3 fund Portfolio vs Multi-Asset fund

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Topic Author
purpleRose
Posts: 71
Joined: Tue May 08, 2018 5:27 pm

3 fund Portfolio vs Multi-Asset fund

Post by purpleRose »

Hi Bogleheads,

Please help me think through this retirement portfolio allocation.

What would be the disadvantages of creating a portfolio that has:
1) Multi-asset funds like (LifeStrategy, Freedom Index) in tax-advantaged accounts in a pre-determined allocation.
2) Stock ETFs in taxable accounts - that amount balanced with Intermediate treasuries in tax-advantaged accounts.
For example if one had 200K in stock ETFs in a taxable account then place 200K (or whatever your asset allocation is) in a treasury bond ETF in a tax-advantaged account.

The advantages I see are:
1) No need to rebalance the multi-asset funds (less chance of user error or emotional decisions). Will only need to re-balance stock ETF / treasury bond ETF.
2) Tax loss harvesting easier as you just have stock ETFs in taxable account. No need to worry about wash sale rules.
3) Withdrawals are easier as you don't need to check which asset has done better then withdraw to re-balance. With multi-asset funds growth of one asset happens internally and rebalancing is done automatically.

Guess I am looking for simplicity now and as we head into the later years of retirement. What am I missing? Thanks for any insights.....
dbr
Posts: 46182
Joined: Sun Mar 04, 2007 8:50 am

Re: 3 fund Portfolio vs Multi-Asset fund

Post by dbr »

What you suggest is certainly possible as long as it meets good practice for tax efficient asset location.

Whether or not it is simple is debatable. It is probably six of one and half dozen of another but could work for you.

I think you are exaggerating the chance of error or emotional decisions. I also think you are imagining that rebalancing is a more frequent and more critical task than it really is for retired investors.

But, yes, you could try it and see if you like how it works. I myself would, and have, gone the opposite direction and don't use any multi-asset funds. I also haven't needed to rebalance anything until recently after ten years, and the last time I tax loss harvested was ten years ago and everything I own in taxable has appreciated so much there isn't going to be tax loss harvesting ever again, we certainly hope. I also withdraw and spend any dividends in taxable.
sycamore
Posts: 6360
Joined: Tue May 08, 2018 12:06 pm

Re: 3 fund Portfolio vs Multi-Asset fund

Post by sycamore »

I do have a portfolio somewhat like the OP: the use of Target Date and LifeStrategy funds for a sizeable portion of my portfolio (these also happen to cover my fixed income allocation needs), and separate stock funds for the rest.

It's not the most optimal expense ratio-wise due to roughly 0.06% higher ER of multi-asset funds. That's the main disadvantage.

I calculated the cost of doing it my way versus a completely tax and ER optimal way. Turns out it the extra cost was reasonable for achieving my need for automatic rebalancing / fewer funds + simplicity / "understandability" for my spouse. OP, I encourage you to "run the numbers" to see how much it'll cost you in dollar terms, and whether you find that it's too much.
Topic Author
purpleRose
Posts: 71
Joined: Tue May 08, 2018 5:27 pm

Re: 3 fund Portfolio vs Multi-Asset fund

Post by purpleRose »

dbr wrote: Sun Jul 18, 2021 1:22 pm I think you are exaggerating the chance of error or emotional decisions. I also think you are imagining that rebalancing is a more frequent and more critical task than it really is for retired investors.
Thanks for replying. I probably am overthinking the rebalancing and tracking of accounts. I think I need to consolidate accounts and account types to 1 or 2 brokerages first. I find that I need a spreadsheet to keep track of asset allocation / balances. Then I need to be able to re-balance in a big market move (up or down). It's not difficult to track, but to re-balance in a big downmove is not as easy to execute. With the one fund allocation it's done and on auto-pilot.
Topic Author
purpleRose
Posts: 71
Joined: Tue May 08, 2018 5:27 pm

