Rebalancing suggestions?

[Yarnstormer]

I want to balance my portfolio. Currently I have a lot of individual stocks (inherited) in an inherited IRA and also a brokerage account.

In my roth I have mutual funds, indiv stocks, and index fund. I am not happy with it's performance and pricey funds and plan to move it and redo everything. But bonds? I had the idea a roth should be more aggressively invested. Don't know why!

In my traditional deferred account I have a target date fund and an index fund. This can be rolled over from my former employer as well and reallocated if needed. It's pretty affordable where it is now tho as I worked for a local govt.

In another brokerage account I have index funds, a small amount of a target date fund, and a good bit of cash - 12% of my total assets still in cash.

So, about 51% of my assets are in taxable brokerage accounts. Because of my self employed status I probably will not be able to change that ratio, it may very well increase even if I put $6500/yr in the roth. I will not have a large earned income for at least a few years so can't dump tons into deferred iras.

The inherited IRA will have some growth but the rmds will nibble at it. I am happy with it's performance.

I was thinking of one of the balanced funds at vanguard to add some bonds to my portfolio. However, I read that bonds should be held in IRAs, not taxable accounts for tax reasons. I would have to allocate my entire rollover ira to bonds and then some to achieve the recommended balanced portfolio and still keep bonds in an ira! Really, it's not doable.

Am I over thinking this since I am not high income? Is there a tax friendly fund with bonds at vanguard that would be ok in a taxable account?
What about the target date funds at vanguard? Ok to have in a brokerage account?

Or I can just keep sitting on the cash!

 

[pb4uski]

You need to do two things. First, decide what you want your overall AA to be. Second, spreadsheet out where you are and moves that you can make towards that end.

I have a situation very similar to yours... when I retired I was 44/53/3 taxable/tax-deferred/tax free. Since I was 60/40 when I was working my tax-deferred accounts were mostly bonds, and my taxable and tax-free accounts were all equities.

Within tax deferred it is simple... sell equities and buy fixed income.. since there are no tax implications of those trades it is easy. Ditto for tax-free. Taxable is trickier in that you want to avoid your rebalancing resulting in NET taxable gains.

It is doable... and probably easily doable if you really want to do it... the only tricky part is th taxable account.

 

[Yarnstormer]

So yes? Important to have bonds in tax deferred vs taxable?
Tough with taxable like you say. I can sell some losers I think.

 

[Whisper66]

Is there a tax friendly fund with bonds at vanguard that would be ok in a taxable account?
What about the target date funds at vanguard? Ok to have in a brokerage account? Or I can just keep sitting on the cash!

For tax friendly bond funds, go to this link and apply a filter for "bonds" and "tax exempt" and "tax managed". For our tax managed account, we have some bonds in the VMLUX and VWIUX funds, both are tax exempt municiple funds.

The Vanguard Target Date funds are comprised of a mixture of index funds so I would think would be fine in a taxable account. Even better would be to buy the index funds directly for the taxable account.

Sitting on cash - it's up to your risk tolerance on how much cash to sit on.

 

[pb4uski]

So yes? Important to have bonds in tax deferred vs taxable?
Tough with taxable like you say. I can sell some losers I think.

It all depends on how tax efficient you want to be... if you want to be tax efficient then either bonds in tax-deferred or tax-exempt in taxable. This presumes that you are in a tax bracket where tax-efficiency is worth the effort.

Also, if you sell a loser in your taxable be careful not to negate it by buying the same security in your tax deferred portfolio (wash sale).

 

[Yarnstormer]

Thank you so much for your replies. I will explore the tax exempt and tax managed funds..... At present my need for tax efficiency is not extreme, but as the portfolio grows it might become more important, particularly as I already have taxable rmds that I MUST take that I won't be able to control.

I am sitting on too much cash at present but I figure being so invested in equities it balances out until I add some bonds.

 

[sengsational]

As one input to your decision into setting your asset allocation, you could look look at one of the gone fishing calculators on this page. You can pick a Vanguard, a Schwab, or a non-affiliated calculator, put in your age and your assets and it will give you a reasonable AA target.

Then, you can use a spreadsheet or you might be able to use MorningStar Instant X-Ray to type in your existing portfolio, or a proposed new portfolio (simulate removal of some existing stuff and acquiring other stuff).

I posted an asset allocation and rebalancing spreadsheet a long time ago, which, apparently, nobody cared about (or at least nobody commented upon). You probably would need to be a spreadsheet "expert" to make it work. I talk about it here, and the link to it is here.

 

[Yarnstormer]

Hey that's pretty cool!
I have the suggested allocation re Vanguard to go by. Vanguard also allows you to input outside investments so I did that except for the work ira ones that were not available to input. So, I get a reasonable idea of my current situation using that method.

It's very impressive how carefully some of you track your percentages and adjust accordingly. I'll download the spreadsheet and have a look. Thanks for sharing!

 

[pb4uski]

Another tool you may find useful is Vanguard's Portfolio Tester... you can put in projected trades and see how it changes your AA.

 

[sengsational]

Vanguard also allows you to input outside investments so I did that except for the work ira ones that were not available to input.

Just to put a little finer point on it, what you could do for the work IRA assets is use a similar publicly traded fund. It won't be 100% accurate, but it probably will be very close.

So for instance, say you're invested in a "Total US Equities" as a company investment offering. If you search "Vanguard Total US Equities, you see ETF called "VTI". So you'd add enough shares of VTI in whatever you use to measure your allocation to match your IRA balance. Occasionally you might need to adjust the number of shares to realign the balance, but these things tend to track fairly closely to each other. By the way, I didn't even know Vanguard had it, but it does have "My Accounts > Portfolio Watch > Asset Allocation". Unfortunately, it looks like hard assets are not really managed the way I like. For instance, metals/mining is shown as "other" and REIT is put with US Mid/Small Equities. Seems like "hard assets" would be a reasonable additional category, but that's just me.

As to how detailed to be about it, it doesn't have to be super precise. What matters more is consistency. So if the method you use to measure your allocation is consistent, it doesn't matter too much if it is off by a few percent. Picking an AA target and sticking with it, that's the most important thing. Even if your method of measuring against it isn't perfect, as long as it's consistent, that's the important thing.