Search in book...
Toggle Font Controls
Create new playlist

Name your new playlist

Playlist description (optional)
Sign In

Email address

Password

Forgot Password?

or

Continue with Facebook

Continue with Google
Sign Up

Full Name

Email address

Confirm Email Address

Password

or

Continue with Facebook

Continue with Google

Chapter 13
How to Construct Your Portfolio

Can you relate to this situation? It's Wednesday afternoon, you've lost steam at work, and your lunch break just ended. What a drag. Naturally, you put aside that ASAP assignment you were supposed to finish yesterday to spend a few minutes focusing on more appetizing thoughts – like what you should do for dinner.

Your first option is to go all in, Bobby Flay style. This would entail heading to the grocery store after work, purchasing the individual ingredients you need to make a nice meal, sous chefing, cooking, and cleaning up afterward. That may be the cheapest and tastiest option, but it also takes up most of your evening.

Alternatively, you could pay a little more for precut vegetables to avoid having to spend 15 minutes chopping onions and wiping away your tears – and still get most of the benefits of a home-cooked meal.

Or finally, because it's a weekday, you could just pick up a meal from the prepared foods section – requiring you to simply reheat and eat, and freeing up time for you to watch a movie. While this option may be the priciest and the least tasty, it requires minimal preparation and cleanup.

Believe it or not, the thought process you go through to decide how to prepare a meal parallels deciding how to build your investment portfolio. In both cases, multiple options are available that will get you to the same destination (i.e., nourished or properly invested). However, the cost and time commitment required for each option will vary.

When deciding between your options for cooking and investing, you're trying to balance efficiency and simplicity. The underlying ingredients you choose to use in your meal or investment portfolio can simplify or complicate your meal preparation or investment plan. Ingredients that simplify either will likely cost a little more.

In both situations, there is no one-size-fits-all option that will be right for everyone. People with a greater interest in cooking or investments may gravitate toward the more hands-on, time-intensive options. Those who are less interested may choose to pay more for simpler options requiring little cleanup or ongoing management.

In this chapter, you'll learn how to balance efficiency and simplicity when investing, and how to construct an investment portfolio that aligns with your goals and the amount of time you want to spend managing your investments.

Step 1: Complete Prerequisites

Which investments you use in your portfolio will depend on what goals you want to achieve and when you want to achieve them. If you haven't fully formed your goals, please refer back to Chapter 11 and go through the exercises to define, quantify, and prioritize your goals.

In Chapter 11, two mandatory goals that I mention include saving for an emergency fund and paying off high-cost debt, such as credit card debt and personal loans. If you haven't funded an emergency fund and fully paid off high-cost debt, focus on achieving those goals before dipping your toe into investing. Reaching both goals will help you build a solid financial foundation and ensure you can stick to your investment plan.

Step 2: Review Your Goals

Once you've completed the prerequisites for investing, the next step toward building your investment portfolio is to review your goals and the applicable timelines for each. Table 13.1 provides general guidance on how to invest your money, based on your time horizon for a particular goal.

When saving for goals less than five years away, most of the allocated money should remain in cash. While this strategy will limit your potential gains, it will also limit your potential losses, giving you a better chance of having the money you'll need to achieve these short-term goals. For goals that are five or more years away, the exercise requires a little more thought. As your time horizon increases, you may feel more comfortable increasing your stock exposure. In order to determine the right asset allocation for you, you'll need to evaluate and balance the trade-offs between how much risk you want or need to take, compared to the expected return (see Table 13.2).

In particular, your personal risk tolerance could influence your ability and comfort sticking with your plan and investment portfolio, especially in the face of large downward swings in prices. While stocks may return, on average, positive annual returns for longer holding periods, the journey to capturing those long-term positive returns may feel more like riding a rollercoaster than floating along a lazy river – with a lot of bumps along the way, and potentially huge downward swings in your portfolio value. If severe market downturns could cause you to make knee-jerk reactions, such as moving all of your money to cash, you may be more comfortable with a lower percentage of stocks in your portfolio – even if your goal is 20-plus years away.

