Am I diversified?

[dvd7e]

I am going to answer your question indirectly. I say keep fees to a minimum (meaning do not do self managed account) and then use a Roth IRA and other investments to round out portfolio.

....

Then you go to Roth and make sure you get the exact holdings you want

So one thing I'm confused about is how to manage asset allocation across multiple accounts, with varying goals. Do you go for a specific allocation across ALL accounts?

For example, since I am young can I afford to be very aggressive with my retirement portfolio (401k, IRA).....Should I then be pretty conservative (Good mix between Bonds and Stocks) with taxable investments used for saving money for a house downpayment in 3-5 yrs?

Or is it wrong to think of them as different, and instead go for my target allocation across all investments?

I understand how it makes sense to combine the IRA and 401k accounts together to get a desired allocation across both accounts because they are for the same goal (retirement) with the same timeline, but I'm not sure how to balance this with other shorter term goals (house downpayment in 3-5 yrs most likely, wedding in a year, etc).

And a related question - Should you exclude or include emergency funds (the roughly 6+ months of mandatory expenses for the unexpected) tied up in CD's, Money Markets, etc in your Asset Allocation plan?

Thanks!

[jIM_Ohio]

So one thing I'm confused about is how to manage asset allocation across multiple accounts, with varying goals. Do you go for a specific allocation across ALL accounts?

For example, since I am young can I afford to be very aggressive with my retirement portfolio (401k, IRA).....Should I then be pretty conservative (Good mix between Bonds and Stocks) with taxable investments used for saving money for a house downpayment in 3-5 yrs?

Or is it wrong to think of them as different, and instead go for my target allocation across all investments?

I understand how it makes sense to combine the IRA and 401k accounts together to get a desired allocation across both accounts because they are for the same goal (retirement) with the same timeline, but I'm not sure how to balance this with other shorter term goals (house downpayment in 3-5 yrs most likely, wedding in a year, etc).

And a related question - Should you exclude or include emergency funds (the roughly 6+ months of mandatory expenses for the unexpected) tied up in CD's, Money Markets, etc in your Asset Allocation plan?

Thanks!

You want to keep house and retirement funds seperated

This is because

a) the time frames on the money needs are very different
b) the risks you need to take with the monies is very different

There are probably other reasons (tax consequences or things I cannot think of) which also makes it a wise idea to keep the money separated and not part of same "allocation".

Roth and 401k its tough to make same generalization (maybe each account fits into same allocation, maybe it you do something different).


Most on the board consider they have one retirement allocation, and they might put large cap in 401k and foreign in the IRA. If they are married its possible large cap is for the husband, small cap is for the wife, bonds are in one IRA and mid caps are in the other IRA.

My life tells me that is too much work for me- in the 13 years I have worked for my employer, we have been bought and sold 4 times. That is 4 different 401ks. In last 8 years my wife has had 3 jobs and 3 401ks. No way I want to manage making a decision as to one account gets 1 asset class and another gets another asset class, because in 2 years I need to "re do" the whole thing when we get bought out, sold or change jobs.

So what I have is one allocation

45% large cap
15% mid cap
15% small cap
15% foreign large
10% foreign small cap and emerging markets

I do move some of the large cap into bonds (some accounts of mine have 40% large cap and 5% bonds) as I slowly add bonds to my tax deferred portfolios (I do not put bonds inside a Roth).

In my wife's 401k, there is no good foreign small cap or emerging markets fund, so she gets 25% foreign large cap. She also has no decent small cap fund, so she has 30% mid cap. At high level, the allocation looks the same (% stocks-% bonds is the same, and % domestic-% foreign is the same).

In my 401k there is no mid cap fund, so I have 30% small cap. Again % stocks-% bonds is the same and % domestic-% foreign is the same.


If you want another kicker, in my wife's Roth I do not buy funds on asset class, I buy them by sector. Meaning I buy health care fund, natural resources fund, a value fund, a growth fund, a financial services fund etc...

but the 75-25 domestic-foreign allocation is still the same. The large cap-mid cap small cap is almost the same (its only 10k, so still working on adding more tech which is small cap to get right allocation).

