401k Lemonade

A place to talk about speculative investing ideas for the optional Variable Portfolio

Moderator: Global Moderator

Post Reply
Jack Jones
Executive Member
Executive Member
Posts: 268
Joined: Mon Aug 24, 2015 3:12 pm

401k Lemonade

Post by Jack Jones » Wed Aug 26, 2015 7:54 am

On the advice of others in previous threads here, I've decided to consider my 401k as a VP. Although it does have some potential PP options (SP 500 index, Stable Value Fund), it is missing other components (LTT, Gold).

If/when I change employers, I plan on rolling over these funds into my IRA where I am implementing the PP. Because of this, I don't feel like I have enough years to weather market losses that an aggressive allocation would necessitate. So, I'd prefer to have a conservative asset allocation in my 401k so that I can preserve value until I can move the money into a portfolio that I feel better about.

I'm currently targeting a 30/70 BH-style portfolio, however, with some slight modifications:

5% Company Stock (purchased at 15% discount, sold on a rolling yearly basis) (not actually part of the 401k)
10% SP 500 Index
2.5% Small Cap Index
12.5% International (Developed) Index
55% Barclays Capital U.S. Aggregate Index.
15% Stable Value Fund

I feel pretty good about this, but would like some input from the knowledgeable folks here. The component I feel least good about is the Stable Value Fund. It has the highest ER (0.36%), and isn't traditionally held in a BH portfolio. However, I'm holding it in the hopes of reducing volatility of the portfolio.

Thoughts?
mukramesh
Senior Member
Senior Member
Posts: 133
Joined: Fri Sep 12, 2014 3:27 pm

Re: 401k Lemonade

Post by mukramesh » Wed Aug 26, 2015 11:26 am

I am assuming you are only investing in your 401k and IRA and do not have a taxable investment account.

One option is to hold the entire Stock portion of your PP in your 401k and use your IRA to hold the Cash, Gold, and LTTs. This would effectively give you a larger PP than what you have now just using the IRA. Then the leftover portion of the 401k can be invested Boglehead-style.
Jack Jones
Executive Member
Executive Member
Posts: 268
Joined: Mon Aug 24, 2015 3:12 pm

Re: 401k Lemonade

Post by Jack Jones » Wed Aug 26, 2015 12:05 pm

mukramesh wrote: I am assuming you are only investing in your 401k and IRA and do not have a taxable investment account.
Correct.
mukramesh wrote: One option is to hold the entire Stock portion of your PP in your 401k and use your IRA to hold the Cash, Gold, and LTTs. This would effectively give you a larger PP than what you have now just using the IRA. Then the leftover portion of the 401k can be invested Boglehead-style.
Very interesting, I hadn't considered this. However, I'm afraid it might perform differently than a standard PP setup.

For example, consider the case where stocks rise to 35% of the portfolio you suggest. This would trigger a rebalance where you sell off some stocks; however, you wouldn't be able to use the proceeds to buy undervalued assets in the rest of your PP. Instead you would "rebalance" into your Boglehead-head style portfolio.

I'm not really sure how this would affect the function of the PP.
mukramesh
Senior Member
Senior Member
Posts: 133
Joined: Fri Sep 12, 2014 3:27 pm

Re: 401k Lemonade

Post by mukramesh » Wed Aug 26, 2015 12:28 pm

In the hypothetical case you described (Stocks hitting the 35% rebalancing band), you would have to sell them down back to 25% and buy the additional Gold and LTTs in your IRA. The leftover portion that should be in Cash would be a combination of your IRA Cash and 401k Stable Value Fund.

The whole point of this is that you would be considering more of your money part of your Permanent Portfolio and so more of your money would be 'protected' by the concept.

FYI, my PP is actually split over a number account types (taxable- split into several bank accounts + treasury direct, IRA, 401k, HSA) and I have organized all my assets into the various accounts according to tax efficiency. It's a little more complicated than having a separate PP per account but I  am hoping the long term tax savings makes it worth the small hassle (doing a little math) at rebalancing time.

Some people don't want to bother with the added complexity, which is understandable. If you have any more questions about rebalancing between multiple accounts, let me know  ;D
Jack Jones
Executive Member
Executive Member
Posts: 268
Joined: Mon Aug 24, 2015 3:12 pm

Re: 401k Lemonade

Post by Jack Jones » Wed Aug 26, 2015 12:56 pm

mukramesh wrote: In the hypothetical case you described (Stocks hitting the 35% rebalancing band), you would have to sell them down back to 25% and buy the additional Gold and LTTs in your IRA. The leftover portion that should be in Cash would be a combination of your IRA Cash and 401k Stable Value Fund.
Okay, interesting. I think I'm following. So I'd use as much cash as necessary in the IRA to rebalance the Gold and LTT. Then, I'd rebalance my cash portion by moving the stock proceeds into the stable value fund. Yeah that sounds like it will work!