Re: 3 fund Portfolio vs Multi-Asset fund

Post by purpleRose »

sycamore wrote: Sun Jul 18, 2021 1:47 pm I do have a portfolio somewhat like the OP: the use of Target Date and LifeStrategy funds for a sizeable portion of my portfolio (these also happen to cover my fixed income allocation needs).
Thanks for replying.
How do you use these funds to cover fixed income needs? Instead of short-term bond funds you have LifeStrategy funds in taxable?
sycamore wrote: It's not the most optimal expense ratio-wise due to roughly 0.06% higher ER of multi-asset funds. That's the main disadvantage.
Yes, they are around .12 expense ratio. But still relatively cheap.
sycamore wrote: I calculated the cost of doing it my way versus a completely tax and ER optimal way. Turns out it the extra cost was reasonable for achieving my need for automatic rebalancing / fewer funds + simplicity / "understandability" for my spouse. OP, I encourage you to "run the numbers" to see how much it'll cost you in dollar terms, and whether you find that it's too much.
Good point on running the numbers. All the other issues you pointed out are exactly what I am facing too. At this time I am willing to pay the extra cost for simplicity and long term auto-pilot while eliminating not being able to execute a re-balance when the market corrects and keeps going lower.
sycamore
Posts: 6360
Joined: Tue May 08, 2018 12:06 pm

Re: 3 fund Portfolio vs Multi-Asset fund

Post by sycamore »

purpleRose wrote: Sat Jul 24, 2021 3:45 pm
sycamore wrote: Sun Jul 18, 2021 1:47 pm I do have a portfolio somewhat like the OP: the use of Target Date and LifeStrategy funds for a sizeable portion of my portfolio (these also happen to cover my fixed income allocation needs).
Thanks for replying.
How do you use these funds to cover fixed income needs? Instead of short-term bond funds you have LifeStrategy funds in taxable?
For me, the main reason for "fixed income" is to provide stability for my portfolio. Secondary reason is to provide ongoing income distributions for spending. At present, my spending needs are met from a combination of earned income and taxable distributions.

In the case where earned income isn't enough (job/life situation changes), my plan is to (1) harvest some gains from taxable stocks funds (offset by carryover losses) and (2) sell $X per quarter of the LS fund in taxable as needed. Not to age 59.5 yet but once there I'll consider withdrawals from Trad IRA.
purpleRose wrote: Sat Jul 24, 2021 3:45 pm
sycamore wrote: It's not the most optimal expense ratio-wise due to roughly 0.06% higher ER of multi-asset funds. That's the main disadvantage.
Yes, they are around .12 expense ratio. But still relatively cheap.
sycamore wrote: I calculated the cost of doing it my way versus a completely tax and ER optimal way. Turns out it the extra cost was reasonable for achieving my need for automatic rebalancing / fewer funds + simplicity / "understandability" for my spouse. OP, I encourage you to "run the numbers" to see how much it'll cost you in dollar terms, and whether you find that it's too much.
Good point on running the numbers. All the other issues you pointed out are exactly what I am facing too. At this time I am willing to pay the extra cost for simplicity and long term auto-pilot while eliminating not being able to execute a re-balance when the market corrects and keeps going lower.
+1
Topic Author
purpleRose
Posts: 71
Joined: Tue May 08, 2018 5:27 pm

Re: 3 fund Portfolio vs Multi-Asset fund

Post by purpleRose »

sycamore wrote: Sat Jul 24, 2021 4:27 pm For me, the main reason for "fixed income" is to provide stability for my portfolio. Secondary reason is to provide ongoing income distributions for spending. At present, my spending needs are met from a combination of earned income and taxable distributions.

In the case where earned income isn't enough (job/life situation changes), my plan is to (1) harvest some gains from taxable stocks funds (offset by carryover losses) and (2) sell $X per quarter of the LS fund in taxable as needed. Not to age 59.5 yet but once there I'll consider withdrawals from Trad IRA.
Thanks for the details.
Is there a reason you hold LifeStrategy in taxable and not just stock funds like VTI / VXUX?
Would the LS fund in taxable be similar to the overall asset allocation or a more aggressive LS fund (holds more in stocks) compared to the asset allocation in tax-advantaged accounts?

