Hey FAANG FIRE! I just scrapped a nearly finished 2,000 word newsletter on Asset Allocation and Asset Location. The truth is that these topics fill entire books and research papers and I didn’t think I could do it justice. Instead, I am just going to show you
I think while in an asset gathering stage (still working), bonds in 401k with stocks in taxable accounts works fine. Because you can rebalance with contributions (somewhat.. considering you don't necessarily want to decrease your 401k allocation).
But for rebalancing once you're not working, I think you still want bonds + international + US in all major categories (Roth, 401k/IRA, taxable), for rebalancing purposes. While small movements don't matter a lot, we've had some major asset class movements recently. And you can only truly rebalance if you can sell one asset class & buy another (once you don't make major contributions).
Another way to rebalance is to use withdrawals as a rebalancing strategy. I think that's reasonable in general, but I've found that assets get *far* more out of balance than withdrawals will be able to fix, if your savings get high enough :)
How do you manage rebalancing? Currently my portfolio was small enough to focus on my pre-tax account, where I set up automatic rebalancing. As I start earning more and other accounts get bigger, I'm not sure whether to bother with a custom allocation that I have to manually rebalance, or simply use a target-date fund.
What tool did you use to compute your asset allocation percentages across all accounts? I tried looking it up in Monarch but don't see charts similar to yours.
Thank you for the post. I have an only slightly related question: what is the point of keeping bonds for people who are not going to retire in, say, at least a couple of decades? It seems that they have time enough to recover from a stock crash should one come, while being in a position to benefit from the much higher expected returns of stocks.
I think while in an asset gathering stage (still working), bonds in 401k with stocks in taxable accounts works fine. Because you can rebalance with contributions (somewhat.. considering you don't necessarily want to decrease your 401k allocation).
But for rebalancing once you're not working, I think you still want bonds + international + US in all major categories (Roth, 401k/IRA, taxable), for rebalancing purposes. While small movements don't matter a lot, we've had some major asset class movements recently. And you can only truly rebalance if you can sell one asset class & buy another (once you don't make major contributions).
Another way to rebalance is to use withdrawals as a rebalancing strategy. I think that's reasonable in general, but I've found that assets get *far* more out of balance than withdrawals will be able to fix, if your savings get high enough :)
How do you manage rebalancing? Currently my portfolio was small enough to focus on my pre-tax account, where I set up automatic rebalancing. As I start earning more and other accounts get bigger, I'm not sure whether to bother with a custom allocation that I have to manually rebalance, or simply use a target-date fund.
What tool did you use to compute your asset allocation percentages across all accounts? I tried looking it up in Monarch but don't see charts similar to yours.
Thank you for the post. I have an only slightly related question: what is the point of keeping bonds for people who are not going to retire in, say, at least a couple of decades? It seems that they have time enough to recover from a stock crash should one come, while being in a position to benefit from the much higher expected returns of stocks.
Amazing article, as always!