2010 Q3 Investment Portfolio Update – Fund Holdings

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I’ve already posted my target asset allocation, now here’s my actual portfolio holdings. Again, these are my own choices, governed by the size of my tax-advantaged accounts like IRAs/403b/401ks, the brokerage firms that I use, and my preference of passive management and low fees. Even with the explosion of new blogs, I still don’t see very many people sharing their actual holdings. I hope that if I share, then others will share as well. 🙂

Tax-Efficient Placement

One big change for me over the last two years is that I now run out of room in my IRAs and 401ks each year and now have money sitting in taxable accounts. Since each asset class is taxed differently, where you put your assets can make a big difference in your net return. As a result, I’ve moved some things around. Here’s a handy graphic taken from a post about tax-efficient fund placement:

Chart of Relative Tax Efficiency of Assets


US Total Market
I used to own Vanguard Total Stock Market Index Fund (VTSMX) but recently converted that to the ETF share version Vanguard Total Stock Market ETF (VTI) due to the lower 0.07% annual expense ratio. This fund tracks the MSCI US Broad Market Index, and typically holds the largest 1,200–1,300 stocks (covering nearly 95% of the index’s total market capitalization) and a representative sample of the remaining stocks. It currently holds 3,391 different companies. All for $7 a year for each $10,000 hold.

In my 401k, since I have limited options, I hold a mix of 75% Diversified Stock Index Institutional Fund (DISFX) which is basically a S&P 500 fund and 25% Fidelity Spartan Extended Market Index Fund (FSEMX) as it tracks the entire market minus the S&P 500. Together, the track the overall US market very well, at only a slightly higher cost of a weighted 0.25%.

US Small Cap Value
Here, I still hold the Vanguard Small-Cap Value Index Fund (VISVX). I could convert to the Vanguard Small-Cap Value ETF (VBR) with identical holdings and a lower expense ratio of 0.14% vs. 0.28%, but since it is only 5% of my portfolio I haven’t yet. In addition, there are good arguments for alternative ETFs such as iShares Russell 2000 Value Index ETF (IWN) or iShares S&P SmallCap 600 Value Index ETF (IJS). They each track slightly different indices and thus hold different stocks. Something to analyze deeper at a later time.

I still hold the Vanguard REIT Index Fund (VGSIX) as opposed to the Vanguard REIT ETF (VNQ). Both track the MSCI® US REIT Index. I hold this inside my IRA, so I’d rather just have full investment rather than worry about partial shares and such.

International / Total World excluding US
I used to hold Fidelity Spartan International Index Fund (FSIIX) but now hold the Vanguard FTSE All-World ex-US ETF (VEU) which tracks the FTSE All-World ex US Index and holds 2,239 stocks from around the world. There is the equivalent Vanguard FTSE All-World ex-US Index Fund (VFWIX) but since this is a bigger holding for me, the cheaper expense ratio makes a difference.

Emerging Markets
I converted to the Vanguard Emerging Markets ETF (VWO) from the Vanguard Emerging Markets Stock Index Fund (VEIEX). Even though my overall investment here is low, VEIEX has both a 0.25% redemption fee, and a 0.50% purchase fee, which is just too annoying to stay there. Another option would have been the iShares MSCI Emerging Markets Index (EEM), but it is both more expensive and has had more tracking issues. Here’s a EEM vs. VWO comparison post.


Short-Term High Quality Bonds
I used to own the Vanguard Short-Term Treasury Fund Investor Shares (VFISX) but it now only yields 0.41% with an average duration of 2.2 years. If you had an IRA at certain banks, you could buy a CD earning 2-3% over the same time horizon. It would be just as safe. There would be less liquidity, but I’m not really concerned about that. The CD would be even better because you can’t lose what you put in.