I am trying to think through similar issues and was thinking of just VTI in taxable and then balance that amount with BND in tax-advantaged accounts. The remaining $ go to LS funds in tax-advantaged accounts. But what you have maybe simpler. Just one LS fund in taxable also - slightly less tax efficient but simpler. You probably will have less tax loss harvesting opportunities because of less volatility with the LS fund compared to all stock in taxable?
sycamore
Posts: 6360
Joined: Tue May 08, 2018 12:06 pm

Re: 3 fund Portfolio vs Multi-Asset fund

Post by sycamore »

purpleRose wrote: Sat Jul 24, 2021 4:43 pm
sycamore wrote: Sat Jul 24, 2021 4:27 pm For me, the main reason for "fixed income" is to provide stability for my portfolio. Secondary reason is to provide ongoing income distributions for spending. At present, my spending needs are met from a combination of earned income and taxable distributions.

In the case where earned income isn't enough (job/life situation changes), my plan is to (1) harvest some gains from taxable stocks funds (offset by carryover losses) and (2) sell $X per quarter of the LS fund in taxable as needed. Not to age 59.5 yet but once there I'll consider withdrawals from Trad IRA.
Thanks for the details.
Is there a reason you hold LifeStrategy in taxable and not just stock funds like VTI / VXUX?
Would the LS fund in taxable be similar to the overall asset allocation or a more aggressive LS fund (holds more in stocks) compared to the asset allocation in tax-advantaged accounts?

I am trying to think through similar issues and was thinking of just VTI in taxable and then balance that amount with BND in tax-advantaged accounts. The remaining $ go to LS funds in tax-advantaged accounts. But what you have maybe simpler. Just one LS fund in taxable also - slightly less tax efficient but simpler. You probably will have less tax loss harvesting opportunities because of less volatility with the LS fund compared to all stock in taxable?
We wanted some bonds in taxable to help stabilize that part of the portfolio. Some mental accounting going on due in part to uncertainty about job/life changes, but basically wanted to have some bonds there. That plus automatic rebalancing + simplicity led me to LS fund. I still do have a stock fund each in taxable and both my and my spouse's Roth hold just a stock fund.

Using tax-efficient VTI in taxable + BND and LS in tax-advantaged is a fine idea. And I think you've got the pros and cons down. For me, finding the right mix of "simple enough but no simpler" was a bit of a challenge but eventually I figured it out :)
etfan
Posts: 526
Joined: Sun May 16, 2021 4:22 pm

Re: 3 fund Portfolio vs Multi-Asset fund

Post by etfan »

I recently discovered the Paul Merriman strategy of holding a single TDF (target date fund) plus a stock index.

I find the idea appealing because it allows you to mostly have a simple self-balancing fund (in all your tax-sheltered accounts) while also giving you a little control with a stock index (probably in your taxable). Paul Merriman's intent is to get more exposure to small cap equities, but the approach can also be used to reduce the ex-US allocation present in most TDF's (that would be my goal).

And if that results in a lower-than-desired bond allocation, one can just choose an earlier target date for the TDF.
Topic Author
purpleRose
Posts: 71
Joined: Tue May 08, 2018 5:27 pm

Re: 3 fund Portfolio vs Multi-Asset fund

Post by purpleRose »

sycamore wrote: Sat Jul 24, 2021 7:37 pm
We wanted some bonds in taxable to help stabilize that part of the portfolio.

For me, finding the right mix of "simple enough but no simpler" was a bit of a challenge but eventually I figured it out :)
I think you make a good point regarding some bonds in taxable for stability. Maybe I will use this idea to allocate funds needed to pay taxes for Roth IRA conversions. "Stability in taxable" is the key here. Thanks.

Finding the right mix of "simple enough but no simpler" is the path I am also on. Want to get rid of those spreadsheets over multiple accounts!
Topic Author
purpleRose
Posts: 71
Joined: Tue May 08, 2018 5:27 pm

Re: 3 fund Portfolio vs Multi-Asset fund

Post by purpleRose »

etfan wrote: Sat Jul 24, 2021 9:08 pm I recently discovered the Paul Merriman strategy of holding a single TDF (target date fund) plus a stock index.
Thanks. Will research this.
etfan wrote: I find the idea appealing because it allows you to mostly have a simple self-balancing fund (in all your tax-sheltered accounts) while also giving you a little control with a stock index (probably in your taxable). Paul Merriman's intent is to get more exposure to small cap equities, but the approach can also be used to reduce the ex-US allocation present in most TDF's (that would be my goal).
Makes sense.
etfan wrote: And if that results in a lower-than-desired bond allocation, one can just choose an earlier target date for the TDF.
Excellent idea. Thanks.
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