Re-balancing my investments: 2013 Roth IRA contribution edition

My investments have been mostly plodding along this year. Occasionally, I have adjusted how much of my 401(k) contribution went to what (S&P 500 index, total international index, and stable value fund) and then left it alone again. For example, my September and October contributions went about 50/50 to the stable value fund and the total international index because the US stock markets had been doing so well.

But now that it is time to make my 2013 Roth IRA contribution, I am going to re-balance by exchanging some funds around. Back in May, I wrote a post on Tax-Efficient Investment Placement Over Time, which I have referenced so many times that I should really bookmark it.

First, what are the balances in my various accounts?

  • $23,600 Roth IRA (with $5,500 new contribution)
  • $8,200 Old tax-deferred CDs
  • $10,100 Series I Savings Bonds
  • $15,700 Taxable account
  • $74,500 401(k)
  • $132,000 Total investments

What is my asset allocation?

% Category Amount
26% Fixed income $34,320
37% International stocks $48,840
37% US stocks $48,840

If we follow my ordering from my post on tax-efficient investment placement, what does that ideal portfolio look like?

Steps

  1. My employer match to the company stock
  2. Series I Savings Bonds that already exist in taxable
  3. CDs that are already in my Roth IRA
  4. The remaining portion of my fixed income allocation to the stable value fund in my 401(k).
  5. (not necessary) As much of my remaining fixed income allocation to Total Bond Market in my Roth IRA as possible
  6. (not necessary) If my tax-advantaged balances weren’t enough for all the fixed income necessary, added $10,000 in Series I Savings Bonds (possibly early for future-proofing)
  7. (not necessary) Any other fixed income went to a tax-exempt bond fund in taxable.
  8. As much of my international allocation in taxable as it allowed (in the first few years, my entire taxable balance; in later years, the entire international allocation)
  9. Next, I added any of the remaining international allocation into my 401(k).
  10. The remaining 401(k) funds went to the S&P 500 index fund. Call this amount X.
  11. (X/0.8)-X is how much I put into the Extended Market index fund in my Roth IRA (minimum of $3,000).
  12. The remaining Roth IRA funds went to Total Stock Market.
  13. (not necessary) The remaining taxable funds went to Total Stock Market.

Ideal portfolio

Account Fund Current Ideal Difference
401(k) Stable value $14,300 $16,000 +$1,700
Taxable Total international stock index (admiral shares!) $15,700 $15,700 (same)
401(k) Total international stock index $22,100 $33,200 +$11,100
401(k) S&P 500 index + employer stock $38,000 $25,300 -$12,700
Roth IRA Extended Market index fund $8,400 $6,300 -$2,100
Roth IRA Total international stock index $9,700 $0 -$9,700
Roth IRA Total Stock Market index fund (admiral shares -soon!) $5,500 $17,300 +$11,800

Note that these numbers are all rounded, so they may be slightly off if you try to make calculations with them, but they should still illustrate my example sufficiently.

The main thing here is that I’m moving my Roth IRA from being mostly Total International Stock Market index (TISM) with a bit of Extended Market index to being mostly Total Stock Market Index (TSM) with a smaller amount of Extended Market. I’m also going to exchange all of my company stock into the S&P 500 index fund to diversify better. (So many people don’t know you can do this!)

I’ll perform a few transactions to accomplish this:

  1. Contribute $5,500 to the money market account in my Traditional IRA. – done!
  2. Convert the $5,500 from my Traditional IRA into the total stock market index fund in my Roth IRA once the funds settle. – done!
  3. In my 401(k), exchange all of the company stock money to the S&P 500 index fund.
  4. Next in my 401(k), exchange ($11,100 – company stock money = $12,700) from the S&P 500 index fund to $1,700 in the stable value fund and $11,000 in the total international stock index fund.
  5. In my Roth IRA, exchange $2,000 from the extended market index fund and the entirety of the total international stock index fund into the total stock market index fund.

And that’ll be the last re-balance I make by exchanging until early 2015 when I make my Roth IRA contribution for 2015 – all other rebalancing will be done by adjusting which funds in my 401(k) get how much of my contribution each month.

Happy Friday, all!

