Asset allocation in multiple accounts

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 is careful design of a portfolio that meets your asset allocation when considering all the accounts in the portfolio as a whole. This article uses asset location and asset placement interchangeably.

If you want to create a portfolio based on the Bogleheads® investment philosophy, developing it can become complicated when you have to consider more than one account.

If you have only a single retirement account, and that account contains all the funds you need, either in separate funds or in an all-in-one fund (like a target retirement, LifeStrategy or balanced fund), it is straightforward to select your fund(s) today and keep them balanced in the future.

Many investors, however, have a collection of accounts: 401(k) or 403(b), 457, traditional IRA, Roth IRA, taxable accounts, and so on. They may be contributing to some of these, while others might be closed for new contributions. For couples, the number of accounts in a consolidated portfolio can double. Developing a coherent portfolio across all of these accounts that covers the asset allocation you want becomes even more complex.

With IRAs, you generally have your choice of funds. However, you can face problems if one or more of the accounts is a 401k or other employer-sponsored plans with a limited number of low-expense index funds, or none at all. Things also become complicated when you hold investments in your taxable accounts that might not be ideal for Boglehead investing principles, or which might be complicated to plan around, but which you are reluctant to sell because of tax implications.

This article provides initial guidance on how you can design a coherent portfolio across multiple accounts, while combining many of the investment principles covered in greater detail in other articles. However, while this article does cover basic principles, there are many variables that will make your profile unique. Use the information in this article as a framework for thinking about your portfolio design. There are many grey areas, and the information below will not necessarily be enough to build the "perfect" portfolio for your own unique circumstances. Please consider asking portfolio questions on the forum to get input from forum members.

For a more concise explanation of these principles, with practical examples, see How to build a lazy portfolio.

Principles of asset allocation across multiple accounts
Assuming you are already prioritizing investments, then when you choose funds across accounts, follow these principles, listed in general order of priority: The order of priority is not absolute. In many portfolios, you have to balance two or more conflicting principles in concert, as described in more detail in the Conflicting principles section of this article, which may cause you to elevate one priority over another in certain edge cases.
 * 1) Choose the best and most appropriate fund choices for each asset category across your entire portfolio to achieve your target asset allocation
 * 2) Follow principles of tax-efficient fund placement
 * 3) Minimize the blended expense ratio across entire portfolio
 * 4) Provide ability to maintain asset allocation as ongoing contributions accumulate, without needing frequent rebalancing or exchanges (see Rebalancing considerations below for details)
 * 5) Minimize complexity by avoiding an excessive number of "slices."

Consider the first three principles as core principles. The fourth and fifth principles are "nice to haves" but generally come after the core principles.

Illustration of a multi-account portfolio
This section illustrates graphically some basic concepts of what a multi-account portfolio looks like using a sample portfolio with a sample asset allocation target as a case study.

Sample asset allocation
Chart 1 shows a sample portfolio of $100,000 with an asset allocation of 70% stocks and 30% bonds. This asset allocation will be used in the next three sample portfolios. The allocation is further divided into the following three asset classes: In this chart and later charts, these asset classes are color-coded in the following way: In all charts, the relative vertical sizes of the bars in all the charts are the same to help make visual comparisons between the charts equivalent.
 * 50% US stocks
 * 30% bonds
 * 20% international stocks
 * US Stocks in red
 * Bonds in blue
 * International stocks in green

Portfolio 1 - Complex portfolio
Chart 2 shows an example of a complex portfolio for a married couple that implements the asset allocation described above. This portfolio contains six different retirement accounts, for two people, with a total of eight splits spread across five different funds in the six accounts. Each account has a different balance, but the allocations are split up in such a way that the desired overall asset allocation is achieved when all the accounts are summed, which will be illustrated below in Chart 2A.