Table 13.1 Directional Investment Guidelines Based on Goal Time Frames.

Time Frame for Goal	Example Goals	Investment Guideline
Less than five years	Vacation, car, home, continuing education	Mostly cash (e.g., high-yield savings account, certificate of deposit, or equivalent holding)
Five to 15 years	College savings	A mix of bonds and stocks
15-plus years	Retirement/financial independence	Mostly stocks

Table 13.2 Considerations for Whether to Invest in More Stocks.

Consideration	Guideline
Time frame	Shorter-term goals should be tilted more toward bonds; as your time frame increases, you can introduce more stock exposure.
Flexibility of time frame	If your time frame is set, you may not want to take as much risk; if your time frame is flexible and can be delayed, you may be able to take on more risk.
Risk tolerance	If you get spooked easily because of large downward swings in the market, you may want to take on less risk.
Need for returns	Based on your existing savings and how much you can save on an ongoing basis, do you need a high return to reach your goal? If not, you may want to consider taking on less stock exposure.

While there isn't a perfect way to measure risk tolerance, some firms use questionnaires focused on your past or potential actions in turbulent markets to gauge your comfort level with risk. You can find and use a free online risk tolerance questionnaire by doing a quick online search. These risk tolerance questionnaires may be a good starting point to figure out your approximate risk tolerance, and give you more clarity about what the right mix of stocks and bonds may be for you and your goals.

But before you spend hours upon hours trying to figure out the perfect apportionment of your assets, remember that solving for your asset allocation isn't like solving a math problem in school. There is no one “correct” allocation for a particular goal because everyone has different preferences, risk tolerances, and financial situations. Furthermore, a 5% to 10% difference in your stock or bond allocations won't make a significant financial difference to you in the long run. The difference in the Vanguard analysis of average annual returns for various mixes of stocks and bonds was about 0.3% to 0.5% for a 10% change in stock exposure – not a big deal in the grand scheme of things.

How to Maintain Your Asset Allocation and Rebalance Your Portfolio

The asset allocation (i.e., your mix of stocks, bonds, and other investments) that you start out with at the beginning of the year will likely not be the same allocation you have at the end of the year because of changes in the market. In fact, the mix of stocks and bonds in your portfolio may shift the day after you execute on your strategy as the underlying investments in your portfolio will probably perform differently; stocks may increase in value and bonds may drop in value, or vice versa. Over time, these fluctuations may shift the proportion of stocks and bonds in your portfolio so that they no longer align with your target, causing your portfolio to become either more or less risky than you'd like. This is why periodic rebalancing is important.

You can take either a time-based or value-based approach to rebalancing your portfolio. Time-based rebalancing means holding yourself to a set schedule of when to rebalance your portfolio, like semi-annually or annually.

Value-based rebalancing means that instead of rebalancing on a set schedule, you would rebalance your portfolio when your mix of stocks and bonds reached a certain percentage above or below your target asset allocation. For example, let's say you decided to rebalance your portfolio whenever your stock allocation had deviated more than 10% above or below your target. If your target allocation to stocks was 80%, you would rebalance your portfolio whenever your allocation moved to 90% stocks or more, or 70% stocks or less.

While there is no “right” or “best” way to rebalance your portfolio, most readers managing their own portfolios may lean toward the time-based rebalancing approach because it is more hands-off and automatic. In this approach, you'll still compare your actual allocation to your target allocation on rebalancing dates. If the differences are minor, you may decide not to rebalance at all. The value-based strategy, on the other hand, requires you to monitor your portfolio more closely.

