AA By Account or Total Portfolio? (HSA advice)

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youngpleb
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AA By Account or Total Portfolio? (HSA advice)

Post by youngpleb » Sun Oct 29, 2017 6:57 pm

Hi everyone,

I just started contributing to my HSA, and will be using it solely for investing due to the tax benefits it provides. So now I will maxing out my HSA, Roth IRA, and contributing about $15,000 to my Roth 401k each year, and something has got me thinking lately-- if I am going for an overall AA of 80% stocks and 20% bonds, then should I be doing this by account or just in my overall portfolio? This question was spurred because my HSA (Optum Bank) provides great Vanguard Admiral share funds for stocks, but for bonds it only has the actively managed Dodge & Cox (DODIX, .43 ER) and a high-yield bond fund with nearly 1% ER. My IRA and 401k both have access to the great Vanguard Total Bond Index (VBTIX, .04 ER), so the thought of investing in DODIX makes me cringe a bit. However, my natural inclination is to have each of my 3 accounts be at 80/20 so in case the stocks take a dive I will be able to re-balance and take advantage of the low stock prices. If I skimp on DODIX in my HSA and instead simply opt for more VBTIX in my IRA and 401k to maintain a portfolio 80/20 balance, then the HSA will be essentially 100% stocks, and I won't be able to do much re-balancing if stocks plummet. Has anyone else ever faced something like this? What should I do? :confused

Additionally one other idea I had was to simply invest a larger portion of my HSA in a mixed fund, such as Wellington or Vanguard LifeStrategy Conservative Growth, to the point where it would enable me to be at my desired bond percentage. Would that be a good potential solution?
Last edited by youngpleb on Sun Oct 29, 2017 7:03 pm, edited 1 time in total.

fabdog
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Re: AA By Account or Total Portfolio?

Post by fabdog » Sun Oct 29, 2017 7:03 pm

I do mine by total portfolio. There are a number of good articles about asset placement (items that throw off lots of income in tax advantaged, etc) but it also allows you to take advantage of what things are available to you in different accounts.

Trying to do the allocation by account can be pretty frustrating. A simple spreadsheet with your various accounts can help you keep it organized across accounts, especially as you add new money

Mike

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Taylor Larimore
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Re: AA By Account or Total Portfolio?

Post by Taylor Larimore » Sun Oct 29, 2017 7:04 pm

AA (Asset Allocation) by account or total portfolio?
It is arguable, but in my opinion it is nearly always better to look at your portfolio in total.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

youngpleb
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Re: AA By Account or Total Portfolio?

Post by youngpleb » Mon Oct 30, 2017 6:20 pm

fabdog wrote:
Sun Oct 29, 2017 7:03 pm
I do mine by total portfolio. There are a number of good articles about asset placement (items that throw off lots of income in tax advantaged, etc) but it also allows you to take advantage of what things are available to you in different accounts.

Trying to do the allocation by account can be pretty frustrating. A simple spreadsheet with your various accounts can help you keep it organized across accounts, especially as you add new money

Mike
Yeah, I'm a big fan of spreadsheets! :happy Thanks for the suggestions! My case is somewhat uncommon I reckon, since I don't have any taxable accounts. Everything is Roth or my HSA!

Taylor Larimore wrote:
Sun Oct 29, 2017 7:04 pm
AA (Asset Allocation) by account or total portfolio?
It is arguable, but in my opinion it is nearly always better to look at your portfolio in total.

Best wishes.
Taylor
Cool, thanks for chiming in Taylor!

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Artsdoctor
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Re: AA By Account or Total Portfolio? (HSA advice)

Post by Artsdoctor » Tue Oct 31, 2017 4:50 pm

This was been looked at several ways and posted previously. If you start with the premise that money is fungible, there's no reason to separate out your asset allocation by account. You should view your entire portfolio as a whole.

There has been some work with behavioral economics which is anecdotal, but evidently some people cannot bear to have one account filled with equity funds and another account filled with bond funds (for example). During periods of increased market volatility, people may make rash decisions so if having each account contain equities and bonds keeps one from acting badly, so be it. However, this would be strictly an emotional decision.

TropikThunder
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Re: AA By Account or Total Portfolio? (HSA advice)

Post by TropikThunder » Tue Oct 31, 2017 5:09 pm

youngpleb wrote:
Sun Oct 29, 2017 6:57 pm
If I am going for an overall AA of 80% stocks and 20% bonds, then should I be doing this by account or just in my overall portfolio? This question was spurred because my HSA (Optum Bank) provides great Vanguard Admiral share funds for stocks, but for bonds it only has the actively managed Dodge & Cox (DODIX, .43 ER) and a high-yield bond fund with nearly 1% ER. My IRA and 401k both have access to the great Vanguard Total Bond Index (VBTIX, .04 ER), so the thought of investing in DODIX makes me cringe a bit. However, my natural inclination is to have each of my 3 accounts be at 80/20 so in case the stocks take a dive I will be able to re-balance and take advantage of the low stock prices. If I skimp on DODIX in my HSA and instead simply opt for more VBTIX in my IRA and 401k to maintain a portfolio 80/20 balance, then the HSA will be essentially 100% stocks, and I won't be able to do much re-balancing if stocks plummet. Has anyone else ever faced something like this? What should I do? :confused