Observe that two of the funds (S&P 500 in Her 403b and Extended Market in Her Roth IRA) are sub-classes of the overall US stock asset class; this kind of sub-division might be necessary if Her 403b has only a S&P 500 index fund and no total stock market fund. Each account has a different balance, but the allocations are split up in such a way that the desired overall asset allocation is achieved when all the accounts are summed. This is shown below in Chart 2A. On the left side is the amounts held in the three asset classes, divided up by account. The right side repeats Chart 1, which is the desired amounts to hold in each asset class. As you can see, the complex portfolio, when looked at as a unified whole, sums up to the target amounts in each of the three asset classes: Bonds are $30,000, US Stocks are $50,000 and International Stocks are $20,000. Although Portfolio 1 looks complex, it is not uncommon for people who have been investing for a few years to arrive at a portfolio like this. The next sections look at a simpler portfolio and compare and contrast two approaches to portfolio design.

Portfolio 2 - Mirrored asset allocation
Chart 3 shows a different portfolio with the same asset allocation in the original example, distributed across three different retirement accounts, each of which has a different balance. The asset allocation in each account mirrors the overall asset allocation by having one fund for each asset class in each account. The name of each account is on the bottom legend, and each account is separated by a vertical line.

Portfolio 2 will be contrasted with Portfolio 3 below.

Portfolio 3 - Spread asset allocation
Chart 4 shows the sample multi-account portfolio as in Portfolio 2, only with the assets consolidated across three accounts in five total splits. Observe that the total amounts within each asset class (US stocks, bonds and international stocks) are the same.

As well, the overall balance of each of the three accounts is the same. The only difference between Portfolio 2 and 3 is that the latter has fewer slices, and the locations of the asset classes are different. As described in more detail below, although the two portfolios seem to be almost identical variations of each other, Portfolio 3 is the optimal one.

Mirror asset allocation in each account or across portfolio
Portfolio 2 above illustrates a portfolio in which each account has the same desired asset allocation. Portfolio 3, by contrast, does not aim to mirror the desired asset allocation in each account, but does succeed in creating the desired asset allocation across the entire portfolio.

Chart 5 shows both portfolios, summed by account. As you can observe in Chart 5 above, the account balance of each account is identical, but Portfolio 2 has more slices (9) compared to Portfolio 3 (which has 5 slices).

Chart 5a below shows Portfolio 2 and Portfolio 3 side by side, but instead of summing by account balance, we sum by asset class. Chart 5a illustrates that the amount in each asset class is identical for both portfolios. Also shown on the far right are the targets for each asset class (Chart 1) for comparison. As you can see, both Portfolios 2 and 3 sum up to $30,000 in bonds, $50,000 in US Stocks, and $20,000 in international stocks. The only difference is that Portfolio 2 does this with 9 slices whereas Portfolio 3 achieves the same results with 5 slices.

Advantages of whole portfolio allocation
In many cases, the latter approach of consolidating asset classes into a smaller number of fund slices across a total portfolio, as shown in Portfolio 3, has many advantages:


 * This allows you to choose the best and the lowest cost funds from each account.
 * It allows you to invest tax-efficiently.
 * It eliminates tiny slices, especially for narrow asset classes (like REITs)
 * It eliminates having to meet a minimum amount for each fund multiple times.
 * It gets you to cheaper share classes faster (such as Vanguard admiral shares).
 * It eliminates unnecessary duplication.
 * It makes rebalancing simpler.

The possible defects of Portfolio 2 (the 9-slice portfolio) compared to Portfolio 3 (the 5-slice portfolio) are:
 * You might be using more expensive funds in the 401k plan when you could concentrate all your holdings in the least expensive fund. As a result, your blended expense ratio across your entire portfolio will be higher than it needs to be.
 * In the 401k, you may have selected inferior funds in every one of your target asset class, just for the sake of having a fund in every asset class in the 401k account.
 * You may fail to meet the fund minimums for the smallest slices in the smallest account (in this case the bond slice in the Roth IRA may fall below the fund minimum).
 * By slicing into too many small accounts, you might fail to meet the minimum for cheaper share classes such as Vanguard Admiral shares.
 * By putting bonds in taxable, your portfolio is less tax-efficient than it could be if you concentrated bond holdings in tax-advantaged accounts.
 * You have created a more complicated portfolio that can be more difficult to maintain.

