Asset Allocation question

[Fern]

One thing I've always been confused about, and never see the issue addressed in financial news media.

When they talk about having various asset allocations for your investments depending on your personal risk tolerance, goals, etc., assuming your goal is retirement for both taxable and non taxable savings, should you treat your taxable and retirement (IRA/401k etc) monies as a single entity (eg, 40% bonds for taxable AND non-taxable and 60% stocks for taxable AND non-taxable monies) OR develop individual asset allocation formulas for each?

Put another way, if, for example, I know i want 40% bonds/60% equities in my investments, should i figure it based on retirement monies and taxable accounts each separately or together as a single unit? Hope i'm clear in what i'm asking, and may seem like a simplistic question, but i have different mutual funds for each category.

[terry1156]

Re: Asset Allocation question

I guess I'm a little confued with the question. Wouldn't it work out the same either way? Can you give an example to better illustrate?

[jmjj215]

Re: Asset Allocation question

I would just handle it as one lump, personally. Maybe I'm missing some advantage to doing it the other way.

[Fern]

Re: Asset Allocation question

In answer to Terry, no, i think there are ramifications to doing it one way or the other. Taxwise, at least, there would be very different outcomes; for instance, i think i've heard it said that you should invest in all bond funds for tax deferred money and equities for taxable money, or vice versa, i really cant' remember which.

Also, if i treated all the $ as one big pot, it sure would eliminate some redundancies in my taxable/tax-deferred portfolios. I don't have the exact same funds in each, but do have some that are duplicated becus the performance is very good, and i have all the $ in one fund family.

[jmjj215]

Re: Asset Allocation question

I was thinking about the redundancy issue Fern. Since moneys in equity funds historically have provided a higher return than bonds, I would think you would want your tax-advantaged vehicles to be in equities, and taxables to be in bonds - reverse of what you said.

[Bluezy]

Re: Asset Allocation question

I am personally an IRA/ Retirement growth investor. My breakdown is as follows:

80 % Stocks (45% large Cap, 19% small cap and 19% international)
15 % bonds
5 % cash

I am making up for retirement monies used for survival during my rough years. Seems to be working.

[pennywise]

Re: Asset Allocation question

Remeber that retirement monies, is as I say, government controlled money. They tell you when to withdraw, etc. We no longer particiapte in government controlled accounts. I prefer to be in control of my own destiny. Thanks to 401's, etc we lost a bundle in this last turn (we are older - more savings in investments). All employer match, all earnings, and some principal lost because you cannot touch the money. Thus, I will control my fate. It will take 20 years to recover what was lost. Be careful what you read and believe. Remember bias, who is telling you, and why? Did you know they are now going to make it "opt out" of 401's. Not only that I do not think an employer should decide where you invest. There may be kick back involved, etc. I do not think my employer has my best interest at heart. So, recently I have put more into savings bonds and CDs. The stocks will sit and grow, but I will not add to a stock retirement account. I will fund DRIPs - exxon, p&G, Ge, and other great companies have DRIPS.

[BAGAGT1]

Re: Asset Allocation question

Thanks to 401's, etc we lost a bundle in this last turn (we are older - more savings in investments). All employer match, all earnings, and some principal lost because you cannot touch the money. Thus, I will control my fate. It will take 20 years to recover what was lost. Be careful what you read and believe. Remember bias, who is telling you, and why?

Whooah! Let’s break this down a little. First not all 401k’s plans are created equal. While it is true that with all 401k’s there are rules that everybody has to abide by, the rules on how you manage your 401k differ greatly from one plan to the next. For example, my 401K plan allows me to change my contributions, and/or transfer monies into all eight available funds on a daily basis. The plan updates the performance of the funds on a daily basis. My company contributes to my 401K account with shares of the company, thankfully, after the Enron/WorldCom debacle, I can now sell/buy my company shares whenever I want. What that means for me, is that while I lost a little money during the last recession, I managed to move most of my money into money markets and bonds shortly after I saw a downtrend in the market, so I didn’t lose that much. Once I saw an uptrend in the markets, I transferred monies from the money market and bonds back into my growth funds and value funds.

Now as I said earlier, not all 401k are created equal. My wife’s previous 401k plan did not allow changes in contributions except twice a year. Most importantly the fund performance was only updated quarterly, so there was a huge risk of losing money because you are in the dark during a downturn in the market. I didn’t like that 401k plan much, I couldn’t be as aggressive as I would like. Fortunately, my wife’s new employer plan is similar to my current plan, so I am more comfortable in investing more aggressively.