Additionally one other idea I had was to simply invest a larger portion of my HSA in a mixed fund, such as Wellington or Vanguard LifeStrategy Conservative Growth, to the point where it would enable me to be at my desired bond percentage. Would that be a good potential solution?
My 2 cents worth:
  • Q: If I am going for an overall AA of 80% stocks and 20% bonds, then should I be doing this by account or just in my overall portfolio?
    A: I think making each account type a replication of your overall allocation is an unnecessary complication. On the surface, it may seem a simple 80/20 in each location, but do you hold international? If you have US Stock/Int'l Stock/Bonds, then now it's three funds each place. If your 401k doesn't have a Total Stock Market fund, then you may end up with a cobbled together S&P500 + Extended Market fund, and now you're at four funds. Your current 401k has Vanguard funds, but you don't mention which ones, and some 401ks have Vanguard Institutional Index (S&P500) rather than TSM. Plus, people change jobs. Especially with an HSA, it's simpler to just hold one fund since the yearly contribution is usually smaller.
  • Q: If my HSA is 100% stocks, how will I be able to re-balance if stocks plummet?
    A: You would just rebalance -outside- the HSA. If your HSA is 100% stock, then your other accounts will be lower than 80/20 and you can rebalance there.
Also, keep in mind trading costs. You mention that your HSA has Admiral shares, which is great. What's the trading cost? Depending on your trading platform mutual funds can cost $25 or more per transaction. More funds = more trading costs. If your allocation says you need $10,000 in US stock, then you fill the HSA with US stock and hold the rest of it in your IRA or 401k.

ThrustVectoring
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Re: AA By Account or Total Portfolio? (HSA advice)

Post by ThrustVectoring » Tue Oct 31, 2017 5:34 pm

The flip side of having different funds in different accounts is that it complicates figuring out your after-tax effective asset allocation. If you assume your retirement tax rate is 20%, then a 50/50 allocation could have $100k in bonds in your 401(k) and $80k in stocks in your Roth IRA and be perfectly balanced. If you're 50/50 in each account, then the tax assumptions of each account don't matter.

That said, I still think total portfolio is the right approach. Just that you could accidentally get the wrong weightings for a post-tax "spendable money" basis.

TravelforFun
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Re: AA By Account or Total Portfolio? (HSA advice)

Post by TravelforFun » Tue Oct 31, 2017 6:42 pm

Total portfolio. If you're going to leave your money in the HSA for a long time (10 years or more) since it should be the last account you should touch, your HSA should be 100% stocks. Use other accounts to achieve your desired AA.

TravelforFun

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grabiner
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Re: AA By Account or Total Portfolio? (HSA advice)

Post by grabiner » Tue Oct 31, 2017 9:58 pm

TravelforFun wrote:
Tue Oct 31, 2017 6:42 pm
Total portfolio. If you're going to leave your money in the HSA for a long time (10 years or more) since it should be the last account you should touch, your HSA should be 100% stocks. Use other accounts to achieve your desired AA.
It doesn't matter which is the last account you touch, since you can move money within accounts. If you withdraw from your 401(k) instead of your HSA, and your 401(k) is all stock, you can choose to withdraw from stock funds in your 401(k) and move HSA money from stock to bonds so that you make a bond withdrawal.

A more important issue is the options in the various accounts. If you live in AL, CA, or NJ, which do not recognize HSAs, then you may want to hold TIPS in your HSA for the state tax exemption. If the only low-cost option in your 401(k) is an S&P 500 index, then you should hold your US stock there, and bonds and international stock in your other accounts.
David Grabiner

youngpleb
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Re: AA By Account or Total Portfolio? (HSA advice)

Post by youngpleb » Tue Nov 07, 2017 9:24 pm

Oh wow, thanks for the advice everybody! I have switched to the total portfolio asset allocation method now. Those of you who mentioned tax-related issues, I forgot to say that I am doing Roth contributions to both my 401k and IRA. Thanks for the suggestions though! So my only concern with anything taxable would be the little bit of my 401k (about $3,600/year) that my company contributes I guess. I feel really good about my asset allocation now, since I was able to pick a lot of low-cost index funds, along with the couple of active funds I wanted. Here is what I am going to go with, if anyone is interested (the percentages are where the % of the account's yearly total):

HSA:
  • *Wellington Admiral Shares 55%
    *Vanguard Healthcare Admiral 45%
IRA:
  • *Vanguard SC Value Index 30%
    * 30% VG All-world ex-US SC Index 30%
    * 40% PRIMECAP Growth (POGRX)
401k:
  • * 18% VG Total Bond
    * 20% VG Total International Index
    * 50% VG Institutional Index
    * 12% VG Extended Index
It puts me at 85/15 stocks/bonds with a small-cap tilt, with 20% International stocks (5% of that being International SC). It's much better than my previous choices that were based on per-account asset allocation!

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