Archives for March 2006

Ah, mutual fund companies love your money, and fully realize many people are lazy, busy, or just don’t want to deal with money. So they created the All-in-One fund. The one I like the best for our purposes is the Vanguard Target Retirement 2045 Fund (VTIVX). I don’t really care about the dates on the funds, as each company does things a bit differently. Let’s look under the hood. Currently, VTIVX has the following underlying funds:

Vanguard Total Stock Market Index Fund (VTSMX) – 70.4%
Vanguard Total Bond Market Index Fund (VBFMX) – 12.1%
Vanguard European Stock Index Fund (VEURX) – 11.8%
Vanguard Pacific Stock Index Fund (VPACX) – 5.7%
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When I talk about maximizing your return (reward) for a given amount of risk, that is called being on the Efficient Frontier. For a very neat illustration of this, check out this Interactive Risk/Reward Chart from IFA, which lists 15 index portfolios as well as 20 of their suggested portfolios.

The individual index portfolios illustrate that individual asset classes like 1-Yr Bonds, Emerging Markets, or Micro Cap each have their own risk/reward characteristics. But, if you combine a bit of each, you can make a nice happy combination to optimize your risk/reward ratio. Why take any extra risk without more reward? That nice sloping line is the Efficient Frontier. My portfolio options are somewhat similar to the #80 dot, but with some tweaks to minimize expenses and complexity.
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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)
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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.
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