Tax-Efficient Investment Placement Over Time

Since I don’t let myself actually fidget with my investments, I instead make a lot of spreadsheets about them. My latest spreadsheet shows how I would ideally split my investments across multiple accounts as my portfolio grows in size and my target asset allocation shifts. With this spreadsheet, by 2025, I hit a target of a 50/50 asset allocation split and decide to leave it there for a while. This is honestly the most mentally helpful spreadsheet I’ve made about allocating investments so far and I will try to do it justice.

Some assumptions in the making of this summary table:

  1. 401(k) maximum stays at $17,500/year and Roth IRA maximum at $5,500/year.
  2. My employer matching doesn’t increase. (Which it actually does with my salary.)
  3. 5% returns on the overall portfolio, year-over-year.
  4. I have access to the same funds as I do now in my 401(k) for the next 12 years.
  5. My income 2015 and beyond is stable at around $160,000 gross and my expenses stay stable at ~$36-40k/year until the mortgage is paid off and then $24-28k/year after that.
  6. I didn’t calculate any of the Series I Savings Bond interest.

Other notes about the table:

  1. I’m maxing out my 401(k) and Roth IRA each year and either investing or paying down the mortgage with my surplus.
  2. VEXMX (Vanguard Extended Market Index fund, investor shares) is kept in an 80/20 ratio with the S&P 500 index fund in my 401(k) until that becomes < $3,000 and not worthwhile.
  3. The mortgage gets paid off in 2018, which is why the portfolio starts going up by a lot more in 2019.

Investment Allocations over time

Okay, so that table is pretty big. I took out the part below it where it shows that with a safe withdrawal rate (SWR) of 4% I should have enough in investments by 2021 (if I use retirement accounts) and assuming a SWR of 2%, I should be good around 2026.

I mostly made this spreadsheet because I was curious to see how my portfolio would change if it was larger. You can see that as my portfolio gets bigger, fund placement shifts a bit.

  • Things start shifting a lot once the mortgage is paid off (~2018) since I’m then putting a disproportionate amount of money in taxable versus my 401(k) and Roth IRA:
  1. The portion of my 401(k) in Total International gets smaller and smaller each year until 2019 when it’s gone entirely.
  2. Starting in 2019, the S&P 500 index funds in my 401(k) get shifted towards the stable value fund and the extended market funds in my Roth IRA towards Total Stock Market (TSM).
  3. I add shares of TSM in taxable in 2019.
  4. By 2021, there’s no more need to have the extended market funds in my Roth IRA and by 2022, the S&P 500 index fund in my 401(k) is no more.
  5. I start adding to Total Bond Market (TBM) in 2022.
  6. By 2025, my 401(k) and Roth IRA (i.e. all of my tax-advantaged funds) are fully in fixed income. My taxable account now accounts for more than 50% of my investment portfolio, so it definitely needs some fixed income. I recognized that this would happen back in 2022 and started adding some more Series I Savings Bonds, but in 2025, I finally add a tax-exempt bond fund.

Tax-efficient fund placement doesn’t seem all that important with a $100,000 portfolio, let alone the $50,000 portfolio that I had last year, but with a $1 million portfolio, it sure seems a lot more important doesn’t it? My absolute favorite Bogleheads wiki is on this topic. I’ve also read a lot of the Ask a Boglehead posts on the forum to learn more about how people suggest structuring portfolios. I’ve definitely studied this like a crazy person in preparation for one day having a multi-hundred thousand dollar taxable investment portfolio. In my case, this isn’t that hard since my 401(k) has good funds for all cases, except that there is no Total Stock Market fund, “just” a S&P 500 index one.

I had a separate worksheet in my Excel spreadsheet for each year and I started fresh, placing funds in this order:

  1. My employer match to the company stock
  2. Series I Savings Bonds that already exist in taxable
  3. As much of my remaining fixed income allocation to the stable value fund in my 401(k) as possible
  4. As much of my remaining fixed income allocation to Total Bond Market in my Roth IRA as possible
  5. If my tax-advantaged balances weren’t enough for all the fixed income necessary, added $10,000 in Series I Savings Bonds (possibly early for future-proofing)
  6. Any other fixed income went to a tax-exempt bond fund in taxable.
  7. As much of my international allocation in taxable as it allowed (in the first few years, my entire taxable balance; in later years, the entire international allocation)
  8. Next, I added any of the remaining international allocation into my 401(k).
  9. The remaining 401(k) funds went to the S&P 500 index fund. Call this amount X.
  10. (X/0.8)-X is how much I put into the Extended Market index fund in my Roth IRA (minimum of $3,000).
  11. The remaining Roth IRA funds went to Total Stock Market.
  12. The remaining taxable funds went to Total Stock Market.

