Asset Allocation Across Accounts Question

[davidbeitz]

Question for the board.

Excluding my cash and cash equivalent accounts, do you do your asset allocations across multiple accounts? My adviser is recommending that I maintain an asset allocation basically the same in all accounts (IRA's and 401(k)'s). I'd like to be at a 60/40 overall however with the 60% in an account that I won't need for 10-15 years at least to give it the best chance to grow while putting the 40% in an account that may or may not be needed in 5 years to make it a little more conservative and protect it against a downturn.

Thoughts? Does this have any merit

Thanks in advance.

 

[OldShooter]

... Does this have any merit ...

Your idea has merit. His does not. What you are talking about is basically a "bucket" strategy. You can Google it. There are lots of variations.

If I really liked this advisor I would try to understand the reasoning behind his idea and to get him to understand mine. If that didn't go well, I would find a new advisor.

If your accounts are a mixture of taxable and tax-sheltered there are tax planning considerations, too, that would again argue against your advisor's idea.

Edit: If your advisor's idea would result in trading that increased commissions for him, I would drop him like a hot rock. That is not so common any more but still something to be considered.

 

[flyingaway]

I maintain an approximate asset allocation ratio around all accounts. I don't do that for individual accounts. On the other hand, I do not rebalance frequently.

 

[pb4uski]

Question for the board.

Excluding my cash and cash equivalent accounts, do you do your asset allocations across multiple accounts? My adviser is recommending that I maintain an asset allocation basically the same in all accounts (IRA's and 401(k)'s). I'd like to be at a 60/40 overall however with the 60% in an account that I won't need for 10-15 years at least to give it the best chance to grow while putting the 40% in an account that may or may not be needed in 5 years to make it a little more conservative and protect it against a downturn.

Thoughts? Does this have any merit

Thanks in advance.

If you have only or predominately tax-deferred accounts, then it doesn't really matter if you have each account 60/40 or each account very different from 60/40 but 60/40 in aggregate. Six of one or one-half dozen of the other. Money is fungible.

So for example, let's say you have $600k in a tIRA and $400k in a 401k. If you invest the tIRA in stocks and the 401k in bonds or invest each account 60/40 then all else being equal it doesn't make a bit of difference.

Now on the other hand, if you have significant taxable account and/or tax-free accounts in addition to tax-deferred, then it does matter in terms of tax efficiency. Many of us (including me) have signifcant taxable and tax-free money so tax efficient placement does matter... so I monitor and manage my AA across taxable, tax-deferred and tax-free accounts combined.

 

[pb4uski]

Your idea has merit. His does not. What you are talking about is basically a "bucket" strategy. You can Google it. There are lots of variations. ...

WADR, you can do buckets across all accounts or across each account so I'm not sure the above makes sense.

 

[scrabbler1]

Because I ERed at 45, 11 years ag, I set up different AAs for my taxable account versus my rollover IRA. The taxable account I use to generate immediate income to cover my day-to-day expenses, so it is more bond weighted. My rollover IRA is more stock weighted because I won't be accessing the money until at least age 59.5, 3 years from now (or longer, if I likely don't need it right away).


I do rebalancing more often in my IRA than in my taxable account. I only do some rebalancing in my taxable account if I need to adjust the income it generates, compared to actual AA ranges for the IRA.

 

[OldShooter]

One of the fun things about this board is that we can frequently evaluate two alternatives and quickly boil them down to eight.

 

[davidbeitz]

If you have only or predominately tax-deferred accounts, then it doesn't really matter if you have each account 60/40 or each account very different from 60/40 but 60/40 in aggregate. Six of one or one-half dozen of the other. Money is fungible.

So for example, let's say you have $600k in a tIRA and $400k in a 401k. If you invest the tIRA in stocks and the 401k in bonds or invest each account 60/40 then all else being equal it doesn't make a bit of difference.

Now on the other hand, if you have significant taxable account and/or tax-free accounts in addition to tax-deferred, then it does matter in terms of tax efficiency. Many of us (including me) have signifcant taxable and tax-free money so tax efficient placement does matter... so I monitor and manage my AA across taxable, tax-deferred and tax-free accounts combined.

I see your point concerning the tax implications of each. Both are in tax deferred accounts so technically it doesn't matter. It's only in my head with respect to which account I plan on drawing from first.

 

[youbet]

It's only in my head with respect to which account I plan on drawing from first.

+1

In many (most?) cases, a bucket system is indeed only a tool to help keep your head straight regarding investment moves. Usually, you can do the same things managing your portfolio with only an AA strategy.

