As I am looking on how to reallocate my whole portfolio after coming from AUM, I am faced with the decision to go with the mantra-driven pure 3 fund or to expand a little to the less touted, but seemingly still highly utilized, higher diversification. I'm talking here about things like diversifying/tilting from just TSM/International into things like SCV, REITs, etc. Or with bonds determining how to diversify (if at all) between nominal and inflationary bonds (i.e. Go all TIPS? split 50/50, buy munis?).
From most of my reading of the standard sources, two very important concepts (though by no means the only):
*1) Prioritize simplicity (or at least avoid too many complex tilts)*
*2) Place the least efficient (tax) asset classes in the most preferable non-taxable/deferred accounts.*
From this, I also infer from the sources that if you have limited space outside your taxable bucket your choice to diversify it probably more limited.
**IOW if you have a larger % of your assets in a taxable account, you probably should diversify less. Basically, this comes down to having to rebalance your asset classes which can create taxable events.**
My guess is that many people here will state there is absolutely no reason to do anything other than a standard market cap split (VT or VTI/VXUS, etc). And probably a subset of those people would even argue that diversifying beyond standard aggregate bond index is unnecessary (while others may argue go all in on TIPS). At the same time, many of those would concede that tilting isn't necessarily bad, just more work (even if the returns *may* be a bit better.)
***I don't really want to debate whether tilting is something you should do or not in general. I want to discuss whether or not (or how much) your bucket sizes should come into play when deciding to do it:*** If you only have 20% of your assets in non-taxable accounts, would that prevent you from diversifying based upon the likely tax-drag?
If so, where would you draw the line? If not, what strategies would/are you using to rebalance when the bulk of assets are in taxable accounts?