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multiple asset allocations
Old 09-21-2007, 12:53 AM   #1
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multiple asset allocations

I'd like to get others thoughts on maintaining multiple asset allocations. I know the general consensus is to maintain one allocation, but I'm not convinced this makes sense if the time frames differ for the end goal.

The case I'm thinking of is our retirement (core) asset allocation and then our kid's college funds. For the retirement fund, we are looking at a 30 year time frame, but for the college funds it's 10-15 years.

My thinking is that I should treat theirs separately and I'm wondering what others think?

Btw, right now their accounts are invested in an S&P500 Index, but I want to diversify and I'm thinking that I might use one of Vanguard's Target Retirement Funds to keep it simple (either the 2015 or 2020, but most likely the latter).
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Old 09-21-2007, 02:23 AM   #2
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It makes sense to me. You can absolutely partition money for different needs and allocate differently. I really makes sense if the time horizon of each goal is substantially different.

But keep in mind how much effort you want to devote to these things over 15 - 30 or 40 years.


You are going to get a lot of ideas on this topic. Right now my retirement portfolio is managed ala slice and dice method using about less than 10 Mutual Funds. I am doing it that way, because it gives me a little more control. If all of those target ret and lifestyle funds were available 20 years ago, I might have approached it differently. Now I have some tax overhang. I will not describe the draw-down strategy here (too much to describe, I have posted the idea before).

For a College fund (intermediate time horizon), I would try to keep it simple and stay relatively conservative. I would probably use the Vanguard Total Market Fund and the Vanguard Intermediate Bond Fund. I would probably be Dollar Cost averaging (with contributions yearly) with the allocation initially at 70/30 at 15 years. And change the allocation mechanically (say 5% shift) every year or two (e.g., next year target 65/35). At about 2-3 years out (from college), I would move any remaining stocks to the Intermediate Bond money and begin looking into laddered CDs maturing in 2,3,4,5,6 years. If interest rates were poor at the 2-3 year mark, I would park the money in a Money market or high quality short-term bond fund and see if rates improve and then move to laddered CDs. I would stick with High quality bonds or short-term paper... likely treasuries.

Good luck.
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Old 09-21-2007, 06:54 AM   #3
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Money is money. A dollar in my right pocket is the same as a dollar in my left pocket. A dollar in my retirement fund is the same as a dollar in my 529 plan. I do not keep them separate. Instead, I look at our overall situation and the taxes I would pay, then try to adjust things to get the most money in the end.

For example, if I know I am going to pay for college for my offspring, then a 529 plan is gonna be tax-free much like a Roth IRA. So if I need more fixed income in my asset allocation, I know I want to put the fixed income assets in the most tax efficient place I can put them. If my 401k is filled up and my Roth IRA is filled up with fixed income, then I will not buy tax-exempt bonds, but I will just use the 529 plan to buy fixed income.
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Old 09-21-2007, 08:30 AM   #4
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Help stomp out asset allocation, MPT, computer spreadsheets and all that flash in the pan modern fall der all!

Up with the Norwegian widow! The no. 2 pencil! So ok - maybe electricity is here to stay.

heh heh heh - just kidding of course.

As long as it gets the job done you can view the same pile in different ways - if it helps you achieve your goals, gives you better insight, etc.

ie - Unclemick: 85% Target Retirement, 15% individual stocks - take out 5% variable(of dec port. value) in jan and party on. Also get small pension and early SS. Sponsor some kids with 529's Vanguard age related auto asset class rebalanced.

or - the four legged table: four income streams; IRA(either 5% varible or current yield in hard times), early SS, non cola pension, dividends from individual stocks. Move 529's over to budget/retirement expense item since I'm still putting money in each month.

or - the first above plus convert my pension and SS via a calculation into a lump sum fixed amount to see my 'total asset allocation. Maybe toss in my house equity and some timberland/maybe vacation land(someday) value as well. 529 balances are part of the pile.

More than one way to skin a cat.

I think whatever gives you the best view of your situation and works for you. Try several methods and see how they 'feel'.

heh heh heh

BTY - the 529's are Missouri - The Vanguard option has Target type auto asset adjust based on age with college years being 'retired' in the ending asset allocation.

Further: If you haven't guessed - me and the Norwegian widow think of the different asset piles as different Sampo's(Finn joke) grinding out streams of goodies.
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Old 09-22-2007, 12:44 AM   #5
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Originally Posted by chinaco View Post
But keep in mind how much effort you want to devote to these things over 15 - 30 or 40 years.
That's the piece that I want to accomplish: very little long term effort. At least for these accounts (I slice and dice our retirement portfolio).

The accounts we have are coverdell accounts with small balances where we currently contribute the 2k max every year. I think buying individual funds would be too constraining due to the low balances. When I look at the make up of the 2020 fund, it's about 70/30 equity/bond mix, which seems about right to me, plus it adds some international. And when I look at the 2005 fund, the holdings look about right for when we'll actually need the funds (even thought its a tad bit high on the equity, but I can always move to their income fund at that point).

I think I'll go this route and forget about it.

Thanks for the input!
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Old 09-24-2007, 01:47 PM   #6
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Quote:
Originally Posted by kiki View Post
I'd like to get others thoughts on maintaining multiple asset allocations. I know the general consensus is to maintain one allocation, but I'm not convinced this makes sense if the time frames differ for the end goal.

