We recommend funding your Health Savings Account (HSA) to the maximum allowed if you have HSA-compatible health insurance.
We also recommend you keep funding your HSA as long as you are allowed no matter how much money you have in the account.
Funding your HSA to the maximum has many advantages and few disadvantages. In 2019, the HSA contribution limit for a couple over 55 is $6,000 plus two additional $1,000 catch-up contributions, one made into each spouse’s separate HSA.
We recommend keeping your annual deductible in a cash account and investing the remainder of your HSA in an all-stock portfolio.
We have staff and clients using a few different Health Savings Account investment options. Personally, I use HSA Bank which offers an investment account through TD Ameritrade. I recommend using the latest Marotta’s TD Ameritrade Gone-Fishing Portfolio Calculator set to a 100% stock allocation for the asset allocation.
As an important reminder for TD Ameritrade, you have to request that your account be allowed to use the no-transaction fee exchange traded fund list before making any trades.
HealthSavings Administrators is another vendor we include in our list of firms offering HSA investment accounts.
The reason I do not use HealthSavings Administrators is because they have a monthly maintenance fee of up to $3.75 along with a quarterly investment fee of 6.25 basis points every quarter. I dislike paying fees, especially account maintenance fees, and paying 25 basis points each year on an account of $50,000 would result in annual fees of $125.
On the positive side, some have suggested that the client service experience was better at HealthSavings Administrators than other HSA providers and HealthSavings Administrators provides a list of 22 low-cost Vanguard mutual funds with which to craft an appropriate asset allocation.
For each fund choice, I used analysis from the Center for Fiduciary Studies to find what I believed were the best well-performing funds with low fees and expenses. Then from that list, I crafted an all-stock asset allocation in order to allow invested funds to grow at the maximum possible rate, hopefully to fulfill future care funding needs.
The novice impulse when crafting an asset allocation from 22 mutual funds is to put 1/22nd of the portfolio in each fund. A better method of portfolio construction crafts an asset allocation along the efficient frontier. This is part art and part science and developing an investment philosophy is part of what distinguishes different investment advisors.
Here is our asset allocation recommendation for HealthSavings Administrators HSA all-stock portfolios:
24% Vanguard 500 Index (VFIAX) -expense ratio: 0.04
19% Vanguard Mid Cap Index (VIMAX) -expense ratio: 0.05
17% Vanguard Small Cap Index (VSMAX) -expense ratio: 0.05
40% Vanguard Total International Stock Index (VGSTX) -expense ratio: 0.17
Average weighted expense ratio: 0.095
These are very low cost funds. After adding the 25 basis points charged by HealthSavings Administrators, the cost rises to 0.362%.
While this asset allocation uses just 4 of the 22 funds, it also does not use them equally. Portfolio construction with limited choices is like an artist painting a canvas with limited colors. Some colors are never used. Other desired colors are not available and substitutes are selected.
All of the bonds were dropped because we wanted a long-term all-stock portfolio. All of the resource stock allocation was dropped because there were no resource stock options, such as energy, real estate, materials, or metals.
Normally, the U.S. and foreign stock mix might include more foreign stocks than US stocks, but there were no country specific investment options by which countries with the most economic freedom could have been selected. The Vanguard Total International Stock Index fund is an all-world investment. As such, it will include many repressed countries that are low in economic freedom whose returns may suffer. For this reason, I shifted more towards the United States.
Once the allocation between U.S. and foreign stocks was set, sub allocations were crafted. Among U.S. stock choices there were Mid and Small Cap options.
I decided to use Vanguard Mid Cap Index (VIMAX) and Vanguard Small Cap Index (VSMAX), both with an expense ratio of 0.05%, rather than Vanguard Extended Market Index Fund Admiral Shares (VEXAX) so I could more finely craft the blend of Mid and Small. Additionally, both VIMAX and VSMAX have a slightly lower expense ratio than VEXAX which has 0.07%.
I also decided not to include Vanguard Selected Value Fund Investor Shares (VASVX). While the fund tilts toward mid-cap value, one of the styles that has the best expected return for the risk taken, it has a few characteristics that makes me hesitate.
First, it has a higher expense ratio of 0.36%. While this is still low, it is higher than the other options and a low expense ratio is the best indicator of future returns.
Second, the fund’s Score at fi360 suggests it is not performing as well as it could within its peer group.
Finally, the fund’s description at Vanguard reads, “The fund’s three advisors buy stocks they view as being significantly undervalued and out of favor with investors. Because of the size and characteristics of the stocks the fund holds, performance can vary significantly from that of the broad stock market. The fund is typically concentrated in a small number of stocks and, therefore, can be subject to significant volatility.” Funds which allow the fund manager to drift into whatever stock selections they want often include one of these words in their name: Select, Explorer, or Opportunity.
For all of these reasons, I decided not to include VASVX in our asset allocation recommendation.
This asset allocation recommendation for the HealthSavings Administrators HSA Investment is a timeless portfolio that should produce good returns at a low cost for the next several years.
Photo by Federico Beccari on Unsplash