In order to rebalance, you would typically sell the holding that you have too much of and buy more of the holding that you don't have enough of. Let's revisit the prior example in which your target stock allocation had increased from 80% stocks to 90% stocks. In this case, you would need to sell stocks and buy more bonds so your allocations again matched your targets. Alternatively, if you continued to add money to your investment accounts throughout the year, you could simply buy more of the holding that had decreased in value (i.e., bonds in this case), and less of the excessive holding (i.e., stocks in this example).

Selling holdings to rebalance your portfolio in a pretax or Roth account won't have any immediate tax implications. However, if you are selling holdings that have gained value in a taxable brokerage account, you may incur capital gains taxes on this selling, so the tax implications of rebalancing in your taxable account is something to be mindful of before proceeding.

If rebalancing sounds like a lot of work, using target-date funds, which I'll discuss shortly, may be a good fit because these funds do the rebalancing for you, so you don't have to think about how, when, or how often you should rebalance your portfolio.

Step 3: Evaluate Your Options

Once you've determined your overarching mix of stocks and bonds (i.e., your asset allocation), you can take action and implement that target asset allocation in a number of ways, including through a one-fund portfolio, a three-fund portfolio, an asset-located portfolio, or some variation of these portfolios.

Structurally, these options differ based on 1) the number of funds you'll use and 2) whether you'll maintain the same funds in the same proportion across accounts. Those factors will influence the complexity of your portfolio and ongoing management required, as well as how efficient your portfolio is from a cost and tax perspective. Let's take a closer look at each of these options.

Option 1: One-Fund Portfolio (Target-Date Fund)

Translation: All accounts would use the same one fund in the same proportion.

A one-fund portfolio allows you to achieve your target stock and bond mix simply by purchasing one fund, instead of having to buy three or more funds to achieve the same allocation. These funds are sometimes referred to as target-date or lifecycle funds, with most funds having names that may include “Target Retirement Fund [Year]” or “Target [Year]” (see Table 13.3). Generally, target-date funds with years that are further away from the current year will have a greater proportion of stocks than those funds with years that are closer to the current year. For example, the Vanguard Target Retirement 2050 fund has 90% stocks,¹ compared with its 2030 Target Retirement fund, which is made up of 75% stocks.²

Not only do target-date funds simplify the upfront selection process, but they also take care of the ongoing portfolio management. Specifically, they rebalance the portfolio to the target asset allocation while also decreasing the exposure to stocks in the fund as you approach the target retirement date – a task you would be otherwise responsible for handling or outsourcing.

Table 13.3 Target-Date Fund Naming Convention and Fees.

Fund family	Target-Date Fund Naming Convention (Passively Managed Funds)	Expense Ratio Range
Fidelity	Fidelity Freedom Index [Year] Fund	0.08% to 0.14%
Schwab	Schwab Target [Year] Index Fund	0.08%
Vanguard	Target Retirement [Year]	0.12% to 0.15%

Target-date funds may be a good fit for you if:

You value simplicity above all else.
You want to do minimal maintenance and ongoing management of your portfolio.
You only have one investment account at the moment, such as a company 401(k).
You're not currently investing in a taxable brokerage account.
You may not have enough money to meet investment minimums of multiple mutual funds.

Target-date funds may NOT be a good fit for you if:

You have money spread across multiple account types, especially if one of those accounts includes a taxable brokerage account.
You value paying the lowest fees possible.

A Warning About Target-Date Fund Fees

While many fund families offer passively managed target-date funds, some fund families offer both passively managed and actively managed target-date funds. The actively managed target-date funds are much more expensive, so be sure to check the expense ratio of a fund before making a purchase.

For example, Fidelity's actively managed 2050 fund is called “Fidelity Freedom 2050 Fund”³ while its passively managed fund is called “Fidelity Freedom Index 2050 Fund.”⁴ The only difference in the names is that the passively managed fund includes the word “index” in its name. The difference in fees, though, is huge – the actively managed version has an expense ratio of 0.75% compared to just 0.08% for the passively managed version. For most of the large fund families, like Vanguard, Fidelity, and Schwab, the passively managed target-date funds have expense ratios of 0.20% or less, and several have expense ratios less than 0.10%.

