Planning for the Year
Two of the most pernicious myths about investing is that 1. It is complicated and 2. It takes a lot of time to do it well. The Grizzlies are here to dispel both of those rumors. In January we wake up a bit from hibernation and go through an annual ritual – planning our investments for the year! We spend a few hours every January. That’s it. A few hours every year is all it really takes to have a winning investment portfolio. I’ll walk you through our full planning process. We’ll take a look at how we stand right now and figure out how we’re going to adjust over the course of the year.
Most important things first. The broad mix of assets you’re invested in is going to have the biggest impact on your returns. Riskier assets like stocks = higher returns. Less risky assets like bonds = lower but more stable returns. The simplest portfolio is always just a mix of simple stock and bond funds. The Grizzlies have a slightly more complex allocation. I went into some detail in a previous post, but it will be helpful to review. We’ve changed a bit since then thanks to movements and additions but it’s pretty much the same.
Below is the target allocation we’ll be using for this year and where we currently sit. We’re not going to be changing our targets at all. We’re still willing to accept a fairly high risk in exchange for a high return. We invest accordingly.
The only discrepancy worth dealing with is the current overweight in the SP 500 and underweight in a few other categories. The SP 500 is high simply because I got lazy at the end of the year. When I was putting money into our taxable account in Nov/Dec I just dumped everything into the SP500. The main lesson here is that yes, you can be lazy with investing and do just fine!
The first step is an immediate rebalance to get back to our targets. I’ll sell some SP500 and buy some bonds, real-estate, and the US Extended Market. The critical element to call out is that all of this rebalancing is going to happen in tax advantaged accounts. I won’t be selling or moving anything in the taxable accounts. Everything we have is sitting on capital gains and selling would cause a large tax bill.
Remember – rebalance in tax-advantaged accounts. No fiddling with asset allocation is ever worth a 20% or more tax on capital gains.
Next, I plan out our retirement contributions. I do this to make sure we can frontload our contributions and not miss a penny of free money. Below is the full list of the retirement contributions that we’ll make this year. I’ll call out a couple items.
The most significant line that needs explanation is my $27k after-tax contribution to my 401k. This is new this year. My company just enabled this option on our plan. Many 401k plans are capped at an $18k contribution limit – the amount of tax deferred savings you can contribute. However, the cap the IRS puts on ALL contributions is $54k. If your plan doesn’t allow this and you can afford to contribute more, the first thing you should do is talk to your HR department and ask them to get this changed on your plan. The additional $27k can be then rolled directly into a Roth IRA.
Additionally, we’ll both be contributing $5500 (the max) to our IRA’s. We won’t get a tax deduction this year due to high income, but the contributions will still grow tax-free. In total, we’ll be contributing $83k to tax-advantaged accounts this year.
Finally, we need to take into account the remaining taxable contributions we’ll be able to save. We assume the amount is roughly in-line with what we were able to achieve in 2016 (which is hopefully conservative), and peg this number at a flat $200k.
Bringing it all together
Finally, we bring it all together into our rebalancing and contribution plan for the year. Below are the exact puts and takes I’m going to execute. I’ll spend the next 30 minutes setting up the trades and arranging the automatic contribution amounts and withdrawals. Then I’ll largely forget about them for the rest of the year.*
* This is a bit of a lie, I do post a monthly update on the state of our finances. I’ll have to check at least that often!
* For anyone who’s interested, here’s the full list of every fund we currently own