Said more simply, the differences between Portfolio 2 and 3 are:
 * "Portfolio 2 (mirrored allocation in every account) is like going to three grocery stores and buying 4 eggs at each, 1/3 pound of hamburger meat, and two cans of Coke.
 * "Portfolio 3 (intelligent consolidation of asset classes across entire portfolio) is buying a 6 pack of Coke at the store where it is on sale, a dozen eggs at the store where it is on sale, and a pound of hamburger meat where it is the best price (or quality)."

Advantages of mirroring asset allocation in each account
Although a diligent investor who monitors their portfolio can often exact some gains (such as tax efficiency or lower expense ratios) from a whole portfolio approach to asset allocation, in some cases there can be some advantages to mirroring asset allocation in each account.

Rebalancing simplicity
If each account has the same allocation, it can be simpler to rebalancing.

Simplicity of all-in-one funds
Because investors are prone to making the mistake of viewing their portfolios by accounts rather than as a whole, they might be better off holding "balanced" allocations across accounts, even at the cost of a slight increase in a blended expense ratio or a slight loss in tax-efficiency.

Put another way, a casual investor might be better off holding the identical Target Date, Balanced or LifeStrategy funds in every account, rather than divide into single-class funds. They offset any minor sacrifice in expenses or tax-efficiency by holding the right asset classes and avoiding damaging mistakes.

"For investors who do not really understand portfolio management and who only have tax advantaged accounts I really think that using just one target retirement type fund in each account is just about perfect. Could it be tweaked with lower expenses, certainly. But there are so many things that can go wrong that for now just go with the one fund option and let the portfolio manager do all the work."

Steps to designing portfolio
While it may seem difficult at first to compose a portfolio across multiple accounts, there are some general steps you can follow. If you are uncertain you can always submit your plan for feedback, or ask for general advice, in the Help with Personal Investments forum. Also, see How to build a lazy portfolio for a streamlined explanation of what follows.

To visualize this exercise, imagine you have some buckets and some pitchers of fluid, which you can see in Figure 1. Each bucket is an asset class, and the size of each bucket is based on how much you want to hold in that asset class. The pitchers of fluid represent each account you have, and the volume of fluid in each pitcher is based on your account balance. For the purposes of this exercise, suppose that the fluid is a different color for each account and it does not dissolve into other fluids.

In designing a multi-account portfolio, you are trying to strategically pour the fluid (money) from each pitcher (account) into each bucket (asset class) until each bucket is filled and each pitcher is empty. You take your pitcher (the account) and start pouring into a bucket (the asset class). If you fill the bucket and the pitcher still has fluid (money), then fill the next bucket. If your pitcher runs out of fluid, then go to the next pitcher.

When you are done, every pitcher is empty and every bucket should be full. Each bucket will contain fluid from the different accounts, but overall each bucket will be full so that you have the right amount in each asset class.

The bucket/pitcher analogy is represented by Portfolio 3, shown in the nearby bar chart that breaks the portfolio down by its three major asset class. Notice how the three buckets, one for each asset class, are filled by the "fluid" from the three accounts.

The trick to this exercise is you do not want to randomly pour your pitchers into the various buckets -- you want to strategically pour the the right fluids (accounts) into the right buckets (asset classes) by observing the principles of asset allocation across multiple accounts outlined above in this article.

Flowchart for allocating
The bucket-and-pitcher analogy described previously can be depicted by a process flowchart that shows how to fill the buckets. That flowchart is illustrated in Figure 2 nearby. Moving from left to right you will:
 * 1) Identify the first account (bucket) to allocate.
 * 2) Identify the first fund in the account to allocate.
 * 3) Fill that fund until its asset class is full, or until the account has run out of  money, whichever comes first.
 * 4) If the asset class is full, and the account still has money, then go to #2 and repeat.
 * 5) If the asset class is not full, but the account has run out of money, then go to #1 and repeat until all accounts have been allocated.

