Relevant for now - benefits of a balanced allocation

[brian91480]

I feel the need to thank this forum:

During this recent stock market "turbulence / decline"... I haven't felt worried or upset. This is because of the allocation of investments that I have.

My whole life until a few years ago, my allocation was about 99% equities and 1% cash. It was only about 3 years ago that I started to prioritize non-equity holdings to gain a better balance with my investments.

Through personal savings and an inheritance, I transitioned myself from a 99% equity; 1% cash allocation.... to an 80% equity / 20% fixed income allocation.

In addition to holding index funds (and a few solo stocks for fun)... I have some funds in HYSA, MM, I-Bonds, T-Bills, and an Intermediate Bond Fund. Maybe that is a bit over complicated for that portion of the allocation, but the idea is... the portfolio balance is there.

Because I have this allocation, the lagging stock market makes minimal impact on my ability to quit my job today if I wanted to. I have the funds I would need for several years to ride out a bad stock market.

While I assume that my total expected return in the next 20-30 years may be lower with this allocation, I am currently living the benefits. The benefits are real. I have a brother who is still almost entirely in the equity markets, and he is freaking out. I don't have any of those worries. Zero.

If I had to list the value of the Bogglehead Forum into one thing only, it would probably be this:

The forum has opened my eyes to the rational of having a balanced allocation of investments outside of just equities.

Kudos to the BH forum.

--- Brian

[PeterParker]

Just of curiosity, how to treat this balance in retirement accounts vs. taxable accounts?

Everyone needs an allocation of retirement vs. taxable. Can be different for people depending on goals.

Of course, right now I'm maxing retirement accounts because I expect to increase income to a point where I will be restricted in the future for % of tax avoidance, so trying to maximize that now. (of course HSAs and Roths can be 'looted' early penalty free in some cases for flexibility/ liquidity).

But I mean ... when you're talking about "living expenses" or a layoff/ downturn that obviously must usually come from a taxable account, or at least, it would be more prudent than drawing down the HSA/ Roth funds early.

So ... fixed income assets ... are basically more about retaining wealth than growing it per se ---- but do you hold a 80-20 split of this in taxable accounts? I suppose the typical advice is emergency fund of certain X amount of monthly living expenses.

At the same time, I also don't necessarily see the issue of 'liquidating stocks' for expenses. Tax implications? People don't like to 'sell stocks' after a market downturn ... but that is a version of market timing. Expecting an ultra huge juicy gain after a big downturn. Mmm.

[brian91480]

Just of curiosity, how to treat this balance in retirement accounts vs. taxable accounts?

This is an important question. I hope others on the forum reply.

I don't have a good answer for this.

I do have a decent-sized taxable account. We always hear in the forum - put bonds in tax deferred! That is great, except if you want to retire early, you can't be in 100% equities in your taxable account.

There is a difference between tax-optimization... and being able to retire early because you have dollars available, outside of equities.

Because I am so far away from age 55 or 59.5... all of my funds in pre-tax and Roth are in equities. My taxable account is a mix of equities and bonds / fixed income. If tax-optimization was my only priority, I wouldn't structure things like that.

--- Brian

[sycamore]

Just of curiosity, how to treat this balance in retirement accounts vs. taxable accounts?

This is an important question. I hope others on the forum reply.

Not sure if this is what's being ask about, but check out the Bogleheads' wiki article Tax-adjusted asset allocation. From the intro paragraph:

If you have accounts with different tax treatment (taxable, traditional IRA or 401(k), Roth IRA or 401(k)), equal dollar amounts in those accounts have different after-tax values. Therefore, if you want to optimize the after-tax value of your portfolio, you should base your asset allocation on the after-tax value of the accounts.

It seems to me that not too many Bogleheads actually tax-adjust their AA. In any case it's just one aspect of maintaining a "balanced" AA when you have retirement & taxable accounts.

Another aspect is Tax-efficient fund placement.

More general info is discussed in Asset allocation in multiple accounts.

Lots of food for thought.

[WalkingBackToHouston]

Just of curiosity, how to treat this balance in retirement accounts vs. taxable accounts?

This is an important question. I hope others on the forum reply.

I don't have a good answer for this.

I do have a decent-sized taxable account. We always hear in the forum - put bonds in tax deferred! That is great, except if you want to retire early, you can't be in 100% equities in your taxable account.

