By Dr. Jim Dahle, WCI Founder
Here’s a question I’ve received in the past.
“I’m not sure I’m putting the right asset classes into the right accounts. How should that be done?”
My answer: there are a few principles to doing asset allocation correctly, but there are two prerequisites you need to do first.
The Prerequisites
#1 Develop a Specific Asset Allocation Plan
The first step is to develop an exact asset allocation. I don’t mean something vague like “60% stocks and 40% bonds.” I want you to be very specific. Every dollar in your portfolio should have a name and purpose. You should define your asset allocation very specifically, like in this example:
- 25% US Stocks (Total Stock Market)
- 10% Developed Market Stocks
- 5% Emerging Market Stocks
- 10% US Small Value Stocks
- 10% REITs
- 20% US Nominal Bonds
- 10% Foreign Bonds
- 10% TIPS
This is a reasonably complex 60/40 portfolio containing eight separate asset classes. It is likely to meet an investor’s goals if it’s held for the long term and combined with an adequate savings rate and reasonable goals. Like any portfolio, it isn’t perfect. Without the ability to predict the future, there is no perfect portfolio. But it’s good enough. Deciding on a reasonable asset allocation is the first prerequisite to this process.
#2 Figure Out What You Have in Each Account
The second prerequisite is understanding exactly what you have, what is available in each of your accounts, and what future contributions will look like. The best way to do this is to list it all on paper. For example, this investor may have accounts that look like this:
Total balance of all accounts: $250,000
Total contributions per year: $100,000
Account: His 401(k)
Current balance: $0
Expected contributions: $51,000 per year
Useful investments: An S&P 500 Index Fund with a 0.35% expense ratio (ER), an actively managed small value fund with a 0.91% ER, an actively managed international fund with a 1.1% ER, and an actively managed bond fund with a 0.6% ER.
Account: Her 401(k)
Current balance: $50,000
Expected contributions: $17,500 per year
Useful investments: A total stock market fund with an ER of 0.1%, a total bond market fund with an ER of 0.1%, and a total international stock market fund with an ER of 0.15%.
Account: His Roth IRA at Vanguard
Current balance: $50,000
Expected contributions: $5,500 per year
Useful investments: All Vanguard funds available
Account: Her Roth IRA at Vanguard
Current balance: $50,000
Expected contributions: $5,500 per year
Useful investments: All Vanguard funds available
Account: Taxable account
Current balance: $100,000
Expected contributions: $19,500 per year
Useful investments: All publicly traded investments available; Vanguard funds available commission-free
The process of actually writing out your accounts and investments in this format is extremely useful. Be sure to evaluate your 401(k) or other employer-provided retirement account options so you understand what is available. Once you do this, you’ll find the remainder of the process far easier. If you don’t do it, it will seem impossible and possibly become very expensive if you have to hire someone else to help you do it.
Make Some Observations
Once you write down all this stuff, you can make a few observations.
- Most, but not all, of the portfolio will be in tax-protected accounts.
- Within a few years, his 401(k) will be the largest account by far, with the taxable account the second largest.
- Her 401(k) has better investing options and lower expenses than his.
More information here:
The Importance of Asset Allocation
Principles of Asset Placement
There are a few basic principles to follow when going through this process. I’ll list them here:
- Taxable accounts should generally be filled with the most tax-efficient investments.
- Bonds generally go into tax-protected accounts, but it doesn’t matter (or may even reverse) in times of lower interest rates.
- If placing bonds in taxable, compare after-tax yields to decide if municipal bonds are appropriate.
- Rebalance only in tax-protected accounts to avoid capital gains taxes.
- Take advantage of the best (usually lowest cost) investments in your employer’s retirement plans, and build the rest of your portfolio around those.
- Keep in mind the effects of Roth vs. tax-deferred placement. (Placing assets with an expected high return preferentially into Roth accounts increases the risk of the portfolio on an after-tax basis and vice versa.)
- Keep future growth in mind when placing assets.
- Be sure at least one asset in each account is found in at least one other account to aid in rebalancing.
More information here:
My 2 Asset Location Pet Peeves
Implementing the Asset Allocation
How should our investor implement his allocation?
The Taxable Account
Since the taxable account is relatively large at $100,000, let’s start there. We want to put tax-efficient assets into the taxable account preferentially.
Perhaps the most tax-efficient asset class is the international stocks. International stocks are slightly more tax-efficient than US stocks due to the foreign tax credit. Since the portfolio’s overall value is $250,000, then the asset allocation calls for $250,000 * 10% = $25,000 in developed markets and $250,000 * 5% = $12,500 in emerging markets.