The case I'm thinking of is our retirement (core) asset allocation and then our kid's college funds. For the retirement fund, we are looking at a 30 year time frame, but for the college funds it's 10-15 years.

My thinking is that I should treat theirs separately and I'm wondering what others think?

Btw, right now their accounts are invested in an S&P500 Index, but I want to diversify and I'm thinking that I might use one of Vanguard's Target Retirement Funds to keep it simple (either the 2015 or 2020, but most likely the latter).
Between my wife and I, we have 3 retirement accounts, each of them has it's own asset allocation. We also have life insurance with it's own allocation, and if we have kids (god willing), the education accounts will have their own allocation. If we use HSA's, that too would have it's own allocation.

The 3 retirement accounts:

My 401k (~120k)
Wife's 401k (~20k)
IRAs (2 rollover, 2 Roth, ~40k)

Each of these 3 is either 100% equity or 99% equity, 1% bond.

The equity position in each is:

45% domestic large cap
15% domestic mid cap
15% domestic small cap
15% international large cap
10% international small cap

the logic:
we are 34/33 yo, 20 years or so before we can comtemplate retirement.

I have had one job for 11 years. In those 11 years, I have had FOUR 401ks based on getting bought/sold by bigger fish (or smaller fish, depends on which side you are on).
My wife has had FOUR 401ks in 7 or 8 years. Her employment has stablized last 2 years, but before that it appeared she had a new job every 18-24 months.

If we only cherry picked the "best funds" from the 401k, the complimented the IRAs with what was missing, we would have been buying/selling the IRAs so often we would have hit transaction limits at T Rowe Price (where all IRAs are kept).

It is much easier for me to look at my 401k, choose the best large cap funds (22% and 23% into those), and best small cap funds (10% into each of 3 different small cap choices). No mid cap fund in my 401k exists, so I reallocate that to something close (wilshire index is one of 3 funds I send 10% to). My 401k does not have a small cap international fund... no issue, I put 25% into a foreign large cap fund, and allocate according to 45%/15%/15%/15%/10% model as best I can.

I then look at my wife's 401k, find the best large cap, mid cap and small cap funds, for example. I find the best international fund (again no small caps), and allocate according to 45%/15%/15%/15%/10% model as best I can.

In the IRAs, all IRAs are treated as one (with T Rowe Price), with the pure 45%-15%-15%-15%-10% allocation we have designed.

When we get any of the account statements, I can see if any are out of whack without needing to chase down information for 6 or 7 different accounts.

My 401k is rebalanced twice a year. I sell 1% to bonds every 6 months (until this position is 20%). We contribute 11% and increase this by 1% per year.

My wife's 401k is rebalanced very little. Once per year, but we only contribute up to match on this, so this doesn't grow very fast.

Our IRAs are rebalanced each month based on contributions. My Roth is maxed out each August, and my wife's Roth is maxed each December. By tweaking the contributions to the 7 funds we own, we can rebalance without selling.

The IRA's are the true "core". Eventually all the assets will be in an IRA, so it's important the IRA is built solid. We have some close funds in the Roth (RPMGX) and two other funds have been closed before (PRNHX and PRIDX), so selling these funds because a 401k has a good choice "right now" in that category makes little sense to me.
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Old 09-24-2007, 01:51 PM   #7
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Quote:
Originally Posted by LOL! View Post
Money is money. A dollar in my right pocket is the same as a dollar in my left pocket. A dollar in my retirement fund is the same as a dollar in my 529 plan. I do not keep them separate. Instead, I look at our overall situation and the taxes I would pay, then try to adjust things to get the most money in the end.

For example, if I know I am going to pay for college for my offspring, then a 529 plan is gonna be tax-free much like a Roth IRA. So if I need more fixed income in my asset allocation, I know I want to put the fixed income assets in the most tax efficient place I can put them. If my 401k is filled up and my Roth IRA is filled up with fixed income, then I will not buy tax-exempt bonds, but I will just use the 529 plan to buy fixed income.
One point

a dollar in an HSA is worth more than a dollar in a 401k or 529.

HSA not taxed going in
HSA not taxed going out (for medical expenses)

401k is not taxed going in
401k is taxed going out

I assume a 529 is not taxed going in
I assume a 529 is taxed at withdraw?

don't have kids (yet) so unsure on 529 rules.
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Old 09-24-2007, 03:16 PM   #8
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I assume a 529 is not taxed going in
I assume a 529 is taxed at withdraw?

My state's 529 has a state tax deduction going in and is tax-free on withdrawal if used for qualified educational expenses.

2Cor521
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Old 09-25-2007, 09:30 AM   #9
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Originally Posted by SecondCor521 View Post
My state's 529 has a state tax deduction going in and is tax-free on withdrawal if used for qualified educational expenses.

2Cor521
so 529 and HSA are equal dollar for dollar.

a 401k dollar is not as equal. Whatever your effective tax rate is, is the effective discount for the 401k value

401k not taxed going in
401k taxed going out

529 not taxed going in
529 not taxed going out

HSA not taxed going in
HSA not taxed going out

**assuming withdraws from 529 and HSA are for college/health care**
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