Over the past few months, I’ve been giving a lot of thought to our investment mix. We’re now maxing out our available retirement options, so we’ve turned our attention to investing in a taxable account. This brings up a number of issues related to both asset allocation and asset location. While we need to maintain a reasonable overall asset allocation, we also need to be careful to maintain tax efficiency in our taxable account.
Yesterday I finally decided to slice and dice our various accounts to figure out exactly where we stand with regard to asset allocation. For starters, my wife and I both have Roth IRAs with Vanguard, though we’re not currently eligible to make contributions. I also have a SEP-IRA and a 403(b) at Vanguard, as well as a 457(b) at TIAA-CREF, and another work-related retirement account at Fidelity. Finally, our taxable account is at Vanguard.
Our current mix
The cornerstone of our investments is currently the Target Retirement 2035 Fund (VTTHX) from Vanguard, which contains the following asset mix:
71.6% – Total Stock Market Index Fund
10.3% – Total Bond Market Index Fund
10.0% – European Stock Index Fund
4.4% – Pacific Stock Index Fund
3.7% – Emerging Markets Stock Index Fund
In our other (non-Vanguard) retirement accounts, I’ve created a reasonable facsimile of this mix, with 72% in a total stock market fund, 18% in an international index fund, and 10% in a total bond market index fund. In our taxable account, our only current holding is the Vanguard Total Stock Market Index Fund.
Based on the above, my general feeling has been that we have too little in terms of international exposure, due in large part to the absence of international holdings in our taxable account. I’d also like to bump up our bond exposure in our retirement accounts to offset the 100% equity stance in our taxable account. That being said, I had never really lumped everything together and then broken it down.
After whipping up an Excel spreadsheet containing a breakdown of our holdings, I found that we have the following overall asset mix:
74.8% – Domestic equities
15.9% – International equities
9.3% – Domestic bonds
Overall, this exercise confirmed my suspicions… I’d like for us to be a bit heavier in terms of both bonds and international equities.
In the end, I’d like to have roughly 80% in equities and 20% in bonds. For that 80% equity stake, we’ll probably end up shooting for 50-55% in domestic equities and 25-30% in international equities. While we’ll likely be adding an international fund to our taxable account, and also picking up additional bond exposure in our retirement accounts, we might also end up dropping the Target Retirement 2035 funds and replacing them with a simple mix of our own.
Of course, there are other, finer distinctions to consider. For example, the breakdown of large vs. small cap stocks is an important factor, and the MSCI Broad Market Index upon which the Total Stock Market Index Fund is based is actually rather light on small caps. Similarly, we’ll need to take a look at the specific mix of international equities to be sure that we’re happy with the balance of developed vs. emerging markets.
If you have any thoughts, please don’t hesitate to share them.