The next most tax-efficient asset class is probably the US stocks, although an argument could be made for using municipal nominal bonds. The asset allocation calls for $250,000 * 25% = $62,500 in US stocks. Since the taxable account has exactly $100,000 in it and since you need exactly $25,000 in international stocks, $12,500 in emerging market stocks, and $62,500 in US stocks, it fits perfectly. However, this violates principle No. 8. Perhaps a better option would be to put some municipal bonds into the taxable account. The asset allocation calls for $250,000 * 20% = $50,000 in nominal bonds. You could put all $50,000 into municipal bonds and then put the last $12,500 into US stocks.
The 401(k)s
His 401(k)
Let’s leave the taxable account for a minute and move on to his 401(k). There is nothing in his account now, but clearly, the best investment option in his 401(k) is the S&P 500 index fund. As that fund grows, he’s going to want his US stocks primarily in there. We know there will be a gradual transition of US stocks from the taxable account and perhaps another account over the years to his 401(k).
Her 401(k)
There is $50,000 now, and it will grow at a moderate rate. There is a great international option there, but we already have that covered in the taxable account. There is also a great US stock fund and a great US nominal bond option, similar to the taxable account. Perhaps using the total stock market fund will be the best option. Let’s move on to the Roths.
The Roth Accounts
Both Roths have $50,000, and they will grow slowly with new contributions. This works out just fine right now to put $250,000 * 10% = $25,000 into each of the four remaining asset classes. Two could go into each Roth, and it would work out perfectly. It will make rebalancing difficult—due to the violation of principle No. 8—but since there are no tax consequences or investment expenses associated with rebalancing in Roth accounts, this can be worked out later.
This leaves us with an initial asset allocation plan that looks like this:
Total Portfolio: $250,000
His 401(k): $0
$0 in S&P 500 Fund
Her 401(k): $50,000
$50,000 into Total Stock Market Fund
His Roth: $50,000
$25,000 into Vanguard REIT Index Fund
$25,000 into Vanguard International Bond Fund
Her Roth: $50,000
$25,000 into Vanguard Small Value Index Fund
$25,000 into Vanguard TIPS Fund
Taxable: $100,000
$25,000 into Vanguard Developed Market Index Fund
$12,500 into Vanguard Emerging Market Index Fund
$50,000 into Vanguard Municipal Bond Fund
$12,500 into Vanguard Total Stock Market Fund
Is it perfect? No. Is it good enough? Absolutely. Another option that may be just as good, at least for now, is to put $50,000 in bonds into her 401(k) using the Total Bond Market Fund and putting all $62,500 allocated to US stocks into the Vanguard Total Stock Market Fund in the taxable account.
What Happens the Second Year?
Everything is perfectly balanced now, but what happens over the next year? This couple will be contributing $100,000 per year or about 40% of their current portfolio balance. Half of this will be going into his 401(k) with 5.5% into each Roth and nearly 20% into each of the two other accounts. Assuming no investment gains, the situation might look like this in a year.
Total Portfolio: $350,000
US Stocks: $350,000 * 25% = $87,500
Developing Market Stocks: $350,000 * 10% = $35,000
Emerging Market Stocks: $350K * 5% = $17,500
Small Value Stocks: $350,000 * 10% = $35,000
REITs: $350,000 * 10% = $35,000
US Nominal Bonds: $350,000 * 20% = $70,000
International Bonds: $350,000 * 10% = $35,000
TIPS: $350,000 * 10% = $35,000
This can be allocated like this:
His 401(k): $51,000
$51,000 in S&P 500 Fund
Her 401(k): $67,500
$24,000 into Total Stock Market Fund
$43,500 into Total Bond Market Fund
His Roth: $55,500
$35,000 into Vanguard REIT Index Fund
$20,500 into Vanguard International Bond Fund
Her Roth: $55,500
$14,500 into Vanguard International Bond Fund
$6,000 into Vanguard Small Value Index Fund
$35,000 into Vanguard TIPS Fund
Taxable: $119,500
$35,000 into Vanguard Developed Market Index Fund
$17,500 into Vanguard Emerging Market Index Fund
$26,500 into Vanguard Municipal Bond Fund
$12,500 into Vanguard Total Stock Market Fund
$29,000 into Vanguard Small Value Stock Fund
The portfolio is still balanced. It is certainly less than ideal to have a small value stock fund in a taxable account while a total stock market fund and nominal bonds (that could be muni bonds) are in a tax-protected account. But given the limited good options available in the 401(k)s, this is a compromise that has to be made to maintain the asset allocation. Another good option might have been to put more bonds into his 401(k) and more US stocks into the taxable account instead of the small value stocks. But you’re weighing higher expenses against higher tax efficiency, and neither option is really ideal.
What had to be done during the year to get from our first setup to the second one?
- In his 401(k), all new contributions went to the S&P 500 fund.
- In her 401(k), all new contributions went into bonds, and some of the stocks were sold to buy bonds.
- In his Roth, new contributions went into the REIT fund, and some of the international bond fund had to be sold to buy more REITs. There was no cost to that sale.
