Interim Asset Allocation: Existing Accounts, Fund Choices, and Implementation

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Okay, so I’ve decided upon an asset allocation plan. Now for my least favorite part – juggling and cramming all those asset classes into several different accounts. First, I’ll list my existing accounts, their estimated current balances, and my flexibility in investment options.

Account Type Est. Value Fund Choices
Roth IRA #1 $46,000 Vanguard funds w/ no transaction fee (NTF)
Roth IRA #2 $13,000 All Vanguard funds
Traditional 401k #1 $23,000 All Fidelity funds+ ETFs w/ $20 commission
Traditional 403b #2 $14,500 Limited low-cost fund choices (S&P 500 index fund, DODGX)
Traditional 401k #3 (old job) $2,000 Select Fidelity funds
Total Value $98,500

So I’ve got 7 asset classes to fit in 5 accounts. Below is a chart that shows the major asset classes sorted by tax efficiency:

Chart of Relative Tax Efficiency of Assets
(See my post on Tax Efficient Mutual Fund Placement For Maximum Return for sources and more information.)

Next, I combine my chosen 86% stocks/14% bonds with my asset allocation to find the breakdown below:

Asset Class Percentage of Total Portfolio Est. Value
Short-Term Treasury Bonds 7% $7,000
TIPS 7% $7,000
Real Estate 8.6% $8,500
US Small Value 8.6% $8,500
Emerging Markets 8.6% $8,500
International Large 25.8% $25,500
US Large 34.4% $34,000
Totals 100% $99,000

For example, with 40% of all stocks as US Large, I get 40% x 86% = 34.4% US Large over my entire portfolio. You might notice that I also sorted them in the tax-efficient order given above.

But in this case, I also need to consider the availability of low-cost index funds as well as placement, especially since all my money is already in tax-deferred accounts. My Roth IRAs are all with Vanguard with a wide variety of index choices, but my Traditional 401ks are limited to a few select index funds. After spending some time with a pencil, paper, and good eraser, here is the compromise I have worked out:

Roth IRA #1
$7,000 Vanguard Short-Term Treasury Fund (VFISX)
$3,000 Vanguard REIT Index Fund (VGSIX)
$8,500 Vanguard Small-Cap Value Index Fund (VISVX)
$8,500 Vanguard Emerging Markets Stock Index Fund (VEIEX)
$19,000 Vanguard Total Stock Market Index Fund (VTSMX)

Roth IRA #2
$7,000 Vanguard Inflation-Protected Securities Fund (VIPSX)
$6,000 Vanguard REIT Index Fund (VGSIX)

Traditional 401k #1
$23,000 Fidelity Spartan International Index Fund (FSIIX)

Traditional 403b #2
$14,500 Diversified [S&P 500 Index] Fund (DISFX)

Traditional 401k #3 (old job)
$1,000 Fidelity Spartan Total Market Index Fund (FSTMX)
$1,000 Fidelity Spartan International Index Fund (FSIIX)

On additional reason for this particular set up is to accommodate future growth. As the year progresses, I can continue to buy more shares of the largest asset classes (FSIIX and DISFX) in our 401ks. To retain the target asset allocation if things get out of whack, I can sell VTSMX in my Roth IRA and buy other funds as needed, with only a $3,000 minimum for most funds. I avoid any other low-balance fees at Vanguard by choosing electronic delivery of statements. In the future, I may switch my IRAs to an brokerage account to simply buy ETFs, but I don’t think that is necessary quite yet. I like the current simplicity and good service.

(By the way, I have such large Roth IRA balances because I did a Traditional-to-Roth conversion while our tax brackets were lower than they are now.)

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Comments

  1. bushidozen says:

    Wow…..just wow.
    I am in awe of your diversificational greatness.

  2. I have a question which relates to this post.

    Currently my wife and I have one Roth IRA each; mine with one mutual fund and hers with another. From that point of view it is relatively easy to track the contributions limit of (currently) $4000 / year for each of us. I am seriously considering transferring all our invested money in these 2 mutual funds over to Vanguard and would like to set up a simple 3 index fund approach for both of our IRA contributions. I guess my question is how we do this from a practicality point of view? I can easily work out, based on the funds and our desired asset class allocation, how much to contribute to each fund each month so that the total of our contributions combined are not more than $8000/year. Do I sign up for 2 of the funds and my wife the other?

    For example: lets say the 3 funds are X, Y and Z.
    If my allocation calls for 40% in X, 40% in Y and 20% in Z over the year, that will mean $3200 invested in X and Y and $1600 in Z. If I had made the the funds for my Roth X and Z and my wife as Y, then although together we have not gone over the contribution limits, I will have individually by contributing $4800. Is this allowed, or is there something I’m missing here? Alternately, would we both have to open a Roth with account Z and then contribute each separately to that same fund so that we comply with both the $4000/year limit and the married $8000/year limit.

    ie. Me: Roth fund X – $3200
    fund Z – $800

    Wife: Roth fund Y – $3200
    separate acct but same fund Z – $800

    Any advice is greatly appreciated. To me it just seems to get complicated from this point of view. It would be even worse (I think?) if I were to want to go with a 5 fund asset allocation plan split between the 2 of us.

  3. Hi there. Since the return of certain asset classes (small, value, emerging) over time are expected to be greater than others (short term bonds, TIPS), why are all of your bond holdings in the Roth accounts? It seems like you will save on taxes if they were switched to the traditional tax-advantaged accounts.

    That said, I enjoy your asset allocation posts. The topic is much neglected.

  4. I’m late to the party on this one, but… We’ve locked in our smaller accounts on a single investment type each such that we don’t have to manage them at all. We then use my SEP-IRA, which is larger and has substantial inflow, to balance things out and achieve our target allocation. This is *so* much easier than keeping multiple investments in each of multiple accounts.

  5. That is definitely smart. It’s can be hard as well because the place where I have most inflow (401k) is also where I have the most limited choices (no good index funds for more specific asset classes).

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