Market fluctuatuons are unpredictable in the short run. It is amusing to watch the talking heads go from euphoria one day to "not liking the price action" the very next day and then round trip again. Market tops and bottoms are only identifiable after they have happened.
Since timing the market is almost impossible we recommend a methodical approach for transitioning a portfolio to the desired final asset allocation. Making the move in four or five equal steps at evenly space time intervals is as good an approach as any. The key is to keep moving towards the final allocation and avoid waiting for a market pull back that never comes.
The decision of where to put the investments is a different story. You will want to make use of tax sheltered accounts for certain investments. The rule is to use tax sheltered accounts for investments that generate a lot of taxable income.
Tax sheltered accounts include IRA's, 401K's and UGTM's. The following table shows which investments should go in one:
|INVESTMENT||REASON TO SHELTER|
|taxable bonds||dividends taxed as ordinary income|
|VNQI, TRREX||high dividends|
|DBA, DBB, DBE, GLD||very complex tax treatments|
|inflation protected bonds||taxed on value increase even though no income is generated|
The other investments can be placed in ordinary accounts. If you don't have a large enough tax sheltered account for all the above, put the investments generating the largest dividends in first. The tax forms for the commodity investments (DBA, DBB, DBE and GLD) are also a big incentive to get them into a tax sheltered account. Even then they may generate taxable income in some situations. Consult a financial planner or accountant to sort all this out if it becomes overly complex.
Once you have a properly allocated portfolio with the investments in the right type of accounts you will need a plan for what to do if the allocations change due to market fluctuations. Some adjustment is also appropriate based on age This topic is covered next.