- In her Roth, new contributions went toward TIPS, and some of the small value stocks were sold to purchase TIPS and international bonds.
- In the taxable account, new contributions went into the developed markets fund, the emerging markets fund, and the small value fund. Some of the municipal bond fund was sold to purchase small value stocks. This is the only taxable event of the entire year, and given that it involved the sale of an asset which generally doesn’t appreciate very rapidly, it would have very little tax consequence. As the ratio of new contributions to portfolio size falls, investors become less and less able to rebalance mostly with new contributions, and they’ll have to actually sell assets more and more frequently. Try to avoid this in taxable accounts by selling assets with a loss first, then using new contributions, then using distributions (perhaps tolerating a little more imbalance than you would in a tax-protected account), and finally selling assets with a gain. In the end, you don’t want the tax tail to wag the investment dog. The only thing worse than having to pay capital gains taxes to rebalance is not having to pay them.
I hope you found that demonstration helpful. The more accounts you have to deal with and the more asset classes in your portfolio, the more complex this process becomes. If you find yourself hitting your head against the wall while staring at your investments, remember that it could be worse.
Following this process will allow you to manage your own portfolio and save investment manager fees. Alternatively, if you choose to pay someone else to do this for you, you can understand what they ought to be doing in exchange for those thousands of dollars in fees. If you just need a little help, you’ll find the Bogleheads willing if you can manage to complete the two prerequisites on your own.
What do you think of my principles of asset placement? Did I miss something? What else would you do? Do you have any tips for implementing and maintaining an investment plan? Comment below!
[This updated post was originally published in 2019.]
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Medical debt can be intimidating and complex for many individuals, often leading to confusion and misconceptions regarding its impact on credit reports. Unlike other types of debts, medical collections carry unique characteristics that influence how credit reporting agencies treat them. It’s essential to debunk these myths and show how individuals can better manage and understand medical collections to safeguard their financial health. For those navigating this complicated terrain, learning how to dispute medical debt can make a significant difference in reclaiming control over one’s credit standing.
Myth #1: All Medical Debt Affects Your Credit Report Immediately
They include the following: Medical debt is reflected on credit reports as soon as it is incurred. There is a time gap before such unpaid medical bills become collections and part of the credit report. Most doctors give a window for insurance to process the claim or the patient to negotiate on the payment. If the bill has yet to be paid at this time, it is passed on to a collection agency.
Nevertheless, major credit bureaus like Equifax, Experian, and TransUnion usually only add medical collections to a credit report after 180 days, sufficient time for the person to contest or pay the balance. This buffer is supposed to protect patients from increased charges because their insurance is slow to pay or they misunderstand the providers.
Myth #2: Paying Off a Medical Collection Will Immediately Boost Your Credit Score
Most people think their credit score will change immediately when they pay off a medical collection, which is invalid. Even though some recent changes to credit reporting, like eliminating paid medical collection, have positive effects, it may take some time for the changes to be felt in your score. Also, unpaid collections can remain on the credit report for up to 7 years, even if you make the necessary payments.
Therefore, even if you want to clear medical collections, you should also ensure that your credit report is constantly checked so that changes are made correctly and on time. While a credit score rebound after paying off medical debt is good news to lenders, it may take some time to be reflected on the credit score, and there are many other factors that determine it.
Myth #3: Medical Collections Are Treated Like Any Other Debt
Another common myth is that creditors and lenders treat other debts the same way as medical collections. Medical debt is not like other consumer debts in several ways. For instance, FICO and VantageScore credit scoring models show medical collection is less than other categories of collections due to their compulsory nature and other factors such as billing mistakes or insurance issues. Therefore, although the medical collections do negatively affect the credit scores, the effect is not as damaging as that of other types of debts. It is crucial to note this difference to reduce anxiety about the fact that medical bills will forever tarnish your credit report when managing them.
Myth #4: Disputing Medical Collections Is Impossible or Futile
Some people with medical debts think they can never challenge the debts once they have been reported to the credit bureaus. Disputing medical collections is not only feasible but also advisable when one receives an erroneous bill, insurance issue, or a case of fraud. Patients have the right to request the debt collector to verify the debt, challenge the accuracy of the debt, or work with the healthcare providers to understand the billing before it goes to the collection. The law that provides specific rights to consumers is the Fair Credit Reporting Act (FCRA), which protects the consumer by releasing accurate information to the credit bureaus. This myth can make people avoid fighting for themselves, but if you know your rights and seek help, it may be the difference between getting your medical bills paid and not.
Myth #5: Medical Collections Never Fall Off Your Credit Report
That medical collections do not come off credit reports at some point is another myth that can cause anxiety. Medical collections have a time frame of up to 7 years from when they go into collections before they should be taken off your credit report. Even though seven years may seem like a long time, it can help to know that these collections will one day be gone.