I’ve actually gone ahead an put this portion of my portfolio in a stable value fund inside my 401k. I explored the risks and rewards of stable value funds, and while they are not of the utmost safety, the worst-case scenario is on the same order of the worst-case scenario of many short-term bond funds. My stable value fund is earning 3.5% for all of 2010.

I’ve also been looking at municipal bond funds such as the Vanguard Limited-Term Tax-Exempt Fund (VMLTX) and Vanguard Intermediate-Term Tax-Exempt Fund (VWITX) since they are mostly rated AA and above with interest being federally tax-exempt. If I lived in California and had a big bond allocation, I’d still consider a partial holding in the Vanguard California Intermediate-Term Tax-Exempt Fund (VCAIX) since the interest is higher and is exempt from both federal and CA income tax. I wrote about VCAIX in late 2009 when the yield was 3.49%. It’s done quite well since then, although California’s still got major issues to work out. If I lived in New York, I’d consider the same for NY funds.

Inflation-Protected Bonds (TIPS)
Here, the only thing to buy is either individual TIPS bonds or a mutual fund/ETF holding TIPS bonds. Usually buying individual bonds is risky because you aren’t spreading the default risk across hundreds of issuers, but in this case every single bond is just as safe and backed by the US government.

I have my Self-Employed 401k at Fidelity, which allows me to buy individual TIPS with no commission (just bid/ask spread). I bought some longer-term TIPS with real yields of 2-3%, and they’ve been doing well since real yields have dropped since. In addition, I hold shares of the iShares Barclays TIPS Bond ETF (TIP) because I can trade iShares ETFs commission-free at Fidelity.

The Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX) was also considered, along with new TIPS ETFs that have different maturities such as the PIMCO 15+ Year U.S. TIPS Index ETF (LTPZ).

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  1. Why not use VEA instead of VEU and up your VWO allocation to make up the difference? VEA’s expense ratio is 0.15% versus VEU’s ER of 0.26%. VWO is only 0.27%, so you’ll come out ahead that way.

    What I’m saying is instead of using 40% in VEU, replace it with 27.4% in VEA and 12.6% in VWO. (You’d actually put 17.6% in VWO to keep with the target allocation you had in the previous post.) This would give you a blended expense ratio of 0.188% on your Int’l allocation and wouldn’t require any fancy footwork. No additional funds – just a switch from VEU to VEA.

    What do you think, Jonathan?

  2. P.S. That move would be a 27.7% savings on your expenses in the Int’l category. I can’t think of any downsides unless you have some unrealized gains.

  3. why not use Vangards brokerage?

  4. I am curious if you compared VFWIX (FTSE AW ex-US) to VGTSX (Total Intl Index) for your international component, or their ETF equivalents. Why might you have chosen VFWIX over VGTSX?

  5. Hi Jonathan,

    Thanks for sharing your latest portfolio. I see that, like me, you’ve opted to simplify your portfolio somewhat. I remember reading about your asset allocation and holdings several years ago, but I missed the 2008 update until now. I seem to remember that you had more of a slice and dice approach before with a larger number asset classes.

    Most notably, also like me, somewhere along the line you ditched microcaps (BRSIX). I’m curious about this decision, unless there already was a blog post about this and I missed that too. Personally, I had BRSIX in taxable and realized I didn’t want to do that much rebalancing in taxable after all, not to mention that the fund didn’t track its benchmark very well in 2009 and probably would have significant tracking error in the future.

  6. Nice asset allocation for a solid foundation. No individual stocks?

  7. @Paul – That sounds like a fine minor tweak to make. Weirdly enough, VEU holds more stocks than VEA + VWO combined. And then I’d miss out on my Canadian stocks 🙂 Perhaps if I can do some tax-loss harvesting I’ll switch between VEA and VEU.

    @fred – I do use Vanguard’s brokerage. All Vanguard ETFs are held at Vanguard where I can trade them for free. I opted not to switch my IRAs to brokerage at the moment.