I could have easily chosen to put Total International in my Roth IRA and more S&P 500 index fund in my 401(k), but this way will eventually eliminate the Extended Market index fund from my Roth IRA and make rebalancing even simpler. This exercise showed me that managing a multi-hundred thousand dollar portfolio isn’t that much more complicated than managing a $100,000 portfolio if you set things up nicely and it shouldn’t be that hard to keep up going forward.

2013 Investing Plan

1) Contributions

The first step to setting out my investing plan for the year is to calculate how much I plan to contribute to my investments, which requires choosing investment vehicles.

Investment Vehicles

  1. I am going to max out my Traditional 401(k) since it saves me a good amount on income taxes. $17,500 in pre-tax income instead of post-tax saves $4,900 in the 28% federal income tax bracket, which is not a small amount.
  2. Maxing out my 401(k) is more than enough to get the maximum match from my employer.
  3. I could also contribute part of the IRA contribution limit ($5,000) to a Roth IRA for 2012. I won’t know for sure how much I will be able to contribute until I do a full run of my income taxes with all the tax forms.
  4. I could also contribute the remainder of the 2012 IRA contribution limit to a non-deductible Traditional IRA and the full 2013 contribution limit ($5,500) to a non-deductible Traditional IRA.
  5. I could buy up to $10,000 in i-bonds through Treasury Direct.
  6. I could buy index funds in my regular, taxable investing account at Vanguard.

I’ve decided to go with #1, #2, and #3 for this year. Any remaining savings for the year will go towards the mortgage principal. I will re-evaluate this plan again for 2014.

Why do I not want to use the non-deductible Traditional IRA? Its gains are taxed as ordinary income rather than capital gains like they would be in a taxable account. It could make sense to defer taxes on fixed income investments, but for now, I have plenty of tax-advantaged room to cover than between my 401(k) and my Roth IRA and I could always buy i-bonds in taxable to gain some more fixed income room. Buying total stock index funds in taxable is pretty tax efficient, so I would rather do that over opening and maintaining a Traditional IRA with non-deductible contributions. It could make sense to use the non-deductible Traditional IRA if I was to convert its funds to my Roth IRA within a year or two. At some point, I could end up working somewhere with high fees in the 401(k) plan and wanting to roll over my current 401(k) to a Rollover IRA instead of into the new plan, which would leave me with both non-deductible and deductible Traditional IRA contributions. So for now, I’m going to keep things simple and not make non-deductible contributions. As above, I will re-evaluate this plan for 2014 and may retroactively make a non-deductible Traditional IRA contribution for the 2013 tax year.

Why do I not want to buy i-bonds? I don’t have a need for that much fixed income room yet. My current fixed income allocation is ~1/4 of my investment portfolio. I like their tax-deferred nature, but the current composite rate is 1.76%, which is still less than my mortgage.

Why do I not want to add more funds to my taxable account? I would rather pay down the mortgage than invest in a non-tax-advantaged account this year. I will, of course, re-visit this decision again next year.

Monthly 401(k) Contributions

I have a simple little spreadsheet that takes the following formula to tell me how much to set my monthly contributions at:

  • H3 = annual base pay (gross)
  • J2 = Yearly max to the 401(k) – $17,000 for 2012
  • I2 = ROUNDUP(J2/H3,2) = the % that I should contribute monthly from my paycheck to max out the 401(k) over the course of the year, e.g. if it is XX.3%, I will set it to XX+1%.

I updated my 401(k) contribution % back in December, so it is already set for the year!

Roth IRA Contribution

I set aside my estimated Roth IRA contribution with my January RSU vest. It is in a savings account and once I’m sure of the final amount, I will ACH it off to my Roth IRA at Vanguard. I will pull any extra funds necessary to max out my Roth IRA from my general savings account.