 

[pb4uski]

^^^^ That's the conclusion that I came to. I considered a bucket system and did some analysis around it based on a video by Christine Benz on the M* website. However, I was bothered by the lack of clarity over how liquidity buckets were refilled and when and the overall result was similar to the 60/40 AA approach that I understand.

In retrospect, if I was to adopt a bucket approach I would probably just refill buckets when rebalancing and when equities exceed target and let rebalancing waterfall from equities to bonds to cash... IOW cash would get replenished only when equities or bonds exceed targets. But I don't think it adds much over a conventional AA approach other than perhaps some added complexity.

 

[RunningBum]

I use https://www.bogleheads.org/wiki/Tax-efficient_fund_placement as a guide for where to place assets, and I add up the totals from all accounts to balance my AA. It is inefficient in all or at least most cases to have the same AA in each account.

Now, an tIRA and a 401K are the same class of investments, so they could have the same %s, though they don't need to. So if those are the only accounts you have, your advisor isn't steering you wrong. If you also have a taxable account, or even a Roth IRA, with the same allocation, that would be wrong. IMO. And the bogleheads wiki.

 

[pb4uski]

... Now, an tIRA and a 401K are the same class of investments, so they could have the same %s, though they don't need to. So if those are the only accounts you have, your advisor isn't steering you wrong. ...

I agree, but the advisor isn't steering the OP right either... it really doean't matter... so if the OP has a personal preference that should prevail IMO

 

[donheff]

We have equities only in taxable and bonds and the rest of our equities in tax deferred. As things stand now DWs tIRA and 401Ks (where most tax deferred is) are all over the place with the AA established globally. We are planning to balance the funds in the IRAs and 401Ks so they have the same AA before RMDs begin since we will have to pull out of all of them. If we roll over the 401K and other non-IRA into a tIRA we would have two big IRAs and could consider some sort of differential bucket withdrawal strategy. It makes my head spin just to think of it.

At some point we will probably go to automatic RMDs in which case having the same AA in each tax deferred account makes sense, doesn't it?

 

[jazz4cash]

Since the IRAs give you access to almost everything, I would use them to bolster the limitations of the 401k.
I consider my spouse’s accounts along with my own as one portfolio and allocate across all of them. Spouse’s deferred comp plan has the best stable value plan so it gets the bulk of the cash allocation. My plan has the best international index fund so that allocation goes there. You get the idea.

 

[mrfeh]

I see your point concerning the tax implications of each. Both are in tax deferred accounts so technically it doesn't matter. It's only in my head with respect to which account I plan on drawing from first.

If all the funds in question are in tax-deferred accounts, then it doesn't matter. It's just mental accounting.

A useful page for when all the money isn't tax-deferred: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

 

[a60dan]

My advisor has the same asset allocation spread over multiple retirement accounts.

Schwab is the custodian, who also pointed out that many of the trades are institutional funds that I could not buy on my own. The $25 charges I see are not Schwab fees.

At this time, we are making no distributions from the retirement accounts so income tax isn't a concern (yet).

My biggest complaint is that the same overall asset could theoretically be implemented with far fewer trades (i.e. one trade for each unique security for all accounts, instead of 1 fee per account).

Both the fee based advisor and Schwab tell me that the tools they use don't support my concept. My complaint in this case should be directed to the advisor. I agree, and continue to follow up.

While the advisor always agrees to get the "extra unnecessary trading costs" (my term) refunded, I maintain that for what I'm paying an advisor, they should be preventing the extra costs in the first place and not require action on my part.

I find it hard to believe that software to minimize trading costs across multiple accounts for a single asset allocation does not exist.

As I discern consolidating my retirement funds over the next 2 years, I'm hoping to find custodian and/or advisor that can overcome this glaring limitation.

 

[pb4uski]

Please elaborate... how much are they charging you in fees a quarter?

 

[OldShooter]

My advisor has the same asset allocation spread over multiple retirement accounts.

Schwab is the custodian, who also pointed out that many of the trades are institutional funds that I could not buy on my own. The $25 charges I see are not Schwab fees.

At this time, we are making no distributions from the retirement accounts so income tax isn't a concern (yet).

My biggest complaint is that the same overall asset could theoretically be implemented with far fewer trades (i.e. one trade for each unique security for all accounts, instead of 1 fee per account).

Both the fee based advisor and Schwab tell me that the tools they use don't support my concept. My complaint in this case should be directed to the advisor. I agree, and continue to follow up.

While the advisor always agrees to get the "extra unnecessary trading costs" (my term) refunded, I maintain that for what I'm paying an advisor, they should be preventing the extra costs in the first place and not require action on my part.

I find it hard to believe that software to minimize trading costs across multiple accounts for a single asset allocation does not exist.

