Building portfolios; funds that change over time | Scott Burns
Readers get advice on how to allocate assets among portfolios, and how best to utilize popular funds that change over the course of a life.
Q: How should I build several portfolios simultaneously with my after-tax savings, my Roth account and my 401(k) account?
The easiest path is to build three (nearly) identical portfolios, although that seems redundant and not the most efficient (at least for fees).
A: You might start with the following considerations:
• Your Roth account is most likely your longest-term holding. It has no minimum required distributions, and you’re likely to want to hold a portfolio that most suits your long-term needs.
• Your 401(k) account is also a long-term account where you can enjoy tax deferral on interest income but lose the advantageous tax treatment of capital gains and dividends. This account should have a bias toward fixed income, but it shouldn’t be in fixed income exclusively.
• Your taxable account will benefit most from the tax efficiency of holding low-turnover index funds that invest in equities. But it is also the account that you’ll likely use for emergencies. This account should have a bias toward holding equities, but should also hold some readily accessible, short-term fixed income investments.
• Finally, relax. Big-time precision is not a requirement here, just a little attention. The Asset Allocation Police will not arrest you if one account is 75 percent equities and another is 60 percent.
Q: My Thrift Savings Plan statement shows my account had a $60,000 gain last year. I’m floored! I’ve never made that much in one year from my account.
Should I take the gain? I’m wondering if I should move that $60,000 to the stable-value G Fund so that I don’t lose it.
I’m currently invested 100 percent in the 2030 Lifecycle Fund. I have about $380,000 in my account, and I put the maximum $17,500 in each year. I’m 48 years old and my husband is 53.
A: One of the nice things about these popular funds is that they automatically adjust your asset allocation so that you become more conservative as the fund approaches its maturity year.
Your 2030 fund, for instance, is now about one-third fixed income and two-thirds equities. By the time you are 60, it will be 53 percent fixed income and 47 percent equities.
Having a large gain last year doesn’t mean you’ll lose it all this year. The best investment stance is to set an asset allocation and stick with it rather than move with the wind of investor sentiment. That’s what these funds do for you.
If you do want to dial back your risk level, the easiest move is to transfer your holdings to the 2020 Lifecycle Fund.
That fund is currently about 48 percent fixed income. That isn’t as much of a risk reduction as moving $60,000 to the very stable G Fund.
If you haven’t already done so, spend some time examining the Lifecycle Fund options on the Thrift Savings Plan website in more detail. Each fund has a toolbar that you can move to show the planned asset allocation of the fund during any year as it moves toward its maturity date.
Copyright 2014, Universal Press Syndicate