I'll have to think about this some more to figure out if there could be any other problematic rebalancing scenarios.
mukramesh wrote: The whole point of this is that you would be considering more of your money part of your Permanent Portfolio and so more of your money would be 'protected' by the concept.
If we're okay rebalancing into the Stable Value Fund, is there any reason not to hold the initial 25% cash portion in the 401k as well? This would of course get even more money under the PP umbrella.
mukramesh wrote: If you have any more questions about rebalancing between multiple accounts, let me know  ;D
Hey, thanks so much. I really appreciate the help!
mukramesh
Senior Member
Senior Member
Posts: 133
Joined: Fri Sep 12, 2014 3:27 pm

Re: 401k Lemonade

Post by mukramesh » Wed Aug 26, 2015 2:28 pm

Jack Jones wrote: Okay, interesting. I think I'm following. So I'd use as much cash as necessary in the IRA to rebalance the Gold and LTT. Then, I'd rebalance my cash portion by moving the stock proceeds into the stable value fund. Yeah that sounds like it will work!
Yes that is essentially the idea!
Jack Jones wrote: If we're okay rebalancing into the Stable Value Fund, is there any reason not to hold the initial 25% cash portion in the 401k as well? This would of course get even more money under the PP umbrella.
If your IRA holds only Gold and LTTs while your 401k holds only Stocks and Cash, you'll run into a problem when Stocks hit the 35% rebalancing band. You'd sell down the stocks but now you'd be unable to purchase more Gold and LTTs in the IRA because you didn't have a cash buffer. This was the scenario described by your last question which now no longer works.

The solution would probably be to split the Cash in ~half between the IRA and 401k. That way, you would be able to purchase something in either account due to future rebalancing.
Jack Jones
Executive Member
Executive Member
Posts: 268
Joined: Mon Aug 24, 2015 3:12 pm

Re: 401k Lemonade

Post by Jack Jones » Wed Aug 26, 2015 3:38 pm

mukramesh wrote: The solution would probably be to split the Cash in ~half between the IRA and 401k. That way, you would be able to purchase something in either account due to future rebalancing.
Here's a case where this might not work:

IRA
----
15% Gold
20% LTT
12.5% Cash

401k
------
35% Stock
17.5% Cash

In this case, you don't have enough cash in the IRA to fully rebalance into Gold and LTT. In practice though, if you direct your yearly contributions towards lagging assets, I doubt this is likely to happen.
User avatar
Desert
Executive Member
Executive Member
Posts: 3233
Joined: Sat Jun 26, 2010 2:39 pm

Re: 401k Lemonade

Post by Desert » Wed Aug 26, 2015 5:37 pm

Jack, I'd either do a 30/70 equity/bonds in your 401k and HBPP in your IRA, or:

As others have suggested, spread the PP across all accounts.  I do this with my household portfolio, making sure to place the assets with high expected returns in my wife's account first. 

In your 401k, I think the stable value is a decent proxy for cash if you need it, or even better, just hold the total bond market as a proxy for cash+LTT.  Past performance has been remarkably similar for TBM instead of the cash/LTT barbell.
Our greatest fear should not be of failure, but of succeeding at something that doesn't really matter. 
- D.L. Moody

Diversification means always having to say you're sorry.
mukramesh
Senior Member
Senior Member
Posts: 133
Joined: Fri Sep 12, 2014 3:27 pm

Re: 401k Lemonade

Post by mukramesh » Wed Aug 26, 2015 5:47 pm

Yes there are definitely some scenarios where you wouldn't have enough cash to buy the assets in the IRA.

I actually put my yearly IRA contribution and 401k contributions in Cash and decide what to do when I hit a rebalancing band. Since I am in the accumulation phase, I expect to only hit rebalancing bands due to constantly adding cash and reaching the 35% threshold rather than the appreciation/depreciation of the other assets. Therefore I find it unlikely that I'll run into the issue you describe myself. Since you are also in the accumulation phase (you have a 401k with an employer), maybe you're in the same situation as me?
Jack Jones
Executive Member
Executive Member
Posts: 268
Joined: Mon Aug 24, 2015 3:12 pm

Re: 401k Lemonade

Post by Jack Jones » Thu Aug 27, 2015 10:52 pm

Hey, just wanted to say thanks for the help. I was able to increase the size of my PP by 58% by holding 37.5% of its assets in my 401k. I'm going to invest the remainder of my 401k conservatively, with the following goals in mind:
  1. Preserve capital until it can be moved to PP
  2. Provide some diversification to overall portfolio
  3. Keep things simple
I'm going to do this by holding around 25% equities in my VP, much of which will be in an international index. I'm also going to hold a small cap index so that its value is 1/5 my PP equites to try to approximate a total stock market index in my overall portfolio. The rest will be in a bond fund.
mukramesh
Senior Member
Senior Member
Posts: 133
Joined: Fri Sep 12, 2014 3:27 pm

Re: 401k Lemonade

Post by mukramesh » Fri Aug 28, 2015 4:40 pm

Sounds like a good plan to me. Glad I could help  :D
Post Reply