Maintaining balance across multiple accounts via new contributions

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Topic Author
AstaticInventor
Posts: 11
Joined: Thu Aug 22, 2019 2:15 pm

Maintaining balance across multiple accounts via new contributions

Post by AstaticInventor »

Hi, everyone.

I’m in the process of converting from a mirrored asset allocation to a spread allocation strategy and would like to make sure my plan for maintaining asset allocation balance across accounts going forward is sound.

Four accounts make up my retirement savings.

- Vanguard taxable brokerage account
- Vanguard traditional IRA
- Vanguard Roth IRA
- Vanguard employer 401k

The employer 401k and taxable accounts are the only accounts to which I can contribute.

The bulk of new contributions will be through my 401k. About 40% of each new contribution will be going into my taxable account.

Allocation strategy is:

- 100% VTSAX in taxable account to avoid generating tax liability.
- 100% VTSAX in Roth IRA because the account balance is small and this is one of the highest-return assets I have.
- U.S. total stock, international total stock, U.S. total bond and international total bond in traditional IRA. This is my biggest account.
- Employer 401k will start out 100% international total stock because this account has the best fund for that (VTSNX) and the account balance is medium-sized relative to other accounts.

To keep things in balance going forward I’m thinking:

- Continue to put 100% of new contributions to the taxable account into VTSAX.
- Have new contributions to the 401k go into U.S. stock, international stock and U.S. bond funds in the appropriate proportions to maintain the overall portfolio balance for these classes.

The only problem is the 401k doesn’t have an international bond fund. At all. Not even a bad one.

To accommodate that I was thinking of sending the portion of new contributions that should go into international bonds into the 401k’s U.S. bonds fund. Then during my yearly rebalancing I could sell U.S. bonds in the traditional IRA and buy international bonds in the traditional IRA to restore balance.

Is this sound or are there problems with this approach?

It feels risky since the “rebalancing” here isn’t really sell high, buy low.
sycamore
Posts: 6360
Joined: Tue May 08, 2018 12:06 pm

Re: Maintaining balance across multiple accounts via new contributions

Post by sycamore »

AstaticInventor wrote: Mon Apr 19, 2021 3:06 pm Hi, everyone.

I’m in the process of converting from a mirrored asset allocation to a spread allocation strategy and would like to make sure my plan for maintaining asset allocation balance across accounts going forward is sound.

Four accounts make up my retirement savings.

- Vanguard taxable brokerage account
- Vanguard traditional IRA
- Vanguard Roth IRA
- Vanguard employer 401k

The employer 401k and taxable accounts are the only accounts to which I can contribute.

The bulk of new contributions will be through my 401k. About 40% of each new contribution will be going into my taxable account.

Allocation strategy is:

- 100% VTSAX in taxable account to avoid generating tax liability.
- 100% VTSAX in Roth IRA because the account balance is small and this is one of the highest-return assets I have.
- U.S. total stock, international total stock, U.S. total bond and international total bond in traditional IRA. This is my biggest account.
- Employer 401k will start out 100% international total stock because this account has the best fund for that (VTSNX) and the account balance is medium-sized relative to other accounts.

To keep things in balance going forward I’m thinking:

- Continue to put 100% of new contributions to the taxable account into VTSAX.
- Have new contributions to the 401k go into U.S. stock, international stock and U.S. bond funds in the appropriate proportions to maintain the overall portfolio balance for these classes.

The only problem is the 401k doesn’t have an international bond fund. At all. Not even a bad one.

To accommodate that I was thinking of sending the portion of new contributions that should go into international bonds into the 401k’s U.S. bonds fund. Then during my yearly rebalancing I could sell U.S. bonds in the traditional IRA and buy international bonds in the traditional IRA to restore balance.

Is this sound or are there problems with this approach?

It feels risky since the “rebalancing” here isn’t really sell high, buy low.
That's a sound and easy-to-implement approach.

Whether it's really all that "risky" isn't clear to me. There's some debate about how often one should rebalance anyway, and that's in regard to stocks and bonds. In your case, it's about rebalancing US bonds and international bonds. They likely don't diverge all that much (in terms of performance) so I don't think you're missing out by being underweight intl bonds for a while.

And it's easy enough to rebalance US and intl bonds once a quarter if that'll alleviate any lingering concern.