As I discern consolidating my retirement funds over the next 2 years, I'm hoping to find custodian and/or advisor that can overcome this glaring limitation.

To be clear, you are not the OP right? So this is a similar problem but new to the thread? Thoughts:

1) Access to "institutional funds" is meaningless. In Olden Times fees on this type of fund tended to be lower, but in our wonderful new era of miniscule or no fees, you no longer care. They are telling you this so that you think your advisor has given you wonderful and mystical investments. See also #4 below.

2) If you have not done it, go to https://brokercheck.finra.org/ and check our your advisor. Look especially for customer disputes. Hopefully he/she will check clean; otherwise you have an immediate problem.

3) Ask your advisor whether he/she is acting as a fiduciary in your relationship. If no, get out of there. If yes, tell the advisor that you have been told that this problem of your having to spot fees to get them reversed is a breach of fiduciary duty. Then listen.

4) From the tone of your post, it sounds to me like you have a complex portfolio. This is a standard tactic with advisors, who have to make investing look difficult to dissuade the client from DIY. If individual stocks, you almost certainly have a diversification problem as it takes maybe 100 stocks carefully chosen for sector and geographic diversity to diversify away individual stock risk. If you have a bunch of mutual funds, it is entirely possible that in aggregate they correlate with a single total market fund. You can check this with Portfolio Visualizer: https://www.portfoliovisualizer.com/backtest-portfolio

If you hold so many issues that it is burdensome or impossible to use Portfolio Visualizer, then for guessing right I win the giant virtual stuff teddy bear.

5) From your post, you seem to be detail-oriented and intelligent. Read these two books: "The Coffeehouse Investor" by Bill Schultheis and "The Bogleheads' Guide to Investing" and you will see that you can easily do this yourself. For a litle more depth, you can progress to "A Random Walk Down Wall Street" by Burton Malkiel or "Winning the Loser's Game" by Charles Ellis.

6) Really, you don't seem to communicate well with this advisor. This is the kind of situation that is, for me, one strike and you're out. Read the books and then decide whether you even need to find someone else after you ditch this guy.

7) If the advisor gives you any pushback on any of this, contact Schwab and complain. They have a Very Big Hammer, which you do not.

 

[Filetmerlot]

One of the fun things about this board is that we can frequently evaluate two alternatives and quickly boil them down to eight.

Then we must have lots of engineers on this board

 

[Montecfo]

I use an overall asset allocation, intentionally making it different by account type. My Roth IRAs are all equities, as i may never tap them. The Rollover IRAs are 80%+ equities. I will be start to tap them in next couple of years as part of tax strategy. My taxable account is 40% conservative equities, 60% bonds and CDs.

My spending money comes from maturing CDs.

Making the allocation the same in each account makes little sense in my view, but it does complicate matters and drive trading fees.

 

[capjak]

I try to follow boglehead wiki for asset location. I believe the short answer per bogleheads is to start with bonds/fixed income and put bonds in tax deferred until reach bond allocation than add equities in rest of tax deferred and taxable. Roth should be high growth assets.

IF not enough space in tax deferred for all fixed income than add fixed income to taxable (dependent on tax rate may use muni in taxable).

 

[mrfeh]

I try to follow boglehead wiki for asset location. I believe the short answer per bogleheads is to start with bonds/fixed income and put bonds in tax deferred until reach bond allocation than add equities in rest of tax deferred and taxable. Roth should be high growth assets.

IF not enough space in tax deferred for all fixed income than add fixed income to taxable (dependent on tax rate may use muni in taxable).

+1

When you need the funds in an account should not be a factor.

 

[pb4uski]

Then we must have lots of engineers on this board

Too many.

 

[Gotadimple]

I can understand the Advisor's perspective about keeping a common allocation in taxable/tax-deferred/and tax-free accounts. When rebalancing to a common allocation it is easier with the allocation mixed within each account type. The alternative if a Roth is all equities and a T-IRA is all bonds is that there may be no way to get extra cash into the T-IRA to boost the flagging bond allocation.

With bonds/equities in each type of account, the OP can achieve the desired allocation without worrying about the inability to move $ between account types (which could be a taxable event). Or, alternatively, having to put a bond holding in a Roth Account because cash can be generated by selling an equity, and the only place the OP has equities is in a Roth.


The problem as I see it is that the OP needs to select investments that don't generate dividends for the taxable/tax-deferred in order to keep the tax burden low when liquidating. A common asset allocation is what everyone aims for, but, re-allocating can be an issue if asset location is restricted by account types. I haven't found a solution to that, especially once you are no longer eligible to make deposits on a T-IRA or Roth/401-k!