2) Asset Allocation

Now for the fun part: figuring out which index funds should get all of this money. To do that, I calculate what my portfolio will look like at the end of 2013 if the market makes no changes and what the “ideal” portfolio would be.

As of writing this post, my investments portfolio is worth ~$77,400. I estimate adding $20,700 to the portfolio this year, including my 401(k) contributions, my employer match, and my Roth IRA contribution, putting an estimated end of year balance at $98,100.

My target asset allocation at the end of 2013 will be:

  • 31% S&P 500 Index
  • 7% Extended Market Index
  • 37% International Stocks
  • 25% Fixed Income

Based on this, let’s calculate my ideal portfolio at the end of 2013 and compare it to where my portfolio is now:

Current Ideal EOY Difference
S&P 500 $23,500 $30,411 $6,911
Extended Market $3,500 $6,867 $3,367
International Stocks $32,000 $36,297 $4,297
Fixed Income $18,400 $24,525 $6,125
total $77,400 $98,100 $20,700

I keep the Extended Market index fund in my Roth IRA. The amount that needs to go into it by the end of the year is more than my contribution amount. I also have Total International Stock Index fund in my Roth IRA, so I will re-balance by putting 100% of my Roth IRA contribution into the Extended Market Index fund and by exchanging the difference from the Total International Stock index fund into the Extended Market Index fund. That will even things out and then I won’t look at the Roth IRA again until January/February 2014.

The remaining amounts will go into my 401(k). I subtracted my employer match off of the targeted amount for the S&P 500 index fund since it goes into something I count as that for my asset allocation calculations and then came up with the following split for my 401(k) contributions:

  • 27% Vanguard 500 Index fund
  • 38% Vanguard Total International Stock Index Fund
  • 35% Vanguard Retirement Savings Trust

Since this is all the contributions I plan on making for 2013, I should just be able to set and forget this for the rest of the year. I’ll check in on what things look like perhaps in early to mid July, but it looks like this year will be pretty simple for investment contributions!

Readers, have you set your 2013 investment plan? How does it look?

July savings plan

I’m maxing out my 401(k). My income is high enough that that is really my only tax-advantaged savings vehicle available to me: 1) I’m past the deduction for the traditional IRA and 2) I’m past the Roth IRA income eligibility for single filers or pretty close to it.

I’m not the sort of person who would *not* take out a loan to invest. I’m the sort of person who would have more job security if I lowered my yearly fixed expenses by $14,469.48 than by having a larger amount of money in the bank.

This would be a somewhat different decision if I, like nicoleandmaggie, I had a ton of tax-advantaged savings room that I would give up if I didn’t use in a particular year.

I also have this strange goal to have an Admiral Shares index fund. So since I can’t get it in my Roth IRA (my account has dipped below the $10,000 that I have contributed to it) and I don’t plan on leaving my employer anytime soon and rolling over my 401(k), the only place I could do that is in a taxable account. I need about $3,600 to accomplish that goal.

I have some more things that I want to do/buy for my condo:

  1. Re-paint the second bathroom and the hallways – $500?
  2. Fix the closets in the master bedroom – $500?
  3. Buy a bed to put in the second bedroom for guests – $500?
  4. Buy a small table to put in the front entryway – $500?

(I realize that some of these estimates are probably way off, but the total could likely add up to $2,000.)

  • Money in my condo savings account right now less the projects listed above: $6,400
  • Savings planned for this month: $12,000

I’m going to take the money necessary to reach the Admiral Shares index fund goal out of my condo savings account, leaving it with $4,800. I’ll leave $2,000 in the condo savings account for those projects, so I’ll take $2,800 and pre-pay the mortgage principal. I’m also going to take the money from my bonus this month and the savings from my paycheck at the end of the month and pre-pay the mortgage. Anything that is leftover in the condo savings account will end up going there too, as well as whatever I get as a refund of the deposit on my apartment (I’m guessing about $100).