The steps in the flowchart are outlined in more detail in the sections below.

Determine asset allocation
The first step is to choose your asset allocation, basically your allocation to stocks, bonds, and cash. Be sure to consider this in the context of your entire portfolio. The allocations should reflect your return needs for return, balanced against your tolerance for risk. For most investors this will mean hopefully gaining returns that, in the long run, outpace inflation, while reducing the magnitude of short term investment losses to a level that allows the investor to remain invested without panic selling.

Calculate asset classes
Next, work out the percentages you want to hold in US Stocks, International Stocks and Bonds. If you desire to overweight smaller sectors (REITs, small cap value, etc.) then determine those percentages as well. If you want to split your bond holdings in different types, then determine those percentages. For example, suppose you want to hold 60% stocks and 40% bonds, with one-third of your stocks in international. That comes out to:
 * US: 40% (2/3 * 60%)
 * International: 20% (1/3 * 60%)
 * Bonds: 40%

Start with problematic account
Start with the plan or account that has the most expensive or most limited choice of funds. In most cases, this will be a 401k or other employer-sponsored retirement plan.

Selecting the fund
Scan your fund listings and look for any index funds with low expense ratios. In most cases, the lowest-expense funds will be index funds. Find the lowest fee fund. In most cases, this fund will be an S&P 500 index fund. Note that the actual name of the fund might not actually be S&P 500 Index Fund. It might be called 500 Index, Equity Index, Large Cap Index or some other name. You may need to read your plan information carefully determine the fund’s composition.

Your plan might also have a Total US Stock Index fund. If the expense ratio is not much higher than the S&P 500 Index fund in your plan (if any), then so much the better—-it is generally easier to work with a Total US Stock Market index fund when creating a portfolio. If you do not have a Total US Stock Market Index Fund, but you have a 500-index fund an extended market index fund, then you can pair these two funds as described below.

Put all your assets in that fund, up to the amount you need for that asset class, and up to your account balance.

For example, given the sample account above, if you have a $100,000 balance in all your retirement accounts, then you want to hold $40,000 in US Total Stock Market. Suppose your 401k has a US Total Stock Market fund, and your 401k balance is $25,000. In this case, put all $25,000 in that fund; you will then move on to the rest of your funds to fill up the other asset classes.

If your 401k balance is $50,000, then put $40,000 to the Total US Stock Market Fund. After that, you still have $10,000 more to allocate in the 401k.

Allocating around a S&P 500 index fund
If your plan only has a S&P 500 index fund, but no Total US Stock Market Index Fund, then you should use the 500 Index fund up to around 80% of the total amount you want to allocate to US Stock. You should then complement the 500 Index fund with small-cap or a combination of mid-cap and small-cap to approximate total stock market; see linked article for exact ratios depending on which small/mid cap or extended market index funds you can use in other accounts.

For example, a $100,000 portfolio that needs $40,000 in US Stocks would need $32,000 in a S&P 500 index and $8,000 in an extended market index fund; again, see linked article for up-to-date exact percentages for various small/mid-cap funds.

So, if your 401k balance is under $32,000, then put all of it in the S&P 500 index fund. If the balance is over $32,000, then put $32,000 in the S&P 500 Index fund. Next, you can either put the remaining in International or Bond funds as described in Guidelines for international funds and Guidelines for bond funds, or find complementary small/mid cap funds in the same plan.

If you can find suitable small/mid-cap index funds or an extended market index fund, and the expense ratios are less than suitable international or bond index funds, then use the small-cap/mid-cap/extended market index funds up to the amount you need to fill the US Total Stock Market asset class. If your balance is less than the amount needed, then you would need to use a similar fund in a different account to complete your holdings. If you balance is more than the amount needed, then go to the next section (Allocating to remaining accounts).