I know the allocation I want, I can quickly diagnose it without xray (because 45% is 3X 15%, I just have to see if one fund size is 3X the other) and the xray shows me fund drift (for example I know my mid cap fund holds about 30% small cap and my small cap funds hold about 40% mid cap).



So for retirement find your allocation, then find a way to deploy it for retirement accounts only.

For the house fund, if you are investing in anything other than cash, good luck to you.

Do not consider the house monies part of retirement asset allocation. Make sense?

[disneysteve]

Most on the board consider they have one retirement allocation, and they might put large cap in 401k and foreign in the IRA. If they are married its possible large cap is for the husband, small cap is for the wife, bonds are in one IRA and mid caps are in the other IRA.

That would be us. I can't imagine doing it any other way. If I had to have a full asset allocation in each individual account, that would be nuts. Rather than researching and managing perhaps 6 funds, I'd have to manage 15 or 18 or 20 or more different funds between my traditional IRA, my rollover IRA, my wife's rollover IRA, my Roth, wife's Roth, wife's 403b and wife's 401k. It is far, far easier to do as Jim describes.

[jIM_Ohio]

That would be us. I can't imagine doing it any other way. If I had to have a full asset allocation in each individual account, that would be nuts. Rather than researching and managing perhaps 6 funds, I'd have to manage 15 or 18 or 20 or more different funds between my traditional IRA, my rollover IRA, my wife's rollover IRA, my Roth, wife's Roth, wife's 403b and wife's 401k. It is far, far easier to do as Jim describes.

To be clear this allocation I listed above

45% large cap
15% mid cap
15% small cap
15% foreign large
10% foreign small cap and emerging markets

Is in 6 accounts, meaning each of the 6 has the allocation I listed. IMO this works really well if one account or two accounts have most of the money, and some of the accounts are really small in size (for example my wife's IRAs are 1/10 the size of my 401k and 1/10 the size of my IRAs).

My wife's 401k has 5 funds
large cap-mid cap-foreign-bond fund-company stock

My 401k has 7 funds
large cap-small cap-foreign large- foreign small-corporate bond-high yield bond-company stock

My Roth has 6 funds
Large cap-mid cap-small cap growth- small cap value- foreign large- foreign small

My Rollover has 6 funds
Large cap- mid cap- small cap- foreign large -foreign small- bond fund

My wife's Rollover+Roth is about 10 funds
1 Financial services 2 real estate 3 value 4 growth 5 natural resources 6 health care 7 emerging markets 8 africa middle east 9 global technology 10 science and technology


When I analyze any of the accounts above, I expect to see:

75% domestic and 25% foreign- this is my core allocation

and for the most part I expect to see 45% in large caps and 30% in small/mid caps and 15% foreign large and 10% foreign small... if possible I want it to be the detailed allocation below, but in the 401ks each one is missing one of the asset classes based on the choices (or lack of).

45% large cap
15% mid cap
15% small cap
15% foreign large
10% foreign small cap and emerging markets

That is 34 funds total.
granted 3 of the funds in my Roth are also in my rollover (same large cap, foreign large, foreign small)

I never look at portfolio as a whole... my 401k funds have no tickers (they are institutional funds specifically for my company)- I analyze and rebalance each account without looking at others because I know every account is the "same". I dont have to worry about selling a fund in my Roth because my wife's 401k did something or did not do something.

[MoneySaver2]

Hi,

I want to know if I am properly diversified. I am 24 yrs old (so obviously many, many yrs from retirement) and just started working out of college, only have about 5k in my 401k and 20k in short term investments/emergency funds.


