Building a Financial Plan – Part 4

This is part 4 of a series on Building a Financial Plan.  This posts covers portfolio asset class allocation, retirement savings, and college savings.

  • Part 1
    • Goals and Objectives
    • Emergency Savings
    • Debt Reduction
    • Home Ownership
  • Part 2
    • Reducing Expenses
    • Increasing Income
  • Part 3
    • Living Will and Last Will
    • Life Insurance
  • Part 4
    • Portfolio Asset Class Allocation
    • Retirement Savings
    • College Savings
    • Summary

Portfolio Asset Class Allocation

The stock market is one of the best places (if not the best place) to invest your money for the opportunity for real growth over the long run. To an outsider, the stock market might seem like a great way to enrich Wall Street. To others it might be difficult to distinguish from gambling at a casino.  However, I’ve come to learn that a little bit of education can go a far way to put you on the path to long-term success.

My first portfolio consisted of a single actively managed mutual fund. It experienced tremendous growth until the music stopped during the Great Recession of 2008. After experiencing significant losses, I resolved to learn if there was a better way. That’s when I discovered modern portfolio theory (MPT), asset class diversification, portfolio re-balancing, and risk management. All of this is best summed up in two fantastic books which I highly recommend:

The first key step is to determine your portfolio’s percentage split between stocks and bonds. This determines your overall exposure to risk. You need stocks for growth but you need bonds to reduce risk of losses. The most common method is to calculate your stock percentage by subtracting your age from 120. Thus, a 35-year-old would have an 85% stock 15% bond split. The older you get, the more bonds you add to your portfolio since you need to preserve your capital for retirement.

The next step is to determine which low-cost index funds you will use to fit into your stock and bond allocations. I’ll do a deep dive on this in a future post. For now, start with the aforementioned books. Once you establish your target asset class allocation, it will drift as some grow and some shrink in value. Choose a fixed schedule to re-balance your portfolio to get back to the target allocation (I recommend 1-4 times per year). This helps you buy low and sell high which allows you to capture gains and buy at a discount. Make this process automatic. Timing the market is impossible.

If managing the above sounds like a lot of work, you would be correct. That’s why I use a robo-advisor to do this for me automatically.  More on that will follow in a separate post.

Retirement Savings

The government imposes limits on the amount you can contribute to tax advantaged retirement accounts. Once the opportunity to contribute has passed, you can’t go back in time and contribute. My strategy is to max out everything possible for both myself and my wife. Here are the most common tax advantaged accounts:

  • 401K pre-tax – at a minimum invest enough to take advantage of your company match since that is free money. $18,500 limit for 2018.
  • 401K after-tax – my employer’s plan allows me to immediately rollover to a Roth IRA (backdoor Roth conversion).
  • Traditional IRA – tax-deductible contributions help reduce your tax bill now. You pay taxes on the appreciated amount when you retire. $5,500 limit in 2018 across both IRAs.
  • Roth IRA – non-deductible contributions now but the appreciated amount is tax-free when you retire. $5,500 limit in 2018 across both IRAs.

For each of the above accounts, apply the portfolio asset class allocation you have chosen above. Note that it is possible to further optimize by taking advantage of tax efficient fund placement. However, in practice it is very difficult to manage this.

College Savings

I have several kids and want them to have the best opportunity for education and employment when they are older. I used a college savings calculator to determine how much I needed to save for each of my children and then I opened several 529 College Savings accounts along with recurring deposits. I chose to use my529 accounts since they use low-cost Vanguard ETF index funds and are one of the highest rated plans available.


I think of my financial plan like a road map. There’s going to be detours and unexpected accidents. I try to keep it simplified down to a list of prioritized goals and actions I need to take to get me closer to my financial goals. How about you? What else do you have included in your financial plan?

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