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The Whole Portfolio
Question: My wife and I each have retirement (401K, Roth IRA) and non-retirement (joint brokerage, ESPP, REIT) investment accounts. I also have a beneficiary IRA setup from an inherited qualified annuity. My question is whether we should consider each account independently in terms of balancing the investments, or view the combined accounts as one big portfolio? For example, an aggressive overall retirement portfolio balanced by a conservative non-retirement portfolio? Or an aggressive 401K with a conservative Roth. We are in our mid-40's and plan to retire in about twelve years. As we near retirement, we would re- balance things for a more conservative overall portfolio. Thanks, and we love your show! Pete, Golden Valley MN
Answer: This is an important question. A very common mistake in allocating your investment money is not looking at your portfolio as a whole. The reason is just what you suggest: You may be more aggressive than you realize or more conservative than you want.
Here's a hypothetical portfolio that makes the pojnt. Lets say a family has saved $100,000 in a 529 college savings plan and their child is off to college in just a few years. The asset allocation is 20% equity and 80% fixed income. The wife has another $100,000 in her retirement account, split into 75% equities and 25% bonds. The asset allocation in each account sounds about right on its own. But taken all together, the overall asset mix is 52% fixed income and 48% equity. Is that the right mix for the household? It's probably too conservative.
So, yes, every once in awhile strip away all the product names (401K, IRA, 529, and the like) and see what is the overall asset allocation for the household. It's a good discpline.
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Chris Farrell Marketplace Money personal finance guru
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Comments (4)
March 29, 2008 11:39 AM PT
Regarding the hypothetical couple described in the answer: It seems that because the 529 money has a special purpose, and that the money will be needed at a certain time (fairly soon), that one would consider the allocation in the 529 separately from all other assets. If the child is headed for college shortly, then wouldn't one want a more conservative allocation of funds? Conversely, if these hypothetical people have a child only now headed for college, then they are probably a ways from retirement. Shouldn't their retirement funds be allocated more aggressively? And who knows what their non-retirement savings are for... perhaps they want to buy a vacation home in the not too distant future... in which case, a more middle of the road allocation would seem smart. Chris, what am I missing here? I cannot see the logic combining pots of money to be used for different purposes at different times when making allocation decisions.
April 1, 2008 11:05 AM PT
I have to agree with Scott. I wouldn't consider managing my 529 assets the same way as my retirement assets. I think one should consider them differently if they serve a different purpose and are being used on a different time scale.
April 2, 2008 6:16 AM PT
A further follow on question - does it matter how you allocate whether you have pre-tax and after-tax accounts, or just lump them together?
April 5, 2008 12:17 PM PT
Considerng the asset allocation balance of the portfolio as a whole makes sense to me, however is the balance of each investment instrument comprising the protfolio also important? For example, if my 401K was 90% stocks and my IRA was 90% fixed income so that the combied allocaton meets my 50/50 overall target, should I stay put? Or would it be wise to apply my traget to each account?
By the way, my the broker who set up the accounts for me said the combined allocation is what counts.
Thanks,
Paul