Portfolio Option #2: Keep It Simple

Now, let’s see if we can take the slice and dice portfolio option and make it a bit simpler, and hopefully avoid all extra fees.

Theoretical Allocation
20% S&P 500 (VFINX or VTGIX)
20% Large Cap Value Index (VIVAX)
20% Small Cap Value Index (VISVX)
10% REIT (VGSIX)
20% Total International Index (VGTSX)
10% Intermediate-Term Bond (VFICX)

Again, I must fit everything into the available funds in my separate accounts:

Wife Roth IRA – $11,000
Roth IRA – $14,000
Trad IRA – $24,000
Joint Taxable Account – $12,000

Real-Life Allocation ($60,000 Portfolio)

Wife Roth IRA
Large Cap Value – $11,000 (18%)

Roth IRA
Total International – $14,000 (23%)

Traditional IRA
Int. Term Bonds – $6,000 (10%)
REIT – $6,000 (10%)
Small Cap Value – $12,000 (20%)

Joint Taxable Account
S&P 500 Tax-Managed (VGTIX) – $12,000 (20%)

Expenses
With this set of funds, I will avoid both the low-balance fees from IRA accounts under $5,000 and that of Index funds accounts under $10,000. My overall annual expense ratio for this portfolio is a nice and low $22 per $10,000, or 0.22%.

Comparison Thoughts
Well, this portfolio has a 0.09% expense ratio edge over the slice-and-dice portfolio, but the question is how much potential performance am I giving up? I’m not really sure. I don’t really think I lose much by sticking with only one Small Cap fund. By using the Total International Fund, I am only about 3% Emerging Markets instead of 10%, and I end with more developed markets like Europe and Japan. Not sure if I like that.

I also consolidated into only one bond fund, the Vanguard Intermediate Term Bond Fund. I chose this over the Total Bond Market Index fund because after looking at them side-by-side, they are pretty similar, but as it’s not an Index fund there is no extra $10 fee.

Finally, next I’ll consider doing the simplest thing of all… nothing. :)


What are the other options?

Portfolio Option #1 – Slice and Dice
Portfolio Option #3: Just One Fund

Comments

  1. For your Theoretical Allocation, I wonder where it is located in the line of efficient frontier. Do you know a place that will give a quantitative results for any combination of mutual funds. I guess ideally we want to stay as close to the line as possible.

    Tang

  2. Good question! Check out my next post I’m writing right now.

  3. Re the efficient frontier, I have looked at this site off and on:
    http://www.efficientfrontier.com/index.shtml

  4. Just a quick note – the intermediate term bond fund you mentioned is in fact an index fund and would be subject to the maintenance fee, and the tax managed s&p fund is symbol VTGIX. I enjoy reading your blog!

  5. I think you have a bit too little in emerging markets and too much allocated to the US market. There is a bit of overlap in the 500 and large cap value, id try to get in on a mid cap value and an emerging market fund. You may even want to target the foreign into VPL (vanguard’s pacific fund) and VGK (vanguard’s europe). Both are ETFs, but if you aren’t trading them or adding to them (in this case you are making lump sum investments) they will offer you the same benefits as an index. In fact you might want to play around with some of their ETFs here: http://www.vanguard.com/jumppage/vipers/

    To maximize your efficiency you drop it all into an account with scottrade or something that can manage your IRAs and you can purchase the ETFs quite cheaply. Additionally for IRA contributions you just need to make 1 lump sum investment every year which will allow you to further diversify or to weight certain sectors.

  6. Joe G – Are you sure? I just double-checked, and VFICX is ‘Vanguard Intermediate-Term Investment-Grade Fund Investor Shares’, with no mention of index funds fees. And did write VTGIX, no?

    I think you’re confusing my two posts? I used different bonds in doing both options.

    ETFs are good, I guess I just like the simplicity and easy dividend reinvestment of mutual funds. I don’t want to have to place orders all the time. Also, I’m surprised at how many ETFs, even index ones, trade at such a high premium over their NAVs at times.

  7. Jeff Warren says:

    Avoiding the extra fees as you have done is key in allocation

  8. like rob said u have a lot of overlap between the large cap fund and the 500 index fund.

    you should have more money invested in overseas funds.

    in addition there are much much better preforming funds than what u mixed……royce small cap, t. rowe price emerging markets, matthews asian funds….all do much much better. while your expense ratio is higher, ur higher returns will me much much better.

  9. J- the adavntage that ETF’S have over the Vanguard funds is that you can do tax harvesting when you rebalance in your taxable accounts. For example if your PowerShares Emerging Market ETF is down, sell it and buy iShares Emerging Market. That’s an LT cap loss do go against your LT cap gain. Transaction costs are minimal.

  10. True… I’ll have to think about that. Most of my funds are in tax-deferred accounts, but that will probably change a bit with time.

  11. You are right that the symbol you use (10% Intermediate-Term Bond (VFICX)) is for the investment grade, but in your side by side comparison you use the intermediate term index.

  12. Ah, you are correct Joe. I fixed the comparison link.

  13. In response to the tax harvesting comments about ETF’s, you should preface this with a warning about Wash Sale rules. If an equivalent stock/fund is purchased 30 days before or after the sale, the IRS does not allow you to claim a loss, so be careful!

  14. People avoid the wash sale rule by using ETFs with slightly different make-ups. For example, you could sell a S&P 500 index and buy a Russell 1000 index. Or for Emerging Markets sell EEM and buy VWO, since they have different holdings (like no Russia for one of them I think). IRS hasn’t really given specific guidance, but it would seem to avoid the rule for ‘substantially identical’ investments.

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