my shoes. A recent thread I started may be helpful:

viewtopic.php?f=1&t=265323

If you are worried about equities dropping, I would suggest adding a long term Treasury bond fund, which (1) does not have the equity risk associated with corporate bonds, and (2) is usually negatively correlated with stocks, especially international stocks which you are loaded up on.

sellthesedownfalls
Posts: 5
Joined: Mon May 22, 2017 7:42 am

Re: Drastic change in asset allocation?

Post by sellthesedownfalls » Mon Dec 10, 2018 1:54 pm

Chip, we can't max out my husband's 401k, he gets caught by highly-compensated employee rules (I mentioned that in his 401k holdings, but not down where I mentioned 'new annual contributions'. We already max out all of our available tax-advantaged space.

Hedgefundie - thanks, I had read your thread before I posted mine.

Thanks, mhalley - I didn't make that connection in my head about changing asset allocation being analogous to DCA vs lump sum.

Chip
Posts: 2371
Joined: Wed Feb 21, 2007 4:57 am

Re: Drastic change in asset allocation?

Post by Chip » Tue Dec 11, 2018 5:45 am

Sorry I missed your notation about HCE complications.

Unless I missed it, you didn't show the relative sizes of the accounts. If your 403b is large enough you could use FXNAX for all of your bond allocation. Then continue contributing all of your bond allocation to that account, up to your entire contribution. Does your husband's old 401k have a low cost bond option?

It's not particularly important, but at your tax rate of 41% paying off the car loan is a better after tax return than investing in bonds.

I believe the same holds true for the rental property mortgage, despite its deductibility from rental proceeds.

In general I would do the following:

1. Get rid of the all in one funds like Target Retirement and Life Strategy, assuming there are low cost "pure" stock and bond fund replacements available. While they are good funds they make it more difficult to see your asset allocation details.

2. If possible, as mhalley mentioned, keep your taxable and Roth accounts 100% equities. All bonds should be in the 401k/403b. This advice changes if it means you have to use high cost funds or if there would be behavioral issues caused by single account volatility or low expected growth.

sellthesedownfalls
Posts: 5
Joined: Mon May 22, 2017 7:42 am

Re: Drastic change in asset allocation?

Post by sellthesedownfalls » Wed Dec 12, 2018 12:19 pm

The holdings inside our accounts, per fund, are listing as a percentage of total retirement assets, so
"Her 401k
FUSVX - Fidelity® 500 Index Fund 23% (0.04%)
FSGDX - Fidelity Global Ex-US Index 20% (0.11%)"

shows that my 401k is 43% of our total retirement assets.

Good call on the deleveraging, it feels weird to throw a lot of money at those debts instead of invest in the market, but that does make sense given bond returns.

Re: the advise about asset placement - 100% equities in taxable and Roth, bonds in 401k -> does that advice change if I'm interested in buying and holding US Treasuries (not possible in my 401k) and/or my own state municipal bonds through my taxable brokerage account, since those have their own tax advantages?

Chip
Posts: 2371
Joined: Wed Feb 21, 2007 4:57 am

Re: Drastic change in asset allocation?

Post by Chip » Wed Dec 12, 2018 3:44 pm

sellthesedownfalls wrote:
Wed Dec 12, 2018 12:19 pm
Re: the advise about asset placement - 100% equities in taxable and Roth, bonds in 401k -> does that advice change if I'm interested in buying and holding US Treasuries (not possible in my 401k) and/or my own state municipal bonds through my taxable brokerage account, since those have their own tax advantages?
That can be a consideration, but remember that you give up some return for the tax benefits of munis and Treasuries. Plus there's some additional concentration of risk in single state munis.

If you keep your taxable account all equities you'll pay current taxes only on the dividends. Non-qualified at your marginal rate, qualified at 18.8% (due to NIIT). The growth in equities will likely be lightly taxed when you sell in retirement, or not taxed at all if passed on to heirs. But if you put those equities in the 401k/403b all of the growth will eventually be taxed as ordinary income. And of course we all hope that equities will grow substantially. If things go well for you it may result in very large RMDS at age 70.5. The wiki article on tax efficient fund placement might be helpful.

But it's not a slam dunk and I don't mean to give that impression. And many here would suggest that you tax-adjust your allocations based on your expected tax rates at withdrawal. So that's another variable to throw in the mix.

I do think that it's much simpler to maintain the portfolio if you have all of your bonds in one place and just the two equity funds in taxable.

Sorry for my continued reading omissions. Maybe I need new glasses. :)

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