Option 2: Three-Fund Portfolio

Translation: All accounts would use the same three or more funds in the same proportion.

In a three-fund portfolio structure, which was originated by Taylor Larimore and popularized by the Bogleheads, instead of buying just one mutual fund or ETF, you would buy three or more funds to achieve your target allocation. Typically, the three funds would consist of a total US stock market index fund, a total international stock market index fund, and a total US bond market index fund.

To determine the amount of money to allocate to each fund, you would first figure out your overall target allocation of stocks and bonds based on your goals, timeline, and risk tolerance. Then you would need to determine how to segment your stock allocation between US and international index funds. While your exact mix will depend on your individual preferences, many leading experts recommend having 20% to 50% of your stock allocation in international stock index funds. You may also refer to the investment breakdown used by target-date funds for additional guidance on how to determine your mix of US and international stock funds.

While implementing the three-fund portfolio structure is pretty straightforward if you only have one account, if you had multiple investment accounts, such as a 401(k) and a taxable brokerage account, you could use the same mix of stocks and bonds in each. For example, in the scenario that you had both a 401(k) and a taxable brokerage account with a target allocation of 90% stocks and 10% bonds, you would buy three funds in each account such that your allocation would be 90% stocks and 10% bonds in your 401(k), and 90% stocks and 10% bonds in your taxable brokerage account.

On an ongoing basis, you would be on the hook for periodically rebalancing your portfolio to ensure your mix of stocks and bonds in each account was close or equal to your original targets. As you approached your goal target, you would also be responsible for gradually decreasing the proportion of stocks in your portfolio.

The upsides of this added complexity are increased flexibility and lower expenses compared with a low-cost target-date fund. For example, the Vanguard Target Retirement 2050 fund has an expense ratio of 0.15%.¹ This option consists of four underlying Vanguard funds:

Vanguard Total Stock Market Index Fund Investor Shares
Vanguard Total International Stock Index Fund Investor Shares
Vanguard Total Bond Market II Index Fund
Vanguard Total International Bond Index Fund

If you bought these (or similar) funds individually and in the same proportion as the Target Retirement 2050 fund, you would only pay 0.07% in ongoing expenses, instead of 0.15%. However, this strategy requires overcoming certain hurdles. In particular, you would need to have sufficient money to meet the minimum investment for each fund (outside of your retirement plan), typically starting at $1,000 or higher.

Table 13.4 provides examples of funds people often use to build a three-fund portfolio with different fund families:

Table 13.4 Example Funds Often Used to Construct a Three-Fund Portfolio.

Fund Family	US Stock Fund	International Stock Fund	US Bond Market Fund
Fidelity	Fidelity Total Market Index Fund (FSKAX)	Fidelity Total International Index Fund (FTIHX)	Fidelity US Bond Index Fund (FXNAX)
Schwab	Schwab Total Stock Market Index Fund (SWTSX)	Schwab International Index Fund (SWISX)	Schwab US Aggregate Bond Index Fund (SWAGX)
Vanguard	Vanguard Total Stock Market Index Admiral Shares (VTSAX)	Vanguard Total International Stock Index Admiral Shares (VTIAX)	Vanguard Total Bond Market Index Admiral Shares (VBTLX)

A three-fund portfolio structure may be a good fit for you if:

You have money spread across several different account types, including a taxable brokerage account.
You want to pay the lowest fees possible.
You can meet the investment minimum for multiple mutual funds (outside of your retirement plan) or choose to use ETFs.

A three-fund portfolio structure may NOT be a good fit for you if:

You value simplicity above all else.
You only have one account type, and it's a pretax or Roth account, not a taxable brokerage account.
You want to use mutual funds, but are unable to meet the investment minimums for several mutual funds.