Broad Market Bond Index Fund: 20% (U.S. Bonds)
S&P 500 Indexed Equity Fund: 10% (Large Cap; Blend)
Value Equity Fund: 25% (Large Cap; Value)
Small/Mid Cap Index Equity Fund: 25% (Small Cap; Growth)
New Perspective Fund (RNPFX): 15% (Large; Growth)(~65% Foreign stocks, 35% U.S.)
MSCI EAFE Indexed Equity: 5% (Large Cap; Blend) (Foreign Markets)

Overall: 20% Bonds, 80% Stocks

Am I diversified?

Thanks

It looks like a good diversified portfolio but everybody's definition for a diversified portfolio differs. My suggestion it to speak with a financial advisor or find a risk tolerance questionarre to identify your risk tolerance. From there you can start to building. Good job on starting at an early age though!

[Snodog]

Hi,

I want to know if I am properly diversified. I am 24 yrs old (so obviously many, many yrs from retirement) and just started working out of college, only have about 5k in my 401k and 20k in short term investments/emergency funds.


Broad Market Bond Index Fund: 20% (U.S. Bonds)
S&P 500 Indexed Equity Fund: 10% (Large Cap; Blend)
Value Equity Fund: 25% (Large Cap; Value)
Small/Mid Cap Index Equity Fund: 25% (Small Cap; Growth)
New Perspective Fund (RNPFX): 15% (Large; Growth)(~65% Foreign stocks, 35% U.S.)
MSCI EAFE Indexed Equity: 5% (Large Cap; Blend) (Foreign Markets)

Overall: 20% Bonds, 80% Stocks

Am I diversified?

Thanks

There are many ways to invest that will get you to where you want to go.

The best course of action would be to read a few investment books to learn for yourself. Take your time and don't make any sudden moves. Your young and even if it takes you 5 years to learn and pick your allocation that is OK. Also check out the Bogleheads site as I have learned much over there.

Personally I would not be caught dead owning a small cap growth fund as I tilt to small cap value as much as I can. I would also prefer more than 15% foreign. I am 50/50 international/US. But these are just my preferences and opinions vary.

Looking at the last 30 years bonds have not slowed you down much but keep in mind that we have been in a bond bull market that can't last forever. I am age=bonds and have a feeling I may regret it but I keep telling myself no one knows the future.

Good luck!!

[Ekmann99]

I would say so, yes.

[dvd7e]

OK So I took a few months off to do a little research and some other things.

I'm 24, have no debt, and single (but will be getting married next year - fortunately won't have to pay any major expenses - and plan on putting down a down payment for a condo with my fiancee/wife). Being on the younger side I would like to be fairly aggressive. Probably retire between 60 and 65.

Funds in my 401k......Holding %.......Ticker used for X-Ray...... Expense Ratio
Broad Market Bond Index Fund......10%......AGG........0.10%
S&P 500 Indexed Equity Fund.......15%......MDSRX......0.11%
Small/Mid Cap Index Eq Fund.......30%......REBEX......0.12%
New Perspective Fund..............20%......RNPFX......0.20% (?)
Global Real Estate Fund...........10%......IFGL.......0.90%
Emerging Markets..................10%......EEM........0.12%
Commodities........................5%......DJP.... ....1.25%
Totals...........................100%......-..........0.27%

18% of Income going into Traditional 401(k) (Before Tax)
7% of Income going into Roth 401(k)
Currently in 25% tax bracket, who knows when I retire

From Morning Star X-Ray (Using the approximate Ticker Symbols where necessary)
Valuation
18 19 18 Large
7 7 11 Med
7 7 6 Small
Value Blend Growth

Large: 55% (Domestic + International)
Medium: 25%
Small: 20%

Value: 32%
Blend: 33%
Growth: 35%

Asset Allocation
Cash: 6%
US Stocks: 52%
Foreign Stocks: 35%
Bonds: 8%

World Regions
US & Canada 63.33%
Europe 12.04%
Japan 3.46%
Latin America 3.58%
Asia & America 14.76%
Other 2.84%
Total 100.01%

Stock Sector
Information: 20%
Services: 48%
Manufacturing: 32%

Type %
High Yield 2.94
Distressed 4.29
Hard Asset 7.21
Cyclical 34.40
Slow Growth 10.96
Classic Growth 6.65
Aggressive Growth 12.79
Speculative Growth 3.84
Not Classified 16.92


Good Asset Allocation? Any big problems I'm overlooking? What about my Traditional vs. Roth balance?