If the account balance is less than 80% of your US stock allocation (for example, you need $40,000 in US Stock but your account balance is $50,000), then choose the cheapest and best index fund, if any, in the international or bond class. In many 401k plans, this is where it becomes more complicated because the quality of choices is mediocre. You will just need to find the best you can

Guidelines for international stock funds
Look for a fund with a name like International Index, Total International Index, International Equity, MSCI All-World ex US, or other fund names that suggest a total market international fund. Generally, if there is an index fund, it will be the least expensive international fund in the plan. You may need to study your funds carefully to find the right fund.

If you do not have an international index fund, then finding the right fund is beyond the scope of this article. Assuming you want to emulate the Vanguard Total International Stock Market Index Fund ([ VGTSX]) then you will want to find a large-cap blend that tracks the Vanguard fund as closely as possible. Ideally, look for funds that have some emerging markets.

Guidelines for bond funds
Similar to international stock fund, look for a bond fund with "index" or "total" in its name. You will probably need to study your funds more closely to see if there is an index fund in your plan. Look for a fund that tracks the Barclays Capital US Aggregate Bond Index, which is the same index the Vanguard Total Bond Market Index Fund ([ VBMFX])tracks.

If you do not have a bond index fund, then choosing which bond fund(s) is beyond the scope of this article.

Choosing between international or bonds if neither is ideal
If you have to choose between an international choice or a bond choice in a plan, and neither is ideal, then you might want to consider the following:
 * All things being equal, choose the fund with the lowest expense ratio; you can use other accounts for the other asset class
 * If you have taxable accounts, then generally you will want to hold international stocks in taxable and bonds in tax-advantaged, so choose the bond fund for a tax-advantaged account; see Principles of tax-efficient fund placement for more information.
 * All things being equal, choose the more "complete" fund that will not require you to complement the fund with another fund in a different account (for example, if you have an international fund with only developed markets, then you would need to hold a complementary emerging markets fund in a different account if you wanted to have a complete international portfolio).
 * If you have another account with a limited number of options, then look at the options in the same asset classes in the other account and try to pick the best combination between the two of them.

Once you identify the next fund (whether bonds or international), then fill up that account up to the maximum you need, up to your account balance. If you still need more money in that asset class, then use your other accounts. If you still have money left over in the first account to allocate, then go to the third and final asset class and find the best fund for that class, using the same principles described above.

Allocating to remaining accounts
Once you have allocated all your money in the first account, then move to the next account. If you have more than one account with limited choices, then move to the next-most-difficult account and apply the same principles above, by finding the best and cheapest index fund in an asset class you need, using it up to the amount you need, etc.

Once you have taken care of the problematic accounts with constraints, then you can move to the accounts where you have more flexibility (typically traditional IRA or Roth IRA accounts).

Repeat until you have allocated all the money in all your accounts. Generally, if you have smaller accounts, try to fill those up with a single fund. In your largest account, where you will likely need to hold two or more funds, it can be advantageous to arrange your holdings so that you can have a fund from each of your asset classes. Depending on your overall portfolio, doing so can mean that you can do all your rebalancing in one account simply by making exchanges between the funds in the largest account.

Considerations about rebalancing across accounts
Assuming you have used the principles above to create a perfectly balanced portfolio today, you need to consider how ongoing contributions or planned withdrawals will affect your asset allocation.

Generally, you want to ensure that you can keep your asset allocation intact into the future without needing to do frequent rebalances or exchanges. If you can find a way to do this without compromising other principles, then do so as it is important to have a maintenance-friendly portfolio.

One way to keep a portfolio balanced with future contributions is, when possible, to have your largest account hold funds in all three asset classes. Ideally, you are still contributing to this account so that you can rebalance with contributions as well as fund-to-fund exchanges, if necessary. In your smaller accounts, if the math works, have each account contain a single asset class each in order to eliminate the need to do exchanges in those smaller accounts.

