This is how it's supposed to be installed:




That being said, when I got my bike, they left a small spacer above the stem on mine. I have yet to die. In fact, I, too, am looking to go lower by one, maybe two spacers in the near future. If I go one, I'll probably do it without getting the tube cut. If I go two, I think it'll be time to cut the tube, because, as is noted in the image, the expander bolt should be inside the tube at/about where the lower stem bolt is outside the tube.