Treat All Your Accounts as One Big Portfolio   Leave a comment

Sometimes I see people self impose limits on their asset allocation within each account, to their detriment. This is best illustrated by example.

Suppose hypothetical Ross has an IRA and a 401k. Below is a table of the lowest expense ratio index funds offered in his accounts.

401k IRA
US Stock 0.10% 0.05%
International Stock 0.20% 0.14%
Bond 0.80% 0.20%

Ross has just started contributing to his 401k and IRA, so he has $17,500 in his 401k and $5500 in his IRA.

He would like to maintain an asset allocation of 70% stocks and 30% bonds, with 30% of the stocks being international – hence his allocation is 49% US stocks, 21% international stocks, and 30% bonds.

If he maintains a 49/21/30 allocation in both his 401k and IRA, then he will end up with the following fund balances (assume for the sake of the argument that he can meet the minimum investment for all these funds:

401k IRA Total
US Stock 8575 2695 11270
International Stock 3675 1155 4830
Bond 5250 1650 6900
Total 17500 5500 23000

In this scenario, his weighted ER across all of his entire portfolio is (8575*.1 + 3675*.2 + 5250*.8 + 2695*.05 + 1155*.14 + 5500*.2) / 23000 = 0.313%.

However, this isn’t the optimal allocation, because the ER of his bond fund is just 0.20%, as opposed to 0.80% in his 401k. So instead, he should try to meet his bond allocation of 30% of his entire portfolio by only holding bonds in his IRA.

Unfortunately, as you’ll notice in his table, he should have $6900 in bonds across his accounts, which can’t be fulfilled by just his IRA alone. So, he does the next best thing and fill his IRA with bonds, and then meet the asset allocation elsewhere. His allocation would then look like

401k IRA Total
US Stock 11270 0 11270
International Stock 4830 0 4830
Bond 1400 5500 6900
Total 17500 5500 23000

Now his weighted ER across his entire portfolio is (11270*.1 + 4830*.2 + 1400*.8 + 5500*.2) / 23000 = 0.188%.. He’s dropped the ER of his entire portfolio by 40% just by changing his allocation within his accounts!

There are many 401ks out there with even worse funds. On the forums I frequent, I have seen expense ratios exceed 1.5%. One time I even saw a fund with a 2.37% expense ratio! The worse the fund offerings are, the greater the difference you will see in treating all of your accounts as one big portfolio.

Yes, it does take some mental overhead to keep your portfolio in balance, but remember – keeping costs low is an important part of investing.


You should always treat all your accounts as one big portfolio that just happens to be allocated into different “buckets.” This way, you can get the lowest ER possible.

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Posted January 27, 2015 by Fiby in Uncategorized

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