    @Jason – For a while, you couldn’t get the foreign tax credit on VGTSX, which hurts if you hold in taxable, but I think now that is fixed. No Canada in VGTSX either. Finally, the ETF version VEU is cheaper than VGTSX which has no ETF version. But big picture, it’s not a big deal. Again, you could tax-loss harvest between the two if you wanted since they track different indices.

    @Dan – Glad to see you’re still around and reading. 🙂 Yes, I’ve decided that in general when there is an argument whether to hold something or not that I am unsure of, to opt for simplicity. I do think owning some more smaller stocks rounds out a total-market-style portfolio nicely, but micro-caps are just hard to do well it appears.

    BRSIX was such a smart part of my portfolio, and I held it at Bridgeway to get free transactions, but tracking all those tax lots was just not worth the bother. Tracking error was also annoying. If Bridgeway would open up their other closed Microcap funds, I might reconsider as my portfolio grows.

  8. @Bill – I do have a “play money” account where I trade individual stocks. I don’t consider it part of my portfolio, it’s just to try out investment ideas and learning new things. I do various things like options trades, going-private transactions with odd lots, and buy BRK when it’s beaten down. I am looking for a stock to try shorting to see how it works. Alas, my future as a hedge fund manager is not very bright.

  9. Canada, eh?

    North America (which I’m guessing means Mexico and Canada) only makes up 6% of VEU, which is only 40% of your portfolio. So you’re looking at 2.4% of your total portfolio. Probably not a big deal.

    Same with # of stocks. After you get so many, the rest are good but probably overkill. Anyway, glad you liked my suggestion! 🙂

  10. Thanks for all the great personal insight!

  11. Just wanted to share that I recently took Vanguard up on their offer to speak with a CFP and have them draw up a financial plan for my retirement accounts (this is a free service for Voyager Select and Flagship customers). I just wanted to see what they would come up with. To my surprise (maybe I should’ve figured as much), they came back to me recommending that I consolidate my portfolio into 3 funds… yes, 3 whole funds! Total Stock Market Index, Total International Stock Index, and Total Bond Market.

    I have to tell you that I love their idea of simplifying my portfolio (while also lowering expenses to 0.13% total).

  12. Tax efficient fund placement is great in theory, but has limited applicability. For re-balancing to work one would need most of the asset classes in all accounts where money cannot be moved across accounts – 401K, IRA accounts and other non retirement accounts.

  13. @Radha – Actually, there’s a way around that problem. Most accounts, for example, have a 500 index fund or some other large cap domestic option available. Say to rebalance, you need to sell international large cap in your taxable account and buy your total bond market fund in your 401k. When you sell your international fund in taxable, instead of buying the bond fund directly in taxable, you’d buy an equivalent amount of the 500 fund. Then sell a corresponding amount of the 500 fund in your 401k, and buy the bond fund there.

  14. Shorting a stock just to “to see how it works”…sounds like a gusty move. There are short ETFs you can try that won’t cost the same money if it doesn’t work out.

  15. “There are short ETFs you can try that won’t cost the same money if it doesn’t work out.”

    The problem is that those short ETFs are generally junk for most individual investors. Some people engage in long-term trades with short ETFs, which is the exact wrong thing to do. Those ETFs return a multiple (1, 2, 3 times, depending) of a particular index as calculated on a DAILY basis. If the underlying index is volatile, you are guaranteed to lose money, even if the index goes down because of the daily rebalancing.

    What these ETFs are meant for is daily hedging, not for long-term investment. They are a sure money-loser for the latter. There are numerous articles about this phenomenon that you could read.

    You are FAR better off doing what Jonathan said and shorting a stock to see how it works. It’s really that different functionally from going long.

  16. Oops, “it’s really *not* that different functionally from going long” is what I meant to say. People often focus on the potential unlimited liability if a stock skyrockets, but isn’t that as likely as most long investments going to zero? It happens, but how often? and over what time frame?

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