Between those two, the mortgage balance could be down to $271,100 by the end of the month, before my first payment is even due! Right now, I see about another $10,000 in savings funds for the year (August through September), which projects an EOY balance of $261,000 (plus a bit lower from the principal in regular payments, maybe just under $260,000), which is below where I need to be to be on track to pay off the mortgage in five years.

It is actually super easy to make a principal only payment on my mortgage. It’s at the credit union I use for my daily banking. I just go to the transfer screen, select the from account (checking or savings), set the to account as the mortgage, enter the amount, and then it confirms whether it is an early payment or a PRINCIPAL ONLY (their emphasis, not mine) payment. It seemed too easy to be true, but the balance was updated correctly based on my payment!

So, in summary: I’m going to use the tax-advantaged savings vehicles that I have, which is only my 401(k), and pay off the mortgage ASAP with the rest since I have a comfortable cash reserve of $24,200, ignoring my goals of investing 20% of my gross income or investing in taxable (other than having an Admiral Shares index fund) or generating $1,000 in passive income for the year.

Maybe I’ll re-evaluate this plan each month, but this is what I’m going to do this month. Mortgage balance after my first (!) pre-payment is now sitting at $283,200!

Investing with Moving Targets: Complicated Case Study

Now what if things are more complicated and I don’t know exactly how much money I’m going to invest at the beginning of the year? I can instead set an algorithm and then follow that throughout the year.

Let’s say that my investments look like this and it is early May:

Roth IRA

  • $3,000 Vanguard Extended Stock Market Index Fund
  • $6,400 Vanguard Total International Stock Market Index Fund
  • $7,700 five-year CDs that I opened while in college

401(k)

  • $14,400 Vanguard 500 Index Fund
  • $5,600 Vanguard Retirement Savings Trust
  • $10,200 Vanguard Total International Stock Market Index Fund
Total investments: $47,400

Then my asset allocation looks like this:

  • 28% Cash
  • 30% US Large-cap stocks
  • 6% US Small/mid-cap stocks
  • 35% International stocks

Target is 23% Cash / 39% US stocks / 38% International stocks, so that isn’t too far off base.

I plan on maxing out my 401(k) and obtaining the full match from my employer, which would put an additional $12,600 into my 401(k) in 2012. My goal though is to invest 20% of my gross income, which isn’t covered by maxing out my 401(k) and receiving the employer match, so I will invest further in a taxable account. With the stock price that I’m using in my income forecasting, I should put $7,300 into my taxable account in addition to investing the $5,500 which is currently sitting in a money market fund at Vanguard.

Let’s plan this out like we did with the simpler case above.

First of all, with the amount that I plan on investing in taxable this year, I want to simplify my portfolio a bit so that it looks like this:

Roth IRA

  • $9,400 Vanguard Total Stock Market Index Fund
  • $7,700 five-year CDs that I opened while in college – these are staying

401(k)

  • $9,100 Vanguard 500 Index Fund
  • $3,000 Vanguard Retirement Savings Trust
  • $18,100 Vanguard Total International Stock Market Index Fund

I’m going to pretend that Vanguard 500 Index Fund = Vanguard Total Stock Market Index Fund since it makes rebalancing easier, the return graphs are similar, and I only have the former available in my 401(k).

The general advice is to put international stocks in taxable, but I would prefer to put the total US fund in taxable since I don’t have access to it in my 401(k), whereas I do have access to my the total international one in my 401(k). I’ll use the S&P 500 index fund to fill in the remaining US stock room in my portfolio.

