As with anything investment-related, see my disclaimers. This post deserves an additional disclaimer. Investing involves risk. I no way do I recommend any course of action. Don't trust random idiots like me on the internet for investing advice. Or for anything else, for that matter.
Last October, I shared my target allocations in my tax loss harvesting update. In this post, I thought I’d provide some financial voyeuristic fodder and share what my current allocations, as well as what investments I have in my portfolio.
Tax-Advantaged and Taxable Allocations
I break out my allocations between my tax-advantaged accounts (workplace 401(k), self-employed 401(k), Roth and Traditional IRAs) and my taxable brokerage accounts. Why? Because some investments, such as REITs, TIPs, and municipal bonds get different tax treatment and can be suboptimal in the wrong kind of account. For example, REITs and TIPs don’t get favorable tax-treatment in taxable accounts and municipal bonds lose their tax-advantage when held in tax-advantaged accounts. True, we’re not talking a huge difference, but over the years, that difference can add up.
I based my allocations roughly off what Wealthfront was offering with the risk dial cranked up. I’ve actually started to wonder if maybe I need to jettison some of the recommendation, such as even having TIPs, REITs or US dividends in my portfolio, perhaps shifting to a simpler model closer to the three-fund approach. And I’m also feeling that maybe I’m too heavy into the fixed income side. I still have twenty to thirty years before retirement, ignoring dreams of FIRE.
So here is the current allocation percentages:
|Asset Category||Tax-Adv. Goal||Tax-Adv. Actual||Taxable Goal||Taxable Actual|
|US Large Cap (S&P 500)||36%||35.3%||34%||27.3%|
|US Small (Russell 2000)||9%||10.6%||9%||7.8%|
|Foreign, Small Cap||10%||9.8%||14%||11.6%|
|US Large (Dividend)||5%||4.6%||7%||5.4%|
My strategy is to either rebalance (a) every 18 months, or (b) whenever a particular investment category gets more than 20% out of variance from my target allocation. My next scheduled rebalance is this coming October. Above, I’ve highlighted five categories that are in need of rebalance to get them back to the target. Clearly, the Cash and Other categories are always out of true whenever there is any money there, but I chose to not highlight them. I’m not as aggressive in rebalancing by selling in my taxable account, mostly because I’d rather gift shares that have appreciated too much and inject additional cash into categories that need more allocation.
Three Fund Approach
My approach has nine different target asset categories for tax-advantaged accounts and eight for taxable accounts. That’s a lot and probably more complicated than most folks can tolerate, modern portfolio theory notwithstanding. Many would suggest skipping complexity and go with a three-fund approach, a mixture of US stocks, US bonds, and international.
So what would my allocation percentages look like, squeezed into the three-fund approach? I would need to recategorize a few things, and because I’m lazy, I’m going to put things like REIT and US Dividend stocks into the US Stock category, even though they also have characteristics similar to bonds. They aren’t 100% equity, but that’s what I’m sticking with.
Here’s my allocations mapped into the three-fund portfolio:
|US Stock||US Large (S&P 500)
US Small (Russell 2000)
US Large (Dividend)
Foreign, Small Cap
Okay, for you financial voyeurs, here’s the actual assets in my investment portfolio. I’m only sharing percentages since I have coworkers who read my blog (yeah, my bad!) and I don’t want them hitting me up for a free lunch. 🙂
|S&P 500 Index Trust||US Large (S&P 500)||26.7%||Institutional 401(k) index fund(s)|
|Vanguard Russell 1000 Value Index Trust||US Large (S&P 500)||6.2%||Institutional 401(k) index fund(s)|
|US Small Cap||US Small (Russell 2000)||9.1%||Institutional 401(k) index fund(s)|
|VIG||US Large (Dividend)||4.6%|
|VTI||US Large (S&P 500)||3.0%|
|VBR||US Small (Russell 2000)||0.8%|
And now for the taxable account:
|VOO||US Large Cap (S&P 500)||27.3%|
|VXF||US Small (Russell 2000)||7.8%|
While I believe in modern portfolio theory and the need to diversify across assets, I’m also wondering if I should simplify things. Here’s a couple things that I’m looking to do in 2021.
#1: Sell my holdings in Vanguard Russell 1000 Value Index Trust: Why am I in this fund? Mostly inertia. When I contributed to my 401(k) while at MegaCorp, I split the money between four different funds and this was one of them. It’s 0.04% expense ratio isn’t as good as the 0.011% ratio for the S&P 500 index option in the same 401(k) and large-cap value isn’t part of my target allocations. I’ll probably roll it into the S&P 500 option, removing the asset completely.
#2: Shift VBR into the US Small Cap: VBR’s ER isn’t bad at 0.07%, but I have access to a Vanguard-run small cap option that has a smaller, 0.03% ER. And removing VBR would simplify things even more.
#3: Remove US Dividend and Resource categories. Frankly, I’m not sure being spread across nine verses eight categories is going to make a big difference return-wise, but it would make things easier to manage, removing four of the twenty eight investments, as well as their tax loss partners. For the VDE and my XLE holdings, the easiest exit will be this March when I gift the shares to avoid long term capital gains, and then shifting the allocation into other asset categories.
#4: Exit completely from DumpsterFire, Inc. As I wrote previously, I’ve already exited 85% of my position. Now to exit the remaining 15% and return back to an index-only portfolio. I’ll probably continue to sell covered calls to expire my way out of this.
#5: Consider lowering my bond ratios. I’m worried I’m being too conservative with my current ratio. I’m considering shifting to 0% bonds in my taxable accounts and dropping my tax advantaged accounts to 10% or lower. I still have a while to retirement. I haven’t decided completely on this one.
So now you have a better idea of what I invest in. You’ll notice that I’m mostly in index funds, with the exception of my DumpsterFire, Inc. shares. You’ll notice there is no crypto currency, gold, etc.
Anything I’m missing? Have some other thoughts after reviewing what I’m invested in? I’d love to hear about it.