For example, suppose you have a dormant account to which you can no longer contribute, but which you cannot (or do not want to) transfer into an account that to which you can contribute. That account is 40% of your portfolio, and you want to hold 40% of your portfolio in bonds. If you put all your money in that account in bonds, then you will be out of balance very soon unless you find another bond fund in a different account that into which you can direct 40% of future contributions. As that one account gradually decreases its share of your overall portfolio (even as its balance, you hope, grows), your other accounts will need to hold more bonds to keep your 40%.

Another difficulty arises when you have one smaller account that holds two asset classes. Suppose it holds international and bonds, with $5,000 in each, in a Vanguard IRA, and you are no longer contributing to this account. Remember that the Vanguard minimum for these funds is $3,000. Suppose you heavily are adding bonds in a different account (like a 401k). To keep your bond allocation where it needs to be, you might periodically transfer some money from the bond fund in the IRA to the international fund. At some point, the balance in the bond fund will hit the minimum. At this point or sometime in the near future, you may need to exchange all the bond funds into international. This may upset your asset allocation by a few percentage points in your asset classes, but there might not be much you can do. In most cases, though, the $3,000 shift will eventually be corrected as future contributions fill in the gaps.

Conflicting principles
Ideally, you can construct a portfolio that meets all of these principles. In many cases, however, you must make compromises because it may be impossible to satisfy two or more conflicting principles simultaneously. Examples may include:
 * You can construct a perfectly balanced portfolio today, but all of your bond holdings are in one account that you no longer contribute to. This means that as future contributions are added, your bond allocation will immediately start falling below your desired allocation.
 * You have a 401k plan with funds that have high expense ratios across the board, with the exception of one low-expense S&P 500 index fund. You would like to use only that S&P 500 index fund in your 401k, but your 401k balance is too big to put all of your money in only that one fund Therefore you are forced to select a less-than-ideal 2nd fund in your 401k that you might ordinarily want to avoid.
 * You must hold some international stocks in your 401(k) to meet your overall asset class targets, but the only desirable fund is not as diversified as you would like (for example, it might exclude small-caps or emerging markets). You would like to hold a complementary emerging markets fund in another account to “complete” your international holdings, but you might not have that option or the amount you need might be under the minimum amount to open the fund.
 * You would like to compose your entire portfolio of index funds, but one account contains only actively-managed funds and it is difficult to determine the best choice.
 * You must hold US Stocks in your 401k. You have an S&P 500 index and a mid-cap index. But, the 500 Index has a high expense ratio and the mid-cap index has a low expense ratio. You are conflicted between holding the theoretically correct asset class and paying reasonable expenses.
 * Following Principles of tax-efficient fund placement - place high growth stock funds, you might prefer to put stock funds in a Roth IRA, but if you have a 401k with low-expense stock funds and high-expense and/or inferior choices of bond funds, then you might be better off putting bonds in the Roth IRA to have lower expenses in the 401k.
 * You may want to hold in your US stock a total US stock market index fund, or an approximation of one. But in your 401k plan, you might have a low-fee S&P 500 index fund and a high-expense actively managed small cap fund. In this case, the benefit of holding a more diversified holding of both S&P 500 and small cap fund may be outweighed by the additional expenses the small cap fund. In some cases, it may be better to omit the small cap fund entirely.

Which principle wins?
Taking the scenarios above, there is not always a clear cut answer when two principles are in conflict.

For example, in the last scenario above, the conflict is between having a complete total stock market allocation comprised of an S&P 500 fund and a complementary small cap fund. You would like to hold both to get complete exposure to US stocks, but the small cap fund has a high expense ratio. If the expense ratios for the funds were 0.10% and 0.20%, then by all means hold both funds. But if the ratios are 0.3% and 1.1%, then the case for choosing the small cap fund over holding exclusively S&P 500 is less convincing. Somewhere along that continuum you must decide which is the better choice.