[jpg7n16]

Good Asset Allocation? Any big problems I'm overlooking? What about my Traditional vs. Roth balance?

yes. no. unless you're making under $71.4k there's not much you can do about it, but you're doing just fine.

(I say 71.4 because $5000 is the max and 5000/7% = 71.4k)

You're doing just fine. In fact you might be on overkill! hah Enjoy some time with your fiance

[jIM_Ohio]

18% of Income going into Traditional 401(k) (Before Tax)
7% of Income going into Roth 401(k)
Currently in 25% tax bracket, who knows when I retire

If you moved some of the 7% going to Roth 401k to traditional, would your tax bracket drop to 15%?
When you get married, double check that again (new tax tables for joint return).

[dvd7e]

yes. no. unless you're making under $71.4k there's not much you can do about it, but you're doing just fine.

(I say 71.4 because $5000 is the max and 5000/7% = 71.4k)

You're doing just fine. In fact you might be on overkill! hah Enjoy some time with your fiance

Isn't 5000 the limit for Roth IRA's, not the ROth 401(k)?

[jIM_Ohio]

From Morning Star X-Ray (Using the approximate Ticker Symbols where necessary)
Valuation
18 19 18 Large
7 7 11 Med
7 7 6 Small
Value Blend Growth

Large: 55% (Domestic + International)
Medium: 25%
Small: 20%

Value: 32%
Blend: 33%
Growth: 35%

Asset Allocation
Cash: 6%
US Stocks: 52%
Foreign Stocks: 35%
Bonds: 8%

World Regions
US & Canada 63.33%
Europe 12.04%
Japan 3.46%
Latin America 3.58%
Asia & America 14.76%
Other 2.84%
Total 100.01%

Most of my allocation focus for me is on the above stats.

You need to very understanding of market caps if large cap is domestic+foreign,

For example, the market cap of Microsoft, GE, or Proctor and Gamble (the largest companies in the US) are 10X-100X-1000X larger than the largest market caps of some COUNTRIES (let alone companies in the countries) within placed like middle east, Asia, Africa or undeveloped parts of south america.

So look carefully at foreign large caps- how big are the companies they hold- most large cap foreign companies would be mid caps if they were 100% domestic US stocks.


If you know what you want, then its easy for xray to give you the information. You need to know what you want before you process the xray though (xray is a tool to get data, not something which gives advice).

If you run xray without knowing what you want, you risk making decisions based on feelings or irrational behavior IMO.

One other point, xray the wilshire 5000 (total US market) for an idea as to how the overall US market is distributed. For example if I have small caps and mid caps higher than the wilshire 5000, that is my goal (IMO the wilshire 5000 does not hold enough small caps). Compare all domestic holdings in xray to wilshire 5000 to give you a decent idea of how diversified you are domestically.

[jpg7n16]

If you moved some of the 7% going to Roth 401k to traditional, would your tax bracket drop to 15%?
When you get married, double check that again (new tax tables for joint return).

That wouldn't really accomplish much if it did. The "tax bracket" is marginal and only applies to the earnings over the lower bracket. Adding more to the traditional would still save at the 25% for each dollar contributed. And if it moves him to a lower bracket, it would actually start saving at only 15% - so a lower tax bracket reduces the effectiveness of the 401k. (By that I mean - you'd use up all your 25% tax savings first, and then start saving 15% tax for each additional dollar)

2010 Tax Rate Schedules: Marginal Ordinary Income Tax Brackets for Year 2010

Isn't 5000 the limit for Roth IRA's, not the ROth 401(k)?

Yup you're right. Oops! I see Roth so much, I didn't notice the Roth 401k part. My mistake.