Further, changes in credit reporting regulation have made changes in paid medical collection easier, meaning that any person who clears their debts will be provided with a clean credit report faster. To sum up, one should remain active and attentive to credit reporting activities to understand and appreciate the role of credit reporting in long-term financial management.
Conclusion
To be financially stable, people must try to demystify myths surrounding medical collections and credit reports. By getting correct information and being very keen, it is easy to reduce the effects of medical bills on credit scores and, in general, make good decisions on debts. With the help of this guide, you’ll be able to steer your way through this challenging landscape, make fundamental changes for the better regarding your finances, and avoid the pitfalls of myths and misconceptions.
It is essential to know about medical collection and how it maintains your credit health. This knowledge will assist you in standing up for yourself when it comes to paying your bills.
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Mental Health challenges amongst young adults is at an all-time high and many experts point to the fact that kids are being over-protected by parents and not allowed to step into their own ability to solve problems. An amazing way to combat this is to involve kids in home improvement projects. It can slow the process down a bit, but the payoff for their confidence is well worth it. Another aspect is that extra hands can move some projects along much quicker and when kids know they were involved in actually speeding a process up the boost to their self-esteem will be tangible. Its easy to read books on parenting strategies like the groundbreaking book on this topic by Dr. Daniel G. Amen and Dr. Charles Fay, but the true challenge is finding opportunities to apply these truths in daily life.
Kids don’t have enough opportunities to be involved in real problem solving
School assignments are generally paper or computer based and very controlled to the lesson at hand. This doesn’t provide opportunities for the mind of your child to engage in the kind of problem solving that almost any home improvement project comes up to. It’s great to see a parent work through what to do if a piece of baseboard is cut slightly short or to work to reset a paver that isn’t quite level on a patio. A major reason to involve kids in your simple projects is that these simple projects still run into complications and if they are around and engaged with the resolution, they will feel some level of power to deal with these things themselves. This will require patience (sometimes more than I have) and it could slow a project down, but this is the practical way to use the power of neuroscience to raise resilient children.
Becoming Mentally Strong starts with actually feeling useful
I have been involved in building two short fences and a paver patio with my kids and these projects all made me think of the big farming families that exist in the distant past. For the fences, my younger daughter was helping with a small nail gun (with me right next to her guiding) while my son held each plank in position. This allowed me to use my hands to ensure the nail was in place and the planks were precisely in the correct spot. This little system got us moving quickly through the installation of about 30 planks on a short front yard fence and we all felt quite pleased at the end. It honestly went much faster than I could have done it by myself or even just with my wife. The three sets of hands, even if they were small were super helpful. It provided a first time to get hands on a project which allows them to begin to understand what it takes to see a project through. This is critical to becoming resilient children and young adults who know how to problem solve.
Types of Projects That Work for Kids
Obviously, the scale of the project needs to be right for this to work. The mental strength and patience that I am trying to generate by having my kids help is obviously not something that has much supply now. I’ve found that fences or replacing siding on a shed have been awesome for this. The kids are genuinely useful and we see a ton of progress quickly. Other items that I think fall into this category would be installing vinyl plank flooring since the kids could be staging to allow a parent to move through the placement or for an older child to actually do the placing while the parent is doing quality control.
Similarly, installing new baseboard is a great home improvement project where extra hands are tremendous and it also allows one of the kids to use a nail gun (with a parent right next to them, once again). This allows the parent to focus on positioning and the child can drive the nails. Cutting baseboard is definitely something that only a teenage child should help with, but if they are ready, this is a great next development step.
Experiences are the way to build mental strength and confidence
The major underlying theory here is that experiences are the currency for building self-confidence and resilience. In the United States, these types of experiences simply aren’t coming to kids at the same rate that they were in past generations. It takes intentional, effective parenting to create these experiences and home improvement projects provide a perfect, organic way to do this. It won’t be perfect, but its 100% worth bringing kids in to help with these items and also plant the seed for them to catch the DIY bug as adults.
All parents want to avoid power struggles and behavioral problems from children of all ages and the foundation that is required is to help build resilient children in their early years to insulate against these challenges.
The U.S. House of Representatives has taken a significant step toward eliminating two contentious provisions of the Social Security Act: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO).
Championed by a bipartisan coalition led by Representatives Abigail Spanberger (D-VA) and Garret Graves (R-LA), the Social Security Fairness Act seeks to rectify what its advocates call decades of unfair treatment of over two million public servants, including police officers, educators, and firefighters. Read the rest
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Weekend Reading – TFSA Year-End Tips Hi Folks! Welcome to a new Weekend Reading edition that includes some TFSA year-end tips! Before those tips and other links, some recent reads and reminders: My wife started to work part-time earlier this year. Lucky her! All fun aside, this has been part of our shared financial plan…I…
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