Also, you can’t forget the company match (if you get one, that’s an automatic percentage match, that you could never find in any other investment) and the tax benefits of the 401k. With that said, I do understand that not everyone has a great experience with 401k’s but in reality, the 401k is just an investment vehicle, and like all other investment vehicles, it has to be managed properly. I haven’t seen a 401k yet, that didn’t offer a money market fund or bond fund, and those are the safe havens that you need to move your money into when things get rough.

For the record, I do agree with you about being careful about who you listen to, the “experts” usually work for large finance firms, and it is usually in their best interest for you to buy and hold an investment rather than move your money when an investment fund doesn’t perform well. But I do believe that the 401k (or 403b etc.) is one of the best investment vehicles for most people to start a retirement account.

[Fern]

Re: Asset Allocation question

Pennywise, it's not true that you cannot "touch" the money in the 401k if there's a stock downturn. What you could have done is transfer it to a money market fund (still within the 401k family) and thereby have preserved it with no loss.

The reason the government limits when you can withdraw is because 401ks and IRAs' primary purpose is for use as a retirement savings vehicle, not a checking account. If people could make withdrawals whenever they wanted (you can now, but not without a 10% penalty before 59 1/2) they would fail to meet their purpose, helping Americans save for retirement.

If you are unhappy with the fund choices now availalbe in your employer's 401k, well, that is another story and it would be perfectly reasonable for you to approach the HR person and bring that up. The employer has a fiduciary responsiblity, i believe, to offer a well balanced portfolio across the full ranke of risk/reward spectrum.

There is no kickback to the employer involved.

Savings bonds and CDs are fine, but over the long-term, they will fail to keep up with inflation and you'll be much further behind than if you were invetsted in stocks or stock mutual funds. DRIPS good too.

[pennywise]

Re: Asset Allocation question

Fern: I do have our stocks. I am also a daytrader. So I am knowledgeable about the financial markets. I would not put money into a 401K, 403 or any other retirement account. First, there is a fee to the man who has knocked on your employers door, second there is a fee to the bank offering the mutual fund, lastly, the mutual fund has taken their cut. There are too many fees that eat your money. I read long ago: the man went to the harbor with the broker who was showing their yachts and the man replied "where are your customer's yachts"? Money managers have made a massive amount of money over the last years while no fund showed good performance, why? I strongly advise against these investment vehicles and encourage self-education and self-control. Recently, the pros stated: stop buying market orders; what they want you to do is place limit orders so they can see what your price is and play against you. Never, ever, ever, in poker show your hand. In addition, if you are a new employee the employer views your account as his bank. You are not fully vested until 3 years, thus he/she can take the money in your account that he/she put in if they terminate you before the 3 years, called dangling a carrot. I have amassed over double the amount that the "professionals" have done for me in 2 years. Those I have paid to manage my money, therefore, have not done their job, they are self focused. I do believe their will be kickbacks to the employer with this new policy of "opt out of the 401". I am not exactly sure who cares about "fiscal responsibility". File a complaint and see how far you get - probably just "thanks for telling us". Thanks for your input, but I do believe the public is being led astray here. The government has given so much of our money away that they, like the employers, want to dump their responsibility to the individual. Best to avoid debt, live frugally, and PLEASE, PLEASE, PLEASE teach yourself about investments so you can invest yourself. There are so many money lies out there that get everyone - like in real estate: you can write the loan off on your mortgage, a home is your best investment - bull; have you ever done the accounting on your home; between the taxes, interest, repairs, etc. a home is not an investment; however, you do break even when you sell or a loss with the added realtor fees and transfer taxes. People, please learn the truths about money. In finance, and educator consumer is dangerous.

[terry1156]

Re: Asset Allocation question

Investments have risks and the past result doesn't guarantee a future result.

It is important to educate yourself to the risks involved and to limit those risks for the returns you're trying to achieve as much as possible. No matter what you decide to invest in, there will be someone that takes a fee. Even index funds charge fees although much lower than managed funds. Pennywise has to pay fees for the trades that are made. You just have to choose carefully.

A home can be an investment if you chose it to be. When we were struggling, we rented out rooms in or place. These paid our mortgage. We did have repair bills , taxes, etc, but living there with the extra income was far less than we could have lived in an apartment. Now when we didn't have the borders, it probably would have been less expensive to live in an apartment. We were also lucky that the equity in out home rose. Again, there is no guarantee this will happen - it is a risk you take when owning a home.