Long Term Asset Allocation for the Short Term?

[Dwhit]

I retired in January of this year, and have planned for an Asset Allocation of 10% Cash, 30% bonds and 60% Stock. I feel pretty comfortable with this level of risk for long term at this point.

Yesterday, my company finally let me know they have cashed out my ESOP company stock shares, but the ESOP plan rules do not allow me to rollover this amount to external accounts/IRAs for another two years (when I reach the plan-defined retirement age). So I will have to keep it in a company account similar to my 401K. This account will have some limited investment options with mutual funds, bond funds,etc.

My original thought was to consider all my accounts as a whole, and make sure the overall asset allocation matched my plan. But the fact that this ESOP cash out account will be my largest account, and that I will need to roll it over at the end of two years has caused me to pause and seek some guidance from the experts.

My worry is that over the short term of these two years, the stock market could be significantly down when I close the account, and I would not have the long term horizon to wait for the market to recover (which is what gives me some peace of mind for the 60% stock allocation in my plan). But logic tells me (at least I think it does) I could just move from one stock fund into another and that would be essentially the same thing as holding the same fund longer term.

So my question is if it were you, would you stick with your long term allocation plan, or be extra conservative given the end date of the account?

 

[REWahoo]

But logic tells me (at least I think it does) I could just move from one stock fund into another and that would be essentially the same thing as holding the same fund longer term.

+1

I'd consider the entire amount of my portfolio, regardless of where it was located, to be under my long-term AA umbrella.

 

[Meadbh]

If the market tanks, it will affect all funds. If you have to sell low, you should be able to buy low as well.

 

[pb4uski]

+1

I'd consider the entire amount of my portfolio, regardless of where it was located, to be under my long-term AA umbrella.

+2 If I understand you correctly, you would be in the same position either way, so don't sweat it.

 

[Katsmeow]

I think the OP though has a different situation than most. That is, ordinarily I agree that you consider all assets as part of one asset allocation and I would choose the funds based upon where the best funds/lowest expenses are located. For example, in our case, my 401k is mostly in a stock fund since that fund has a much lower ER than most of the bond funds in my 401k.

But, OP has an issue that is specific to his situation. In 2 years he has to rollover what is in the fund. He is worried that if equities are low at the time he would be forced to sell them at a time when he would not normally sell equities.

I think that is a legitimate concern. I would personally thing that I would consider the money as part of your overall AA. But, I would be inclined to put the funds that will have to be sold in 2 years in funds that are less volatile than equities. I would look at whether, for example, there was a stable value fund or maybe a bond fund that would meet my AA and would be inclined to put the money that would have to be sold in those funds if the funds were acceptable funds otherwise (and assuming I could do so in accordance with my overall AA).

 

[karluk]

+3 on maintaining your asset allocation over your entire portfolio, including this ESOP account. I don't see how the rollover matters at all. As others have pointed out, if you sell low, you will also be buying low after the rollover.

 

[Huston55]

I think the OP though has a different situation than most. That is, ordinarily I agree that you consider all assets as part of one asset allocation and I would choose the funds based upon where the best funds/lowest expenses are located. For example, in our case, my 401k is mostly in a stock fund since that fund has a much lower ER than most of the bond funds in my 401k.

But, OP has an issue that is specific to his situation. In 2 years he has to rollover what is in the fund. He is worried that if equities are low at the time he would be forced to sell them at a time when he would not normally sell equities.

I think that is a legitimate concern. I would personally thing that I would consider the money as part of your overall AA. But, I would be inclined to put the funds that will have to be sold in 2 years in funds that are less volatile than equities. I would look at whether, for example, there was a stable value fund or maybe a bond fund that would meet my AA and would be inclined to put the money that would have to be sold in those funds if the funds were acceptable funds otherwise (and assuming I could do so in accordance with my overall AA).

I didn't interpret that the rollover is mandatory in 2yrs. If it is, then I agree with Kats that you should: (1) find the most stable investment available with your ESOP funds while, (2) maintaining your AA for your entire portfolio.

If the rollover is not mandatory after 2yrs, then it doesn't seem that it would matter where you invest your ESOP funds, as long as you follow #2 above by maintaining your AA for your entire portfolio.

 

[Katsmeow]

I took as mandatory because he said:

But the fact that this ESOP cash out account will be my largest account, and that I will need to roll it over at the end of two years has caused me to pause and seek some guidance from the experts.

I agree that if he doesn't have to roll it over and if the investment choices in it are reasonable then he can invest however he wants to without having to worry about having to roll it over in two years.

 

[Dwhit]

Thanks for all the replies! I appreciate the advice, which is exactly what I was hoping for.

By way of clarification....

Yes, the funds will be distributed to me in two years. I will need to rollover to an IRA to avoid the tax consequences.

I am basically using my 401k plus some of my post-tax accounts as my cash portion of my asset allocation. So I would need to invest a high portion (a majority) of the ESOP account in stocks to make the allocation numbers come out correctly.

I think that is the thing to do, but want to make sure I am not missing anything I should be considering.

 

[LOL!]

But, OP has an issue that is specific to his situation. In 2 years he has to rollover what is in the fund. He is worried that if equities are low at the time he would be forced to sell them at a time when he would not normally sell equities.

As mentioned by everyone else in the thread, if equities are low at that time and they get sold, then the cash can be used to buy the same equities in the rollover IRA. Unless those equities go up dramatically in the one to two weeks it takes to get the money, the OP will be buying the equities for the same prices that they sold them for.

This is also the idea behind tax-loss harvesting. Sell a loser and buy something to replace it while that something is also low in price. (Yes, I know TLH only applies to taxable accounts.)

Thus the answer for the OP should be just invest for the long-term at your 60/40 allocation and don't worry about losses or gains. Indeed, this ESOP account invested in some "limited investment options with mutual funds, bond funds,etc." is essentially an IRA anyways.

But logic tells me (at least I think it does) I could just move from one stock fund into another and that would be essentially the same thing as holding the same fund longer term.

Yes, logic works.

 

[pb4uski]

+1 with LOL! but if you have taxable accounts in addition to tax-deferred accounts then you may want to consider tax efficiency at the same time you consider asset allocation. If your 401k/ESOP choice includes a stable value fund, then that may be a good candidate for your fixed income allocation.