What's your asset allocation in terms of US stock/intl stock/US bond/intl bond?
Topic Author
AstaticInventor
Posts: 11
Joined: Thu Aug 22, 2019 2:15 pm

Re: Maintaining balance across multiple accounts via new contributions

Post by AstaticInventor »

40% U.S. stock
21% international stock
25% U.S. bond
14% international bond

For a 61%/39% stock/bond split and 65%/35% U.S./international split.
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Duckie
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Joined: Thu Mar 08, 2007 1:55 pm

Re: Maintaining balance across multiple accounts via new contributions

Post by Duckie »

AstaticInventor wrote: Mon Apr 19, 2021 3:06 pm - 100% VTSAX in taxable account to avoid generating tax liability.
- 100% VTSAX in Roth IRA because the account balance is small and this is one of the highest-return assets I have.
By holding VTSAX in both taxable and Roth IRA if you ever sell in taxable for a loss you may create a "wash sale". The way to avoid that is to swap VTSAX in the Roth IRA for something else that is not "substantially identical". VFIAX and VLCAX qualify. Or if you are willing to use ETFs then ITOT, SCHB, or IWV would work.
The only problem is the 401k doesn’t have an international bond fund. At all. Not even a bad one.
You don't need international bonds at all. If you want them that's one thing, but you don't need them.
To accommodate that I was thinking of sending the portion of new contributions that should go into international bonds into the 401k’s U.S. bonds fund. Then during my yearly rebalancing I could sell U.S. bonds in the traditional IRA and buy international bonds in the traditional IRA to restore balance.
That would work.
It feels risky since the “rebalancing” here isn’t really sell high, buy low.
It's getting things back where they should be.
Topic Author
AstaticInventor
Posts: 11
Joined: Thu Aug 22, 2019 2:15 pm

Re: Maintaining balance across multiple accounts via new contributions

Post by AstaticInventor »

Awesome. Thanks to you both for the feedback!
SnowBog
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Joined: Fri Dec 21, 2018 10:21 pm

Re: Maintaining balance across multiple accounts via new contributions

Post by SnowBog »

Overall, looks like a good plan.

Personally I do something similar, except I fully fund our tax-advantaged accounts first, then start doing taxable accounts. That means my "bonds" might get "over funded" for the first part of the year (when I'm not contributing to taxable), but will balance out by the end of the year. So I look at both "current" and expected "year end" AA before I think about rebalancing. If I can redirect future contributions to get AA back in balance by year end, that's what I do. If not, I'll rebalance manually (in my tax-deferred account).
Duckie wrote: Mon Apr 19, 2021 6:19 pm
It feels risky since the “rebalancing” here isn’t really sell high, buy low.
It's getting things back where they should be.
Agreed. If you are maintaining your AA, you are basically maintaining your risk and exposure to the various asset classes. If one is high and another is low (though growth or new contributions), rebalancing is simply getting them back to your target ranges.
Duckie wrote: Mon Apr 19, 2021 6:19 pm
The only problem is the 401k doesn’t have an international bond fund. At all. Not even a bad one.
You don't need international bonds at all. If you want them that's one thing, but you don't need them.
Agreed. I don't hold any international bond. I've not seen anything that makes me think I need them...

For what it's worth, some argue the same about international stocks (when you figure most of the largest "US" companies make a lot of money in global markets and this already have global exposure). Others swear by maintaining international stock in proportion to global weight. I'm somewhere in between.
Duckie wrote: Mon Apr 19, 2021 6:19 pm By holding VTSAX in both taxable and Roth IRA if you ever sell in taxable for a loss you may create a "wash sale". The way to avoid that is to swap VTSAX in the Roth IRA for something else that is not "substantially identical". VFIAX and VLCAX qualify. Or if you are willing to use ETFs then ITOT, SCHB, or IWV would work.
I've seen some arguing that overlap with some accounts might be OK. At best I think this is a "gray area". Personally, I want to err on the side of staying clear of any potential conflict. As such, I agree. I go so far as to use completely distinct choices in tax-advantaged accounts - such that I'll never use them (or others "substantially identical") in my taxable accounts.

But I'll also point out, if you plan to TLH, have a "plan" for several choices and know what you'll do if things keep falling and/or when things recover. I didn't have a great plan last March, so I scrambled to find new alternative funds as stocks were continuing to fall, and then with the quick recovery am basically "stuck" with those funds (or would have to recognize gains).
SnowBog
Posts: 4699
Joined: Fri Dec 21, 2018 10:21 pm

Re: Maintaining balance across multiple accounts via new contributions

Post by SnowBog »

AstaticInventor wrote: Mon Apr 19, 2021 3:06 pm - Vanguard taxable brokerage account
- Vanguard traditional IRA
- Vanguard Roth IRA
- Vanguard employer 401k
One other thought, unrelated to your OP, but you might want to think about consolidating your traditional IRA into your employer 401k if allowed by your plan (and if your funds choices [other than international bond] are OK).

Should you ever be in a position where you wanted to contribute to your Roth account, but make too much to contribute directly, by getting ride of your traditional IRA you've cleared the way for a "Backdoor Roth".

Additionally, having fewer and larger accounts might make it easier for management and rebalancing. I recently consolidated two former 401k plans, and I'm verry happy I did so (but my current employer plan had great low fee choices).
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