Option 3: Asset-Located Portfolio

Translation: Use three or more funds across accounts (like the three-fund portfolio), but each account may have different funds in different proportions.

An asset-located portfolio builds on the fundamentals of the three-fund portfolio structure. Like the three-fund portfolio, an asset-located portfolio would require you to buy three or more funds to reach your target allocation, and you would be responsible for the ongoing rebalancing and risk management of your portfolio. However, unlike a three-fund portfolio structure, where you maintained the same mix of stocks and bonds across account types (e.g., 90% stocks and 10% bonds in your 401(k), and 90% stocks and 10% bonds in your taxable brokerage account), you would unlikely use the same allocation in each account type with an asset-located portfolio (see Table 13.5). Instead, you would focus on placing the most tax-efficient investments in your taxable brokerage account, and the least tax-efficient investments in either your pretax or Roth accounts.

Tax-efficient investments are those that would generally provide you with investment income subject to the more advantageous long-term capital gains rates in a taxable account (read: a lower tax rate). Tax-inefficient investments would be those that kick off investment income subject to the higher short-term capital gains rates (a.k.a. your marginal tax rate – read: much higher tax rates).

Tax-Efficient Investments: Total stock market index funds, tax-managed stock funds, small-cap or mid-cap index funds
Tax-Inefficient Investments: Taxable bonds, REIT funds, actively managed funds

If you were in the 32% tax bracket and received $1,000 in income from your taxable investments, you'd net $680 if the income was interest from a taxable bond and would clear $850 if the income was qualified dividends from a total stock market fund – a $170 difference.

Table 13.5 Executing a 90% Stock/10% Bond Allocation ($200k Portfolio).

	Three-Fund Portfolio	Asset-Located Portfolio
Account: 401(k) Amount: $100,000	$90k Stocks (90%) $10k Bonds (10%)	$80k Stocks (80%) $20k Bonds (20%)
Account: Taxable Brokerage Amount: $100,000	$90k Stocks (90%) $10k Bonds (10%)	$100k Stocks (100%)
Total Portfolio Amount: $200,000	$180k Stocks (90%) $20k Bonds (10%)	$180k Stocks (90%) $20k Bonds (20%)

While being deliberate about which investments you put in what account is certainly the most cost and tax-efficient, it also requires the most amount of work. Because each account may not have the same mix of stocks and bonds by design, it will be difficult to see if your overall asset allocation is off simply by looking at your account. For this strategy, you'll likely need to use a spreadsheet to outline your target allocation across accounts. The other difficulty with this strategy is your account types (e.g., pretax, Roth, and taxable) will likely accumulate money at different rates, making it hard to simply set it and forget it.

An asset-located portfolio may be a good fit for you if:

You want to pay the lowest fees possible.
You want your portfolio to be the most tax-efficient.
You can meet the investment minimum for multiple mutual funds or choose to use ETFs.
You don't mind having to do ongoing management of your portfolio, and may even enjoy it.
You have multiple account types, including a taxable brokerage account.
You're in one of the higher tax brackets (i.e., 32%, 35%, or 37%).

An asset-located portfolio may NOT be a good fit for you if:

You value simplicity.
You only have a pretax or Roth account, and no taxable brokerage account.
You're in a lower tax bracket (i.e., 10%, 12%, or 22%).
You want to use mutual funds, but are unable to meet the investment minimums for several mutual funds.

What About Robo-Advisors?

Since arriving on the investing scene after the 2008 recession, robo-advisors – automated investment platforms that help investors build and manage investment portfolios – have marketed themselves and attracted new investors to good effect. They often position themselves as an alternative to a financial advisor with benefits such as easy account set-up, ongoing rebalancing, tax-loss harvesting, and in some cases, tax-efficient placement of assets. In exchange, robo-advisors typically charge an ongoing management fee of 0.20% to 0.40%, in addition to the fees for the underlying investments – much lower than the fees of a traditional financial advisor, which generally range from 1.00% to 1.50%.

