Last week I met with a Certified Financial Planner for the first time. This was a free service provided by Vanguard, so it was a good opportunity to speak to a professional about my specific situation. For many years, I’ve been relying on mostly generalized advice, whether from books, large communities like the Motley Fool discussion forums (particularly the Living Below Your Means section), financial columnists, or a community of bloggers that has grown from fewer than a dozen to more than a thousand.

My financial planner and I started by discussing my goals. This was tough for me, as I’ve changed my long-term goals several times in the last decade. I’m trying to find the right mission for my life. I’ve made personal finance my passion since the creation of Consumerism Commentary in 2003, but long before that date I was passionate about other aspects of my life. I need to look at how I want to spend the next twenty, thirty, or forty years of my life and some of the more important developments along the way, like having a family.

From a financial standpoint, my next major expenditure will most likely be a house, though that purchase relies on making other choices in my life first.

With my current level of investable net worth — my assets outside of an emergency fund and money put aside for shorter-term goals like a house — I’m willing to give up potential returns in the stock market for less risk. We decided on a mix between 60% stocks and 40% bonds. Complicating the issue is the fact that almost all of my non-cash investments are in stocks. It will be important to look at my portfolio as a whole rather than analyzing my 401(k) separately from my IRA and separately from my taxable account. This is where tools like Quicken, offering charting and reporting across a variety of accounts regardless of where they are held, come in handy.

The 60%/40% split between stock funds and bond funds is more conservative than I would generally recommend for someone my age (thirty-five), but that might be appropriate based on my lower needs for long-term returns and need for maintaining value in the intermediate term as I determine the next steps for my life.

Before discussing specific investments, I made sure the planner was aware that I prefer index mutual funds rather than ETFs, managed mutual funds, or individual investments. The planner suggested that 70% of the stock portion of my portfolio be invested in the Total Stock Market Index with the remaining 30% in the International Stock Market Index. Half of the bond portion of the portfolio should be invested in the Intermediate Tax-Exempt Bond Fund with the other half in the New Jersey Tax-Exempt Municipal Bond Fund. I’m not sure how excited I am about the prospect of investing in New Jersey, but the tax advantage could be helpful.

I brought up the issue of tax efficiency. It was my understanding that tax-efficient investments, such as the bond funds recommended, should be invested in taxable accounts, while investments that did not offer any tax advantages should be invested in retirement plans like 401(k)s and traditional IRAs, where the tax is deferred until retirement. After analyzing my tax situation, the planner concluded the opposite would be true, admitting the idea seemed counter-intuitive. In today’s environment, the tax rate for qualified dividends, the result of stock-based mutual funds, is 15%, while income from bond-based mutual funds is taxed at ordinary income rates.

However, the bond funds he suggested to are federally tax-exempt, and one is also state tax-exempt as long as I continue living in New Jersey. The adviser’s suggestion to invest in bonds in my tax-deferred retirement accounts might make more sense if those investments were not tax-exempt. I think there’s a piece of discussion missing from my notes that might have explained this situation with a more satisfying rationale. I’ll seek a second opinion about this particular aspect of my planning.

With most of my portfolio in cash, the planner suggested moving these funds to stocks and bonds slowly, over the course of eight quarters. Leaving behind any amount I’d like to have let in cash at the end of two years, I would divide the remainder by eight to determine my quarterly investment amount. This method of dollar-cost averaging could ease the pricing risk inherent in investing a lump sum.

If my goal is only to have money for retirement, my time horizon would be long. Again, I’ll need to define some of my life goals to determine time horizons for specific pools of assets. That would be a topic for a later discussion.

In summary, these are the main points of our discussion:

• Six months to one year of living needs in cash, including an emergency fund and any other spending needs.
• With the rest, a 60%/40% split between stock funds and bond funds.
• Using a dollar-cost averaging investing strategy over the next eight quarters for current funds.
• Add the bond fund portion to 401(k) investments and stock fund portion to taxable investments.

What do you think of this strategy?

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