There is a difference between tax-optimization... and being able to retire early because you have dollars available, outside of equities.

Because I am so far away from age 55 or 59.5... all of my funds in pre-tax and Roth are in equities. My taxable account is a mix of equities and bonds / fixed income. If tax-optimization was my only priority, I wouldn't structure things like that.

--- Brian

What would be wrong with favoring ira for fixed income investments and if ever necessary converting some fixed to equity in your ira and then equity to fixed in your taxable if needed to maintain overall allocation?

[brian91480]

What would be wrong with favoring ira for fixed income investments and if ever necessary converting some fixed to equity in your ira and then equity to fixed in your taxable if needed to maintain overall allocation?

That's a great idea in theory. But it takes a certain amount of money to be able to bridge between early retirement and getting access to the IRA.

If the taxable brokerage account doesn't have the necessary cushion to withstand a two year bear market... then for financial safety... a person could keep some of the taxable brokerage funds outside of equities.

So the question is... Where do those dollars get put?

--- Brian

[HighLonesome]

I feel the need to thank this forum:

During this recent stock market "turbulence / decline"... I haven't felt worried or upset. This is because of the allocation of investments that I have.

My whole life until a few years ago, my allocation was about 99% equities and 1% cash. It was only about 3 years ago that I started to prioritize non-equity holdings to gain a better balance with my investments.

Through personal savings and an inheritance, I transitioned myself from a 99% equity; 1% cash allocation.... to an 80% equity / 20% fixed income allocation.

In addition to holding index funds (and a few solo stocks for fun)... I have some funds in HYSA, MM, I-Bonds, T-Bills, and an Intermediate Bond Fund. Maybe that is a bit over complicated for that portion of the allocation, but the idea is... the portfolio balance is there.

Because I have this allocation, the lagging stock market makes minimal impact on my ability to quit my job today if I wanted to. I have the funds I would need for several years to ride out a bad stock market.

While I assume that my total expected return in the next 20-30 years may be lower with this allocation, I am currently living the benefits. The benefits are real. I have a brother who is still almost entirely in the equity markets, and he is freaking out. I don't have any of those worries. Zero.

If I had to list the value of the Bogglehead Forum into one thing only, it would probably be this:

The forum has opened my eyes to the rational of having a balanced allocation of investments outside of just equities.

Kudos to the BH forum.

--- Brian

I feel the same way and am completing year one of retirement. Let me add that I am probably in the lower percentage financially of the BHs on this board. The BH prepared me for downturns.

[steadyosmosis]

Just of curiosity, how to treat this balance in retirement accounts vs. taxable accounts?

This is an important question. I hope others on the forum reply.
I don't have a good answer for this.
I do have a decent-sized taxable account. We always hear in the forum - put bonds in tax deferred! That is great, except if you want to retire early, you can't be in 100% equities in your taxable account.
There is a difference between tax-optimization... and being able to retire early because you have dollars available, outside of equities.
Because I am so far away from age 55 or 59.5... all of my funds in pre-tax and Roth are in equities. My taxable account is a mix of equities and bonds / fixed income. If tax-optimization was my only priority, I wouldn't structure things like that.
--- Brian

I have been retired for numerous years.
I am younger than age 59.5.
I keep no emergency fund (HYSA, etc.), so that I avoid paying unnecessary taxes.
My taxable brokerage account is 100% VTI equities, so that I avoid paying unnecessary taxes.
My TIRA is 100% fixed income, and my RIRA has some spillover fixed income (18% of the RIRA balance), so that I avoid paying unnecessary taxes.
100% of my expenses in retirement have been paid from the VTI equity shares in my taxable account.
If I spend all of that before reaching age 59.5, I plan to then spend from RIRA contributions, or do the SEPP maneuver with a portion of my TIRA.

[brian91480]

100% of my expenses in retirement have been paid from the VTI equity shares in my taxable account.

If I spend all of that before reaching age 59.5, I plan to then spend from RIRA contributions, or do the SEPP maneuver with a portion of my TIRA.

I understand the plan. It's not a bad one. But every plan has warts, I suppose.

I wouldn't want to draw on my Roth account too much in my 50s.

I wouldn't want to deplete my taxable account before age 60.

There is no perfect solution.

--- Brian