Low balance portfolios
If you are just building your portfolio it can be difficult to make the math work with multiple accounts because you might not be able to divide your slices into pieces that are more than the fund minimums. For example, most Vanguard mutual funds have a $3,000 minimum (with the exception of some all-in-one funds). As a result, you may need to underweight or overweight a particular asset class in the present or in the near future if future contributions cannot be made proportionally to funds in each asset class.

In these cases your options are:
 * Use an all-in-one fund in the small account until the balance is big enough to split into single funds.
 * Use ETFs – not necessarily recommended for inexperienced investors, and can add trading expenses.
 * Use mutual funds in other fund families that have lower minimums.
 * Omit a slice until your balances grow enough. This may skew your asset allocation slightly, for example, holding all of your US Stocks in an S&P 500 fund because you do not have enough in another account to open a complementary small cap fund.

See, for a detailed example of a scenario of the challenges and options of crafting a multi-account portfolio and maintaining your target asset allocation when you cannot make future contributions in the same proportions as your target asset allocation.

Taxable accounts
Another constraint may be in a taxable account that holds some funds that you cannot easily sell because of tax issues. In these cases, you may need to work around the holdings in the taxable account.

Factors leading to complex portfolios
While a simple portfolio is generally preferred over a complex portfolio, there are a number of justifications for introducing complexity to a portfolio or deviating from the general principles of allocating assets across a whole portfolio.

Asset protection
Asset protection concerns might lead to a change in asset location policy.

Marital conflicts over investing philosophy
Marital issues may come into play. One spouse may have a much lower risk tolerance than the other, and be very uncomfortable holding a high allocation to volatile investments in their share of accounts. On the other hand, a potential future divorce settlement arguably makes it advisable that each spouse, regardless of risk tolerance, should have at least some equity exposure in their accounts, so that the individually owned accounts are valued more equally.

Slice and dice
If you have a "slice and dice" portfolio, you will usually have a more complex allocation across accounts than if you used a three-fund-portfolio.

Investor behavior
One argument for having balanced accounts throughout a portfolio is that some investors tend to look at single accounts in isolation instead of as a unified whole portfolio.

For example, suppose one investor has $100,000 in a tax-deferred account in bonds, and a $100,000 taxable account with stocks. A different investor has the same overall asset allocation, but each account is split equally between stocks and bonds.

If stocks decline 40%, the first investor will see his taxable account decline 40%. Assuming that bonds have a 0% change, the second investor will see each account decline by 20%. The first investor might focus on the losses in the taxable account, rather than looking at those losses spread over his entire portfolio, and abandon his strategy out of fear of losing more. That same investor might not be as alarmed if both accounts go down 20%, even though in the end both scenarios are essentially identical.

This difficulty of trying to protect investors from this behavioral pitfall is expressed by Rick Ferri: "[T]here is a hidden risk with having different allocations in taxable versus non-taxable, and we saw this risk turn into reality during 2008 and early 2009. A few clients terminated their higher risk taxable portfolio because that specific portfolio was losing more money than the more conservative non-taxable portfolio. In other words, they separated their portfolios in their mind and compared returns rather than looking at the big picture."

Tools
You can use an assortment of tools to design and manage portfolios that span multiple accounts. In addition to the spreadsheets there are various utilities to design and manage portfolios that span multiple accounts. Most cannot automatically compose your ideal portfolio, but you can use them to enter two or three models that you composed, and then you can compare and contrast the results, looking in particular at the blended expense ratios and the totals of each asset class. Two popular tools are:
 * Vanguard Portfolio Watch is an online tool for Vanguard clients to track asset allocation.
 * Morningstar Instant X-Ray is a tool especially useful for breaking down a portfolio into asset allocations and style boxes.

Additionally, you could use one of the many spreadsheets:
 * Using a spreadsheet to maintain a portfolio
 * Asset Allocation Spreadsheet - a Google spreadsheet created by Hoppy08520, with a link to documentation, that can help setup a multi-account portfolio.