I tend to enjoy adding and tracking my taxable portfolio best. The truth is that my tax-sheltered accounts are still the powerhouses of my portfolio. This month, I took a major step toward simplifying and truly re-balancing my Roth IRA and my 401(k).
I had a mess on my hands
I had a nagging reason to clean up my Roth IRA. I honestly was holding onto purchases I’d made years ago for no good reasons. I had a chunk in an energy mutual fund because I thought energy was the best thing since sliced bread after landing a job in energy. I had a chunk in a dividend growth appreciation ETF that I picked up after discovering DGI. I also had a large chunk in a target retirement fund because “that seemed to be wise.” Embarrassingly, I had one share of an ETF that had something to do with Euro markets that I only bought because I had about the right amount left over after a larger purchase.
As for my 401(k), I had it distributed across five fund options. I intended to have some mixture of large-cap, mid-cap, small-cap, and international exposure and was probably doing an OK job. But, an email went out last week notifying me that my 401(k) options were changing soon, and I noticed my expense ratios were about to go a quarter or a half percent higher.
Here are some questions you could have asked me and I would have had no response:
- How much do you have in stocks vs bonds?
- How much do you have in domestic vs international stocks?
- Do you have too much exposure to energy and not enough to tech?
- Why do you overlap your dividend growth ETF with additional dividend growth individual stocks?
- Where else do you have overlap in your portfolio?
These are simple questions I should know the answers to.
Roth IRA Restructure
First, I attacked my Roth IRA. I sold all my odds and ends holdings. After those transactions went through, I looked up Vanguard’s 2040 Target Retirement fund (VFORX). It will serve as my allocation guide. It’s very easy to look up and understand. It is made up of four funds, with the allocation in parentheses:
- Total Stock Market (51.8%)
- Total International Stock Index (33.5%)
- Total Bond Market (10.4%)
- Total International Bond Index (4.3%)
VFORX is a hands-off approach to investing. It promises to change allocations to more conservative investments (bonds) as we approach the target date of 2040. It does that for a low expense ratio of 0.15%. Despite this low expense ratio, I am going to purchase the funds contained in the portfolio and reallocate them myself as the years go by. By owning the four funds, my weighted expense ratio drops to 0.07%. This saves me about $50/year at my current account size.
Voila! I no longer have to wonder if I am overweight or underweight in certain areas of the market. I own a little bit of everything, and have a clear percentage of my portfolio in bonds (15% in my Roth IRA). I also qualified for Vanguard’s admiral shares in the total and international stock market funds. This means I can buy partial shares and won’t have a few dollars sitting around in my settlement fund doing nothing.
I do still have two individual stocks in my Roth IRA (LMT and JNJ). I will continue to hold these, but I see them as more of an experiment. From now on in my Roth IRA, I will just add to my broad, low-cost funds and forget about them aside from reallocating a few times a year.
Next, I attacked my 401(k). I love the tax advantages my 401(k) gives me, but I wish I had the same fund choices I get with Vanguard. On top of that, my company swapped medium-cost options out for high-cost options. Luckily, I still have access to JP Morgan’s target retirement date funds. There is no longer an expense ratio advantage to holding specific funds, so I reallocated my five current 401(k) holdings to a single 2040 target fund with a 0.60% expense ratio. This is totally hands off, easy to see, and worry-free.
What about Traditional IRA and Taxable accounts?
When I rolled over my 401(k), I mimicked the VFORX allocations. I love its clarity and lack of clutter. I’ll keep doing this, and am probably due for a little reallocation.
My taxable account is another story. I treat it as my hobby account and pick individual stocks. That said, my to-do list includes determining if I’m distributing purchases across sectors somewhat well. That will be a topic for another day!