I have taxable investements and non taxable investements (roth,
traditional IRA, 401K etc.). My question is should they be part of one
big portfolio or two separate portfolios.
In case of taxable accounts there is more flexibility because one can
buy and sell lot of different funds and get a desired asset
In case of retirement accounts the possible investments are limited by
fund minimums (such as vangaurd needs atleast $3000), restrictions by
IRS (such as only $5000 contributions in 2009) and restrictions in
availability of funds through 401K.
So if I want to construct one Big portfolio my lack of flexibility in
retirement accounts limits proper asset allocation.
Similarly how should one treat 529?
Your thoughts on this topic are much appreciated.
One of the major goals of portfolio analysis is to have the "right"
balance of stocks and bonds. More stocks increase growth and
volatility; more bonds provide some safety but less growth.
You need to consider this from the perspective of your total
portfolio. Consider the amounts you currently have as well as what
you are buying.
You might evaluate your portfolio based on estimated after-tax
amounts. Roth IRA is tax free; after-tax investments are subject to
capital gains and tax deferred investments (401k, IRA) are treated as
If you don't treat it as one, then you often end up with assets placed
inefficiently for tax purposes. It's difficult to evaluate any
particular situation without a thorough review of all the facts. That
would include things like the relative balance of the taxable vs.
tax-advantaged accounts, and choices in 401(k) plans.
529 plans generally have a different objective and timeframe than
retirement plans, so a separate allocation there can be reasonable idea.
Treat them as one large portfolio to make managing the accounts
Roth and Traditional IRAs allow the purchase of individual stocks or
I would recommend using ETFs instead of traditional funds to enhance
I don't think that you have much of a limitation. There are usually
funds that match the S&P 500 even in a 401K.
My suggestion is for retirement you have "one allocation". Might be
80% stocks-20% bonds, might be something more complex (with REIT-
commodities-foreign stocks and other investments). How you implement
this depends on the relative sizes of each account. In my opinion if
account balances are lopsided, try your best to implement the same
allocation in every portfolio.
In my case, my account balances are about 4X the size of my wife's.
And my Rollover IRA and 401k are about 2X the size of my Roth. The
forces you mention (contribution limits) drive much of this lopsided
account balance. Each of these accounts is invested with 35% large
cap-15% mid cap-15% small cap-15% international large cap and 10%
international small cap or emerging markets and 10% bonds.
I do this so when I rebalance one account, I do not need to retrieve
the other 5 account balances and start selling fund X in account A to
buy fund X' in account B as part of my rebalance. Part of my own
issue is that my 401k has decent funds, but they are institutional
funds specific to my employer. I cannot xray them, I cannot examine
all their holdings "real time" or enter a 5 letter ticker symbol into
any portfolio tracking tool to measure their progress. And this
account is a significant amount of my retirement monies.
In summary, all retirement accounts create 1 retirement allocation.
How you slice and dice the accounts (all accounts have same allocation
or fund A in account 1 and fund B in account 2 and fund C in account
3) is a function of how you want to manage things.
With lopsided account balances, it is my opinion that its best for
each account to have the same allocation which makes rebalancing any
account easy. I can offer more insight into this, if interested (I
have other things I do to make sure the 6 accounts I have (Roth,
Rollover and 401k for each spouse) are working in complimentary
As for 529, that money has a different purpose, with a much shorter
and finite timeframe. With our retirement, I am highly aggressive (80%
+ equities), with our 529, I am much much much more conservative (50%
equities, 50% bonds; removed all foreign and small cap equities). I
have further opinions on why a 529 should be more conservative, if you
want them, please ask.