Personal Investments • Re: Portfolio Questions... please advice on allocations

When you say, to move some funds to FXNAX, which allocation you suggested?
Or do you mean, I should be contributing in FXNAX in any of below ongoing ?

Let's work with your target of 40% fixed income...

Let's assume you get your cash down to 5% (adjust as needed if your target cash is a different amount). If you follow https://www.bogleheads.org/wiki/Tax-eff ... _placement, the rest of your taxable account will be in stocks.

Thus far, your AA would be 43/5 (for your 48% in taxable).

That means you need 35% "more" bonds to get to 40% fixed income...

IIRC your target date funds were about 17% in bonds, and since they make up the other 52% of your portfolio, that gives you 9% bonds. Or said differently your tax-advantaged accounts would be roughly 43/9 (for their 52%).

Merging those together, you'd be roughly 86/14, leaving you 26% short of your target allocation of 40% fixed income. In other words, you can't get to your target without changes...

The most direct would be to exchange some of your target date funds (of which only 17% is in bonds) to a bond fund (like FXNAX or similar) that would give you 100% bonds.

The best place for bonds is in tax-deferred (aka Traditional), so let's start there...

If you moved all 1% from your Rollover IRA, that piece would go from 0.17% bonds to 1% bonds, let's just round up to say it adds 1% bonds. You are still 25% (or so) short of a 40% target.

For simplicity (at least in my head), let's start over:

• 5% in cash in taxable (adjust accordingly)
• 1% in Rollover IRA

You need 34% more to reach target of 40%.

If you exchanged 30% from (aka 81% of) your pre-tax (Traditional) 401k to bonds (FXNAX or similar), that would give you obviously 30% more. Leaving you with a gap of 4%.

The remaining 21% (what's left of 401k + his/her Roth) could remain in your target date funds. Which again have about 17% in bonds, which would be a little under 4% (21% * 17%) to bonds, getting you just about to your stated 40% target for fixed income.

Now, the challenge is keeping that allocation... If you keep your target date funds, you'll need to track how much bonds they carry which may change every year (or every few years) as you get closer to your "target date". Likewise, you are adding funds going forward - so you'd have to do the math (similar to what I did above) and adjust future contributions (and/or rebalance) to remain close to your target AA.

(Target Date funds are best suited for people who have a more aggressive AA during accumulation years but want to slowly drift towards a more conservative AA by their "target date". Again, not sure about yours specificly, but odds are they'll go from 17% bonds today to close to 40% bonds by 2040 [their target date].)

You might benefit from getting out of the target date funds, and just using a typical two- or three-fund portfolio directly. Especially if you want an AA of 60/40 today that you'll maintain going forward. As an example, we could redo the above with:

• 40% fixed income
  • 5% cash [taxable]
  • 1% bonds [roll over IRA]
  • 34% bonds [pre-tax 401k]
• 60% stocks
  • 43% [taxable]
  • 3% [pre-tax 401k]
  • 9% [his Roth IRA]
  • 4% [her Roth IRA]

Note, your %'s - and thus mine - are off, as they only add up to 99%. Presumably rounding one or more of the accounts/funds...

The funds would be the closest you could find to https://www.bogleheads.org/wiki/Three-fund_portfolio. And if you can't find a suitable "world" stock index fund, you could use 40% international + 60% US in its place to keep your same international allocation you have now.

Arguably the above is "easier" to manage, as you don't have to calculate the [ever changing] % of bonds in your target date funds.

But that brings us to the next practical challenge... You are going to run out of space in your pre-tax accounts to hold bonds - which is the "preferred" location. Your options to address could include:

• Add bonds to taxable (not tax efficent, but at low tax brackets may not be that bad; could look at using Savings Bonds which provide tax-deferral - but are limited to how much you can buy per year)
• Add bonds to Roth (not the best use of precious Roth space, but you gotta do what you gotta do)
• Change contributions to add enough to pre-tax (when combined with employer match that is also pre-tax) to add enough bonds to maintain your AA.
• Some combination of the above

The actual $$ needed to contribute to bonds will likely vary each year... The way I handle mine is i figure out each year (at start or end of prior):

• My current AA (which probably isn't my target AA as stocks and bonds don't always move in the same direction
• My current total
• My planned contributions (including employer match)
• Which let's me figure out my estimated end-of-year total (I don't estimate growth - I just say $$ + $)
• Apply my target fixed income % to that total (in your case, 40%)
• Giving me a target of $X in bonds
• Subtract my current amount in bonds...
• What's left is the amount I need to contribute or rebalance to keep my target AA (which changes every year depending on what the markets do)

You can do the above more frequently if you want...

Statistics: Posted by SnowBog — Thu Oct 17, 2024 1:25 am

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