[jIM_Ohio]

That wouldn't really accomplish much if it did. The "tax bracket" is marginal and only applies to the earnings over the lower bracket. Adding more to the traditional would still save at the 25% for each dollar contributed. And if it moves him to a lower bracket, it would actually start saving at only 15% - so a lower tax bracket reduces the effectiveness of the 401k. (By that I mean - you'd use up all your 25% tax savings first, and then start saving 15% tax for each additional dollar)

2010 Tax Rate Schedules: Marginal Ordinary Income Tax Brackets for Year 2010

I agree you gain 25% of money only within the bracket, however to make money best used for about 75% of tax payers, my guideline or attempt to suggest is this:

1) Most people in this country pay taxes in 15% bracket or less. In doing this, most of the good tax credits (child tax credits, education tax credits and more) also are available. There is more than just dealing with top marginal bracket.

2) If a person can get into 15% bracket while working, I can probably make some assumptions on their spending-
like if single, they are spending around 34k or less per year
and if married, they are spending around 68k or less per year

if their spending is that low, and they retire with similar spending patterns, then I can generally conclude that:

3a) 401k in 25% bracket is a good deal, as the probability of they would be taxed that high in retirement (based on spending assumptions above) would be low, so save 25% on taxes while your bracket is "high".
3b) Roth contributions when in 15% bracket mean they are paying low taxes on a fraction of their savings
3c) at some point down the line, the 401k monies can be changed to Roth by slowly converting once retired up to the bracket cap of the 15% bracket


There was an example on this board a few years ago which had a person saving 10k into Roth accounts. By putting that same 10k into a 401k account, the person's paycheck went up 25%, then they could put $2500 into a Roth. This is the type of efficiency I am trying to see if OP in this case could find.

The first $9350 earned for a single person is not taxed
The first $18,700 earned for a married couple is not taxed

So this also means the "first" money put into a 401k will never be taxed (using 4% guideline, this implies $233k in 401k for single person and first $467,000 for a married couple in 401k is not taxed either (the standard deduction and personal exemption(s) in those cases will avoid the tax on that money).

So to me it's better to get the 25% up front savings in 401k for as long as that is available to you, there is HIGH probability that person will not be paying 25% taxes later.

Most people (myself included) will want a little of both (401k and Roth), but I use up all my 401k in 25% bracket before we contribute anything to wife's Roth 401k or either Roth IRA.

[jpg7n16]

1) Most people in this country pay taxes in 15% bracket or less. In doing this, most of the good tax credits (child tax credits, education tax credits and more) also are available. There is more than just dealing with top marginal bracket.

This is probably irrelevant if the OP cannot get below the stated levels (likely the case).

You correctly said that the 15% bracket ends at $34k and $68k for single and MFJ filers, respectively. The top bracket is the 35% ($373k and up) and the OP is in the 25% bracket (S:34-82.4k; MFJ:68-137.3k).

The phaseouts to lose the tax credits you mentioned are all well into the 25% range, and are thus not only available to people in the 15% bracket:

2010 Phaseouts:
Child tax credit: S:$75k+ ; MFJ: $110k+ (Ten Facts about Claiming the Child Tax Credit)
Education tax credit:
--Amercian opportunity tax credit: S:$80k+; MFJ:$160k+ (Hope Credit Expanded)
--Lifetime Learning creidit: S:$50k+ MFJ:$100k+ (Publication 970 (2009), Tax Benefits for Education)
--Student loan interest dedcution: S:$70k+; MFJ$145k+ (Tax Topics - Topic 456 Student Loan Interest Deduction)

I'm really not sure what additional tax benefits come from the lower bracket that the OP does not already have.


And the "4% withdrawal rate" savings from taxes is a good argument in favor of the 401k - that's what I always tell myself about why I like the 401k so much. Because I take from the top bracket today, and start filling up the bottom brackets when I withdraw. Plus deductions makes it better too.

That's why (once I saw my mistake on the type of Roth) I have no problems with the OP's savings allocation of 18/7 Traditional/Roth. I think that's a good breakout to allow himself to manage the taxes during withdraw.