  • Months 5 & 6 401(k) contribution allocation: 31% Vanguard 500 Index Fund / 26% Vanguard Retirement Savings Trust / 43% Vanguard Total International Stock Market Index Fund
  • Late in Month 7 taxable investment: $11,200 to Vanguard Total Stock Market Index Fund. In 401(k), move $6,800 from Vanguard 500 Index Fund split to: $2,600 to Vanguard Retirement Savings Trust / $4,200 Vanguard Total International Stock Market Index Fund.
  • Months 7-12 (regular) taxable investment: 100% to Vanguard Total Stock Market Index Fund
  • Month 7 401(k) contribution allocation: 23% Vanguard 500 Index Fund / 29% Vanguard Retirement Savings Trust / 48% Vanguard Total International Stock Market Index Fund
  • Month 8 401(k) contribution allocation: 24% Vanguard 500 Index Fund / 29% Vanguard Retirement Savings Trust / 47% Vanguard Total International Stock Market Index Fund
  • Month 9 401(k) contribution allocation: 24% Vanguard 500 Index Fund / 28% Vanguard Retirement Savings Trust / 48% Vanguard Total International Stock Market Index Fund
  • Month 10 401(k) contribution allocation: 24% Vanguard 500 Index Fund / 29% Vanguard Retirement Savings Trust / 47% Vanguard Total International Stock Market Index Fund
  • Late in Month 11 taxable investment: $400 to Vanguard Total Stock Market Index Fund
  • Month 11 401(k) contribution allocation: 9% Vanguard 500 Index Fund / 34% Vanguard Retirement Savings Trust / 57% Vanguard Total International Stock Market Index Fund
  • Month 12 401(k) contribution allocation: 8% Vanguard 500 Index Fund / 35% Vanguard Retirement Savings Trust / 57% Vanguard Total International Stock Market Index Fund

With all of that, at the end of 2012, my accounts would look like this:

Taxable

  • $12,800 Vanguard Total Stock Market Index Fund

Roth IRA

  • $9,400 Vanguard Total Stock Market Index Fund
  • $7,700 five-year CDs that I opened while in college – these are staying

401(k)

  • $1,400 Company stock
  • $4,800 Vanguard 500 Index Fund
  • $8,800 Vanguard Retirement Savings Trust
  • $27,700 Vanguard Total International Stock Market Index Fund

Based on the above data, I only need to adjust the allocations to my 401(k) in the months where I make a larger than regular taxable investment. In months 8-10 and 11-12 of what I’ve shown above, the suggested percentages are so close to the same, that it’s not worth fidgeting over. So that does prove my hypothesis that I should adjust my 401(k) future allocations after I make a larger-than-regular taxable investment in the month since that throws the asset allocation off a bit. This will be even more true next year (2013), when there will be several months where I invest $2,200 or so in my taxable account (or more, depending on what 20% of my gross turns out to be).

Algorithm

  • Buy only shares of Vanguard Total Stock Market Index Fund in my taxable account.
  • If a large contribution offsets the balance in my portfolio, then make adjustments as necessary to the existing shares I hold in tax-deferred accounts only if it represents a significant shift. Otherwise, just re-balance with new contributions.
  • Only adjust the contribution allocations to my 401(k) in the months where I make a larger than regular taxable investment, e.g. in the RSU vest months of January, May, July, and November.

Investing with Moving Targets: Simple Case Study

If I knew exactly how much money I was going to put where for the year, making an investing plan and sticking to it would be pretty simple.

Let’s say that my accounts looked like this at the end of 2011:

Roth IRA

  • $10,000 Vanguard Total International Stock Market Index Fund

401(k)

  • $1,000 Company stock
  • $5,000 Vanguard Retirement Savings Trust
  • $6,000 Vanguard 500 Index Fund
  • $10,000 Vanguard Total Stock Market Index Fund

Total value: $32,000

Then my asset allocation looks like this:

  • International stocks: $10,000 + $10,000 = $17,000 / $32,000 = 63%
  • Cash: $5,000 / $32,000 = 16%
  • Large-cap/market US stocks: $1,000 + $6,000 = $7,000 / $32,000 = 22%

That puts the split of Cash/US/International at 16/63/22, which I think is a bit overweighted to international. My target was 13/43/44.

If I knew that I would only add money to my 401(k) and max it out, with say a total employer match for the year of $2,400, I would know that I am adding $19,400 to my portfolio and be able to plan accordingly. (Employer match goes to company stock in full each month.)

