Ok, so here’s my final draft for my new retirement portfolio. I’ve decided to go with a portfolio based closely on my Keep It Simple Portfolio. The twist is that I’ve decided to keep all my taxable funds in exchange-traded funds (ETFs), while keeping my tax-deferred IRA funds in conventional mutual funds. Hopefully this will allow me to take advantage of the tax benefits of ETFs where they matter, while at the same time keeping the simplicity and automatic dividend reinvestments of mutual funds. First, my overall target asset allocation:
90% Stocks / 10% Bonds
(40% Large Cap / 20% Small Cap / 20% Int’l / 10% REIT / 10% Bonds)
Now here’s my plan for the real allocation to fit into our various accounts. I’ve added $2,500 from my 2005 SEP-IRA contributions as well. I am just writing percentages to avoid clutter.
Wife Roth IRA
17% Large Cap Value (VIVAX)
11% International Value (VTRIX)
11% Emerging Markets (VEIEX)
20% Small Cap Value (VISVX)
11% Intermediate Term Bond (VFICX)
11% REIT (VGSIX)
Joint Taxable Account
17% S&P 500 or Russell 1000 Index (IVV or IWB)
For my taxable account, I plan on taking advantage of the fact that the IRS treats capital losses differently than long-term capital gains. This strategy is outlined in my previous post How To Beat The Market?. I plan on swapping between the S&500 Index ETF, IVV, which tracks the largest 500 stocks in the U.S. in a cap-weighted index, and the Russell 1000 ETF, IWB, which tracks the 1,000 largest stocks. These two are very closely correlated with each other, yet are different enough to avoid the IRS wash sale rules. They also have very low expense ratios (0.09% and 0.15%). Additionally, this will give me a taste of investing with ETFs and see if I like it. Of course, this means I need to find a good discount broker!
Even though this will make my overall balance at Vanguard less than $50,000, this is fine because I don’t have any mutual funds with less than $5,000 in them to incur their low-balance IRA fees. With this portfolio, the overall annual expense ratio is still under 0.30%.
Feel free to poke holes in this idea if you see them. Finally, if all this has made your eyes glaze over, refer back to my No-Brainer Portfolio Option.