Archives for February 2007

All of these suggested portfolios were developed by smart people who did their homework. But none of them are the same! This is because every single one also made compromises based on their interpretation of current research, simplicity, availability of suitable investments, costs, and also to some measure their overall predictions of the future. We have to do the same thing on our end.

For example, many people are starting with smaller amounts. Some of these model portfolios have 8 funds or more! Just by the fund minimums alone, you’d be looking at a minimum balance of $24,000 or so. And even then, you’d be looking a various low balance and maintenance fees. So what do you to minimize fees? Here are a few ideas:

1) Buy an all-in-one fund, and split it up later. Since many fund companies have all-in-one target-dated funds, you can simply buy one of these until you have enough to split into other funds. Here are some specific fund suggestions, starting at only $50 per month. The fund’s asset allocation may not be exactly what you want, but it will be well-diversified, and still much better than other high-cost alternatives. Here’s what the Vanguard Target 2045 Fund looks like:

I built up about $50,000 in Vanguard Target funds (VTIVX and VTTHX) before splitting it up into 8 funds last year. Since they were held in IRAs/401ks, I didn’t have to worry about any tax consequences. This choice is my favorite because it’s the most simple – just buy the same fund for a few years!
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(This is the fifth in my series of Model Portfolio Comparisons.)

First written in 1973, Burton Malkiel’s A Random Walk Down Wall Street (my review) has become an investing classic, pioneering the controversial idea that stock prices are random and thus a monkey throwing darts would be just accurate as any stock-picker. Below is a recommended asset allocation from the book for an investor in their “mid-twenties”.

Bold Investor Model Portfolio

Asset Allocation for suggested 75% Stocks/25% Bonds ratio
43% Total US Stock Market
22% Total International Stock Market
10% REIT
20% Treasuries/TIPS/High-Quality Corporate Bonds
5% Cash

This breakdown looks very similar to the basic “Early Saver” portfolio from All About Asset Allocation. See the rest of the model portfolios for example mutual funds and ETFs for each asset classes.

As you age, the recommended percentage of stocks goes down to 65% at age 40 and 40% in late retirement. It is interesting to note that while Malkiel consistently recommends real estate as part of your portfolio, REITs were not explicitly included in the recommended portfolios until recently. I noticed this when comparing my personal copy (published in 1996) to the most recent edition. I’m guessing the growing availability of index funds that track REITs is the reason behind this.