  • Months 1-8: 100% Vanguard 500 Index Fund
  • Month 9: 25% Vanguard 500 Index Fund / 74% Vanguard Retirement Savings Trust / 1% Vanguard Total International Stock Market Index Fund
  • Month 10: 36% Vanguard 500 Index Fund / 15% Vanguard Retirement Savings Trust / 49% Vanguard Total International Stock Market Index Fund
  • Month 11: 50% Vanguard 500 Index Fund / 12% Vanguard Retirement Savings Trust / 38% Vanguard Total International Stock Market Index Fund
  • Month 12: 36% Vanguard 500 Index Fund / 14% Vanguard Retirement Savings Trust / 49% Vanguard Total International Stock Market Index Fund

And voila, after 12 months of that, my accounts would look like this:

Roth IRA

  • $10,000 Vanguard Total International Stock Market Index Fund

401(k)

  • $3,400 Company stock
  • $6,600 Vanguard Retirement Savings Trust
  • $19,100 Vanguard 500 Index Fund
  • $11,900 Vanguard Total International Stock Market Index Fund

Taxable Investing

Tax-deferred investing is awesome for getting used to the crazy world of investing. I don’t know about you, but I didn’t learn much of anything about investing from my parents, in high school, or in college. I developed some pretty good savings habits and frugal ideas, but not about what vehicles to put that money I saved in.

My first retirement accounts (that I opened while in college) are in 5-year certificates that, when they mature, will roll into more 5-year certificates. I include those in my cash asset allocation and just leave them be.

I started putting money into my employer’s 401(k) pretty soon after I started working full-time a few years ago. I started maxing it out in 2011, which was a great decision. It is now valued at over $30,000 and is a good chunk of my investment portfolio!

1. I have had some interesting adventures with investing in my first few years post-college:

2. I invested my 401(k) in NINE different funds.

3. I opened my Roth IRA with $5,000. I had no idea that you could contribute any less! I thought it had to be $5,000 exactly.

4. I eventually learned the difference between index funds and actively managed funds and why I should stick with index funds.

5. I experimented with ETFs and decided to stick with index funds.

6. I started to learn about asset allocation. I eventually learned that it isn’t really an exact science and it’s really hard to gauge my interest/acceptance of risk without experiencing a significant downturn.

Starting out investing in tax-deferred accounts has been a really great blessing. I have a pretty reasonable sum of money in my 401(k) and Roth IRA at this point. I was able to make strange decisions, mistakes, and good decisions without any tax consequences whatsoever.

One of the “problems” with having reasonable sums of money is figuring out exactly what to do with it. Where to put it. Whether to keep it or to give it away. Having this problem when you’re young and haven’t really had any education in these matters is worse. I’m starting to figure out that for a lot of these decisions, there is no one “right” decision, but many “good” ones and I just have to pick one.

Since I sold off some stock and ETF shares in the fall to improve my down payment, I’ve replaced the dollar amount that I “borrowed” from myself, but I haven’t invested it in anything. I’ve just left it all in a money market fund in my taxable account at Vanguard. With the raise last month, I’m now putting some money in there monthly in addition to with my quarterly RSU vests. But I’m still waiting. I’ve decided that after the July RSU vest, I will finally invest the money into stocks and re-balance my Roth IRA and 401(k) accordingly. At that point, I will have over $10,000 sitting in my taxable account, waiting. Hopefully, at that point I will be a bit more confident in my decision.

My taxable account will not be an insignificant portion of my overall investment portfolio. I estimate that it will be valued around $13,000 by the end of 2012 and that I will add another $10,000 – $15,000 to it in 2013, almost as much as I will put into my 401(k) that year. I’m trying to tread cautiously in trying to decide what to do with this money.

I’ve decided that a cash/bonds allocation of only 13% is more risk than I am comfortable with. My portfolio is currently sitting at about 28-29% cash, so I’m going to instead up the target cash/bonds allocation to 24%. I still want to split international/US stocks 50/50.

This is what my ideal portfolio would look like with the forecasted overall amount at the end of 2012:

Taxable

  • 17% Vanguard Total Stock Market Index Fund (Admiral Shares!)

Roth IRA

  • 13% Vanguard Total Stock Market Index Fund (Investor Shares)

Other

  • 11% 5-year certificates

401(k)

  • 13% Vanguard Retirement Savings Trust
  • 38% Vanguard Total International Stock Market Index Fund
  •  8% Vanguard 500 Index Fund

(Percentages are of the overall portfolio, not within each individual account.)

Readers, how did you get your feet wet with investing? Did you start in tax-deferred accounts or taxable accounts? What was the silliest investing move you made when you first started out investing?