Meet The New Boss, Same As The Old Boss

Following up with the second part of the S question--

Dear Uncle Bill,

Great description of dollar cost averaging.  I'd heard the term before but didn't really know what it meant.  What do you do if...you have the emergency money, you have the 401k maxed out,  the Roth IRA maxed out, you have no debt, and you have cash that is only making 4.25% in the bank?

How do I get the equivalent of the asset allocation and dollar cost averaging for non tax sheltered money?  I don't know enough (or enjoy it enough) to pick stocks myself.

What are tax efficient funds?

I am 26.

Signed, S

I'll put in the discussion from Category 13--More On Investments and then go into a little more detail.

--If you have rented well, married well, insured well, eliminated credit card debt, funded your 401(k) and avoided buying a new car you now have cash to invest.

The allocation and mutual funds will be the same as for your 401(k) and IRA.

The Details

Your new lifestyle will generate cash, cash to used for investments that will grow and make you wealthy but, more importantly, independent.  Invest in the same things as your pre-tax investments and reap the benefits of the ‘long run.

Check your allocation after ten years.----

Getting rich is like riding a bike--the first time you try is tough but once you learn you don't forget and it keeps getting easier unless you do something really stupid like run into the ditch. 

Your after-tax investment allocation should mirror your retirement investment plans for the most part with a few tweaks.  Obviously, your emergency fund should be in after-tax money and not retirement as you can't get to it, not easily anyway, in the case of an emergency.  If you have the desire to generate some cash in the form of dividends or interest income that investment (except for the emergency fund) should be in retirement money because the dividends and income will not be taxed until withdrawal or not taxed at all as in the case of a Roth.   

But overall your asset allocation should not change much for pre-tax or after-tax money.  I set up my son in the government 401k, which is 401 something else but close enough, as 70% S&P Equity Index, 15% Small Cap Index and 15% International.  Doing it again I would probably lean more toward international but I'm not trying to catch trends here so will keep it for now.  When he maxed out the government plan I put him in the Vanguard funds that mirror the government funds.  We are just building up the minimums now and that impacts the allocations but when finished his after-tax allocation will mirror the pre-tax set up. 

My son also has another good trait, among others, and that is not reading the business pages or obsessing over finance web sites including this one.  He is spending all his time getting B-52s up in the air and down on the ground to worry about finance.  He leaves that to me and I only hear about it when I screw up. 

If you do want to spend time obsessing over your allocation take a look at the work of Dr. William Bernstein, a real doctor that has made asset allocation a lucrative hobby.  I just pulled the book out of the bookcase and noted I got halfway through it but that's because I'm fairly comfortable with my allocation.  If you are not or want to learn more, check out his web site at www.efficientfrontier.com.

But don't spend too much time on it as I said yesterday, your ally in investing young is time and that is all you need because time, to quote Mick Jagger, is on your side.

Tax efficient funds on Monday.