Asset Allocation in 401K

[Clarice]

Signed up for 401K (better late than never). Some superficial research lead me to the idea of 50-50 split between bonds and stocks. I want to keep it simple and don't know any better. My 401K is run by Wells Fargo. Stock funds seem to have reputable options - Dodge & Cox Stock and American Funds EuroPacific Growth R6. However, the bonds pickings are slim. The only option is Wells Fargo Core Bond CIT N (never heard of it), rated #113 by US News Report. I am wondering if I should proceed with my initial allocation plan or just stick with 2 reputable funds (50-50?)? Any arguments for or against one of those options and other insights are greatly appreciated.

[slowtraveler]

...

[jacob]

I hold nothing but stocks with qualified dividends (excl. dry powder) in taxable accounts. I hold nothing but interest from bonds and REITs with unqualified dividends in tax-deferred accounts. International stuff is held in taxable accounts to get the foreign tax credit. You can not get the credit (your money back), if it's in a tax-deferred account.

Taxable and tax-deferred accounts are part of the complete system that's being taxed. They should not be siloed.

Further, especially wrt ER, consider the difference between "good money" and "bad money" which has been discussed elsewhere. The best income ("good income") is tax-free "good money" and that comes from qualified dividends in a taxable account. "Bad income" is still better than taxed income, so bonds sit in tax-deferred accounts.

I'm fully tax-optimized now. It wasn't always like that but convenience/ignorance has a price. It took a couple of years rearranging the portfolio in order to avoid taking all the hits in the same year. It's better to start out right. Taxes cause tremendous friction on portfolio management.

[Clarice]

@slowtraveler:
Thank you! That was my inclination too - go with the best reputation regardless of the asset class. This, apparently, contradicts Jacob's wisdom if I got it correctly.

@jacob:
Thank you! My best option for now is to trust your advice. The info and noise derived from various books does not translate for me into "I have a gut feeling and know what to do in this situation" when it comes to money. Even your advice will take some time to comb through until I am able to translate it into specific actions. I have a long list to go through:
1. "qualified dividends in taxable accounts"; does that translate into,"invest into dividend-paying companies in your taxable accounts?"
2. "interest from bonds and REITs with unqualified dividends in tax-deferred accounts"; does that translate into, "Invest in bonds and REIT funds in your 401K"?
3. "They should not be siloed"; does that mean strategy as in 1 and 2 or any other action required?
Phew...

[jacob]

1) It means if you have funds or stocks that pay out a substantial amount in qualified dividends and/or if a substantial amount come from foreign sources, you should stick/own those in taxable accounts.
2) And if they pay out substantial amounts in non-qualified dividends and/or interest income, you should stick/own those in tax-deferred accounts.
3) If you have a taxable account (called Ann) and a non-taxable account (called Bob) and your asset allocation is 50/50 stocks and bonds, then Ann should contain as many of the stocks as possible and Bob should contain as many of the bonds as possible. It should not be siloed(*) where Ann holds 50/50 and Bob holds 50/50. Ideally, Ann should hold 100/0 and Bob should hold 0/100 ...

(*) Back in my corporate days I would sometimes get call from a well-meaning "investment advisor" representing my 401k if I wanted to go over my asset allocation plan with them because it didn't seem very diversified being that it was all bonds. But, as I told them, they were only seeing a part of my entire portfolio.

[CS]

I need to do make this switch too. Frankly never had much money outside of retirement account before. Next year it will matter much more taxwise, at least for me as planned.

[Clarice]

OK, so let's see if I've got it straight. Here is my baby-portfolio...
On a bed of cash (emergency stash on my checking account and a potential CD account) lies Bob made entirely out of bonds. I didn't get to choose Bob. Bob was arranged by my 401K (Wells Fargo Core Bond CIT N). It's done. On top of Bob sits a tiny ($3,000.00 to open a Vanguard High Yield Dividend Fund account) and imaginary at this point Ann. I've always imagined Ann being Jacob's mom's fund (Wellesley something), but it consists of 50% bonds, so no go. The Bob part is easy - no choice. The Ann part is difficult. Any ideas wrt the funds that I should invite to audition for the part of Ann?

[arcyallen]

Stock funds seem to have reputable options - Dodge & Cox Stock and American Funds EuroPacific Growth R6.

Those are both great equity funds, and you'll get domestic and international exposure with them. Just remember if you do choose 100% stocks you need to be comfortable with occasional, slow, painful, "never ending" 50% drops in your account from time to time. Bonds help soften the pain if you can't tolerate it.

[Clarice]

@arcyallen:
Thank you! I am somewhat detached from my money and don't have a shadow of a doubt in my ability to tolerate a loss. Now, it's a matter of organizing my tiny, but growing stash of earned money.

[sodonewithit]

I know you may not have a choice but be careful with Wells Fargo, the wife and I had a terrible experience with them. And of course all of the bad headlines they have been getting.

You might consider a target year fund. They have done good by me.

[Clarice]

@sodonwithit:
Wells Fargo would be my choice either.