Optimal Allocation Strategy with Multiple Accounts?

[jhigh]

Hi everyone!

I would like to get some opinions on the optimal Personal Portfolio allocation strategy across multiple accounts (employer 401k, IRA's and taxable).   Obviously, I would like to weight the tax advantaged accounts more heavily towards bonds.  However, the allocation challenge is that almost 70% of the portfolio is in the employer 401k, and is very limited in its offerings.  For example, the only bond fund available is the PIMCO Total Return Fund (PTTRX). This is an intermediate-term bond fund so that's out.  The closest stock fund is the MERRILL LYNCH EQUITY INDEX TRUST, which is an S&P 500 index fund, so that might be an option.  There's also a small cap growth fund which may work for 5% or so of the stock allocation.

What is the best course of action given these circumstances?  Should I allocate 50/50 stocks/cash in the 401k and 100% bonds (either VUSTX or TLT) in the IRA accounts and then use the taxable accounts for GLD and to "fill-in the gaps" to get to 25% in each category?  Is there another strategy that would work?

Thanks!

[KevinW]

I am also nearly completely tax sheltered and have given this some thought.  I've come up with several alternatives:

Only use accounts to the extent that they support a pure PP.  In your case that would probably mean that you only use the 401(k) to hold some of your stock allocation; from now on you would only contribute to IRA and taxable accounts.  This way you have a pure-of-heart PP, at the cost of higher tax exposure.  Browne generally advised "when in doubt do the safer thing," and to suck it up and pay the price to do things properly, so I think this is what he'd suggest.

Build the largest pure PP you can, and treat remaining 401(k) space as a variable portfolio using a different conservative approach.  Let's say you can build a pure permanent portfolio out of 60% of your portfolio, but the other 40% is 401(k) space that can't accommodate PP assets.  Call that your variable portfolio and allocate it to intermediate-term bonds, or a "retirement income" fund, or some other conservative investment.

Use all available accounts and compromise on some of the asset classes.  In the giant Bogleheads thread there was a discussion about using 50% intermediate bonds instead of 25% short- and 25% long-term.  If you are comfortable with this kind of substitution, you might make a "poor man's permanent portfolio" out of
50% whatever intermediate term bond fund is available
25% whatever large-cap stock fund is available
25% gold

A portfolio like that deviates from several important Permanent Portfolio strictures.  However as a practical matter it is likely to correlate with a pure permanent portfolio under all but extreme market conditions.

Petition to get a brokerage option in your 401(k).

I think it's also worth considering how long you will be stuck with this 401(k).  When you change jobs you can rollover the 401(k) into a PP-compatible IRA.  Most people change jobs every few years, and cutting corners is more palatable if it'll only be for a brief time.

If that stock fund is indeed an S&P 500 stock fund, then it should be fine for the stock portion.  I'd be surprised if they didn't have a serviceable cash fund, those seem to be standard 401(k) fare.

[Jan Van]

One reason I wouldn't be in favor of option 1 is that I'd always want to try to maximize my 401k. Just to build more tax-deferred space, and to reap the benefits of a 401k match.
In my own situation I think I'd be biased towards option 3, and do the best I can...

[jhigh]

Thank you for responses and ideas!  I definitely want to leverage my 401k as much as possible since I'm getting a company match.

Would it be reasonable to use aspects of "Poor Man's" Permanant Portfolio in the 401k space only?  What would be the implications of the following approach:

• Allocate 100% of the 401k space to the Pimco Intermediate Bond fund.
• Count 50% of the the total 401k value above as Cash and 50% as Long-Term Bond when I feed those amounts into my overal "pure" PP allocations.
• Allocate the IRA and Taxable accounts accordingly to get 25% in each of the four asset classes overall.

This would certainly be simple and optimal in terms of filling up the tax advantaged space with Bonds to the greatest extent possible.  Thoughts?

[KevinW]

That sounds reasonable.  Though if you're using option 3, to get to a 4x25 allocation you'll need more than just the bond fund in the 401(k).  It sounds like the 401(k) has a viable stock fund, and I doubt it has a gold fund, so you're probably looking at

401(k):
50% intermediate bond fund
20% stock fund

IRA/taxable:
5% stock
25% gold

I agree that this has the virtues of simplicity and making effective use of tax deferred space.  This seems like about the best you can do given what you have to work with.  Just make sure you are OK with the ramifications of using the PIMCO fund in place of Treasuries.  I'm unfamiliar with the fund but I expect it holds riskier bonds than Treasuries, which will add a bit of yield but introduce some risks that could hurt you in an extreme recession or deflation.

[Pkg Man]

Does your 401k have something like a short-term US government bond fund or a stable value fund?  You could use that for the cash portion, make use of the existing S&P500 fund, and use taxable accounts or IRAs for the rest.  Anything left over in the 401k I'd call the VP.  I would be weary of using the intermediate bond fund just to save on taxes, especially if you have access to IRAs for the long term bonds.

Another option is to ask them to add the PRPFX fund as one of the choices; it is a close cousin of the real thing.  Perhaps they would be more agreeable to this than adding a brokerage service.