Despite these advantages, the question of whether to use a robo-advisor isn't necessarily so clear-cut. Here are some considerations when deciding whether a robo-advisor should manage your money.

Your Needs: The first factor to consider is your needs—which requires having a clear handle on your current situation. As a first step, figure out how much money you have available to invest, as well as the account types your money is sitting in (e.g., pretax, Roth, taxable). This information will help you determine what type of service would benefit you the most.
In particular, ask yourself if you're looking to: a) automate and optimize your investments (in which case, a robo-advisor may be a good fit), b) work with someone who can help you with all aspects of your financial situation (which a financial advisor would do), or c) simply manage your investments yourself?
Applicable Benefits: Some robo-advisor benefits may apply to all customers, including automated rebalancing and the use of low-cost investments. However, two benefits often highlighted – tax-loss harvesting and tax-efficient placement of assets – may not apply to your situation if you are only investing money in a traditional or Roth IRA.
Both strategies benefit those investing monies in a taxable brokerage account. Tax-loss harvesting allows you to potentially decrease your tax liability in the current year by selling investments in your taxable account that have temporarily gone down in value at a loss to offset your other investment gains or income that would otherwise be subject to tax. Tax-efficient placement of investments focuses on putting the most tax-efficient assets in your taxable brokerage account—a strategy that is not applicable if you only have money in a traditional or Roth IRA.
Costs: Robo-advisors are less expensive than traditional financial advisors, but they are still more costly than the do-it-yourself portfolios I highlighted in this chapter—including three-fund and asset-located portfolios that would require you to do ongoing rebalancing and risk management of your portfolio, as well as a one-fund portfolio (i.e., a target-date fund) that would take care of those responsibilities for you.
Flexibility and Future Options: The amount of flexibility you want now or in the future matters as well. If you start investing with a robo-advisor with just a traditional or Roth IRA, it's relatively painless, financially, to move this money to a do-it-yourself option or financial advisor down the road because there won't be immediate tax consequences for selling those investments. However, if you use a robo-advisor for your taxable brokerage account, you may incur taxes if your investments increase in value and you decide to change your holdings or strategy.

The bottom line is, robo-advisors offer several potential advantages when it comes to money management, but they're not for everyone. The decision of whether to use a robo-advisor largely depends on your current situation, the level of help you're seeking, the amount of flexibility you want, and whether the applicable benefits of a robo-advisor outweigh the additional costs.

If you're just starting out and only have a traditional or Roth IRA, that could be a good time to test the waters with a robo-advisor. While you won't realize the benefits of tax-loss harvesting and tax-efficient placement of assets, you'll have the option to move your money to a do-it-yourself option or financial advisor later with little to no tax consequences. A target-date fund could be an excellent alternative for that situation as well, particularly for people who want to get started investing with minimum costs and maintenance.

How to Choose an Investment Strategy That Works for You: Balancing Efficiency and Simplicity

Table 13.6 summarizes the benefits and considerations of the three strategies you could use as the foundation for your investment portfolio. As you're considering which option to use, keep the following questions in mind, which may help you decide the strategy to either start with, or move to.

Where is your money? Is it in one account type, like a 401(k), or spread across multiple account types, such as a 401(k), Roth IRA, and taxable brokerage account?
How much flexibility do you want now or in the future to potentially make your portfolio more cost and tax-efficient?
How important is it to you to keep costs and taxes low?
How much ongoing work are you willing to do (i.e., rebalancing and other management)?

When determining which strategy to use, you'll want to balance two competing priorities: efficiency and simplicity.

As your portfolio becomes more efficient from a cost and tax perspective, it will also become more complex and take more time to manage on an ongoing basis. The simplest portfolio includes having just one fund – which is easy to track, and doesn't require much ongoing management or intervention. The trade-off for that simplicity is you will pay a slightly higher fee, you may lose some flexibility, and you could have a less tax-efficient portfolio.

