Just as the Personal Portfolio Tracker can be used to manage a 401(k) or other workplace retirement plan with limited investment choices, it can also be used to manage an investable Health Savings Account (HSA).
A retirement saver’s best friend
HSAs are getting more and more notoriety as healthcare super IRAs, and for good reason. As we’ve written before, if you don’t need or want to use all of your HSA funds for current healthcare costs, and if you use an HSA account provider that allows your balance to be invested, the accounts can be especially beneficial.
First, the money you contribute to the account is tax-deductible (like a traditional IRA). Then, all of the money you withdraw down the road, including your investment returns, are tax-free (like a Roth IRA), as long as you use the money for healthcare costs. You could use it for medical expenses you incur then or to reimburse yourself for healthcare costs you incurred earlier.
There are numerous HSA custodians that allow for investing, each with their own menu of investment options. That’s where the Personal Portfolio Tracker comes in.
An SMI member recently wrote to us, asking for guidance in using the Tracker to manage an HSA account that offers access to 11 equity funds and 3 bond funds. (Note: The following example is relevant, whether applied to an HSA or a workplace retirement plan.)
‘Category’ view or ‘Momentum’ view?
After entering all 14 funds into the Tracker, the default view is the “Category” view in which funds are sorted into the five stock risk categories used in Fund Upgrading or “Other” funds.
This member’s HSA provider offers funds in all five of the Upgrading categories, and right now at least one of its funds is in the top quartile in four of the five categories (that’s the ideal — funds with momentum scores that put them in the top 25% of all funds in their category).
However, with such a small number of funds, as time goes on, it’s unlikely that there will consistently be top quartile funds in so many of the categories. So, if Upgrading is her desired strategy, she would be better off using the Tracker’s “Momentum” view in which funds are simply ranked by momentum, regardless of risk category, as shown below.
With 11 equity funds to choose from, our recommendation (found in the chart in this article) is to invest in the top three.
What about bonds?
Here’s one other very important point. This person said her optimal asset allocation, determined via our Start Here section, is 60% stocks/40% bonds.
So, she would invest in the top three equity funds with 60% of her portfolio spread evenly across the three. As for bonds, we would normally recommend that she take half of her bond allocation and split that evenly across the short-term and the intermediate term funds she has access to. Then she would invest the remaining portion of her bond allocation in the highest-momentum fund among the three bond funds.
However, since the third bond fund she has access to is a “high yield” (i.e. junk) bond fund, and because high yield bonds currently have the worst valuation profile of any asset class we’re aware of, we would steer clear of that fund. Instead, she should split her bond allocation evenly across the short-term and intermediate-term bond funds.
So, that’s how we would recommend using the Tracker to use Upgrading with the funds this SMI member has access to in her Health Savings Account. Again, the same thinking could be applied if a person had the same set of investment options in their 401(k) plan.
These funds actually offer this member one more option — the use of Just-the-Basics. I’ll explain how in my next Monday post in a couple of weeks.