Global vs local diversification

[donheff]

Most of what I have read about diversification over the past few years advises that we treat our investments as a whole. I.e., evaluate our diversification across the sum of our taxable and pre-tax accounts, keeping investments that throw off a lot of income in the non taxed accounts, etc. That made sense to me and is what I have done. But I just read Bob C's excellent book "Work Less, Live More" and it got me thinking more deeply about diversification.

My plan (consistent with most others that I have heard) is to pull from our taxable accounts in the early years of retirement and then tap into the IRAs, 401Ks, et al when we have to. But our taxable accounts are essentially all equities, thus they are much more volatile that the portfolio as a whole. It seems that stands a good chance of leading to inverse dollar cost averaging - we will pull out more shares when on downturns - than would be the case if we treated the taxed and non-taxed accounts as mini-portfolios and followed standard diversification approaches across both.

The problem with that is putting income producing stuff in the taxable accounts (we will be at a very high tax bracket). But still, Bob has me scared of volatility...

Any thoughts?

 

[bpp]

1) Sell $N in stocks from your taxable account.
2) Switch $N from bonds to stocks within your non-taxable account.

Now you've just effectively taken your withdrawal from the bonds portion of your portfolio instead of from the stocks portion.

Season to taste.

Bpp

 

[donheff]

1) Sell $N in stocks from your taxable account.
2) Switch $N from bonds to stocks within your non-taxable account.

Duh, that's pretty easy isn't it. I better get a financial advisor or stay on this board!

Similarly, I take it that after a good year you would sell the most appreciated asset in the taxable account and if there is a more appreciated asset in the non-taxed accounts you would sell that to replace the former and/or to otherwise rebalance?

With respect to the several years of cash account that most people keep, after good years I would assume you pull from the other accounts to "cash out" a year's worth of expenses that you move to the cash account until needed. After a bad year or two do most people just let the cash account drop until they have to pull frm the main accounts?

Thanks for the withdrawal 101 lessons - no one talked about this while we were piling up the savings.

Don