Some people, like my friend Alberto, are super interested in personal finance and want to be very hands-on with their investment portfolio, so they choose a more complex portfolio implementation that requires a fair amount of upkeep. Others may think of investing as just another item on their to-do list that they need to tackle, and don't want it to consume their lives. If you fall into the latter bucket, having a one-fund portfolio may be totally fine. You'll get close to the market return, can rest easy that you're invested properly, and will still pay low fees compared to investors who use a financial advisor or actively managed funds.

Table 13.6 Summary of Base Portfolio Structures.

	Option 1: One-Fund Portfolio (Target-Date Fund)	Option 2: Three-Fund Portfolio	Option 3: Asset-Located Portfolio
Translation	All accounts would use the same one fund in the same proportion.	All accounts would use the same three or more funds in the same proportion.	Use three or more funds across accounts (like the three-fund portfolio), but each account may have different funds in different proportions.
# of Funds	1	3-plus	3-plus
Complexity	Least	Somewhat	Most
Ongoing Rebalancing & Management	Least Work	Some Work	Most Work
Flexibility	Least Flexible	Most Flexible	Most Flexible
Cost	Most Expensive	Least Expensive	Least Expensive
Tax-Efficiency	Least Tax-Efficient	Potentially More Tax-Efficient	Most Tax-Efficient

Your Strategy Can Change

The strategy you decide on today doesn't have to be the strategy you stick with forever. Circumstances change, and what was best for you in your 20s may not be ideal later down the road. That's exactly the message David Oransky, financial planner at Laminar Wealth, tells those who want to manage their own investment portfolios.

“If you're new to investing and have no taxable accounts, a one-fund portfolio could be a good way to get started, and still leaves open the option to change your strategy in the future with minimal consequences,” Oransky says. That's because with pretax and Roth accounts, it's relatively easy to pivot strategies and move money within those accounts without incurring taxes today.

Having investments in a taxable brokerage account begins to complicate matters because as you sell holdings in a taxable account that grow in value, you could pay hefty taxes. This is why Rick Ferri, financial advisor and author of All About Asset Allocation, among other books, says, “Make sure you're absolutely in love with the equity mutual funds and ETFs you decide to put into your taxable account because like marriage, divorcing yourself from those holdings later can often be a taxing experience.”

If you're a novice investor and have a taxable account, Oransky thinks the three-fund portfolio strategy could be a good way to start investing more efficiently, while giving you the flexibility to move to an asset-located portfolio strategy in the future. “If you start with a three-fund portfolio strategy in each of your accounts and down the road decide it's worthwhile to asset-locate across your accounts, you could likely sell the bond fund in your taxable account with little to no capital gains tax,” he says.

Bottom line: your investment strategy can and likely will change over time as you add more money and different accounts to your portfolio. Changing strategies and selling investments within your pretax and Roth accounts should be relatively seamless, with no immediate tax implications. Even selling bond holdings within your taxable account should have a minimal tax impact, but be mindful of the equity holdings you buy and sell in your taxable account, as those tax implications may not be as minor.

Notes

1. “Vanguard Target Retirement 2050 Fund,” Vanguard, https://investor.vanguard.com/mutual-funds/profile/overview/vfifx
2. “Vanguard Target Retirement 2030 Fund,” Vanguard, https://investor.vanguard.com/mutual-funds/profile/VTHRX
3. “Fidelity Freedom 2050 Fund,” Fidelity, https://fundresearch.fidelity.com/mutual-funds/summary/315792416
4. “Fidelity Freedom Index 2050 Fund,” Fidelity, https://fundresearch.fidelity.com/mutual-funds/summary/315793570

..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.

Table of Contents for Chapter 13: How to Construct Your Portfolio

Create new playlist

Sign In

Sign Up