Man, figuring out a good set of funds to work into your asset allocation plan is hard! There are so many different funds to choose from. So I’ve decided to break it down into three possible scenarios that I can then choose from, varying from complex to super-simple. The first scenario is to pick a variety of funds that each focus on a specific asset category. This will result in more complexity and possibly higher fees, but in theory may result in better long-term returns.
First, I’ll list the funds that I would use in theory, and then I’ll list how they would actually fit in reality into our two Roth IRAs, one Traditional IRA, and taxable accounts. The goal is to put the most tax-inefficient funds into the most tax-deferred accounts.
20% S&P 500 Index (VFINX/VTGIX)
20% Large Cap Value Index (VIVAX)
10% Small Cap Index (NAESX)
10% Small Cap Value Index (VISVX)
10% REIT (VGSIX)
10% International Value (VTRIX)
10% Emerging Markets (VEIEX)
5% Short-Term Bond Index (VBISX)
5% TIPS Fund (VIPSX)
This allocation was based on information in The Intelligent Asset Allocator, The Four Pillars of Investing, and other sources. Of course, now I must try to shoehorn the chosen allocation 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%)
International Value – $7,000 (12%)
Emerging Markets – $7,000 (12%)
Short Term Bonds – $3,000 (5%)
TIPS – $3,000 (5%)
REIT – $6,000 (10%)
Small Cap – $6,000 (10%)
Small Cap Value – $6,000 (10%)
Joint Taxable Account
S&P 500 Tax-Managed (VGTIX) – $12,000 (20%)
Vanguard has a lot of little fees for funds with low balances. To avoid the $10/fund low-balance fees for my IRAs, I am putting $12,000 into a taxable joint account. This will be funded partially by me selling off my individual stock holdings, as well as some from our cash stash. I feel it’s time to put a bit more of our cash into stocks.
In addition, Vanguard charges a $10 fee annually for any Index mutual fund account of less than $10,000. Of the above funds, my low balances in the Small Cap, Small Cap Value, Emerging Markets, and Short-Term Bond funds will result in an extra $40 a year in fees at least for now. Taking it all into account, the overall annual expense ratio for this portfolio is currently $31 per $10,000, or 0.31%.
Next, I’ll try to put together a simpler but similar asset allocation with fewer funds.
Edited: I screwed up last night. One should put the most tax-inefficent assets into a Traditional IRA/401k first, then Roth IRA, then taxable account. I had switched the IRAs around, so my Real-Life portfolio is changed up from what I first posted.
What are the other options?
By Jonathan Ping | Retirement | 3/18/06, 10:24pm