Portfolio Advice

[RockSplat]

Hello everyone. I have done a lot of research and read some of Bogle's books as well as other recommended books from this forum. Your advice has been highly valued and I thank you for pointing me in the right direction.

Bogle mentioned that bonds should equal a person's age. I am 32 and whatever plan I put in place I will stick to the defined plan no matter the market performance. I plan to rebalance once a year if I use a custom plan.

I am currently debating on staying in the Vanguard Target Retirement 2035 or creating my own mix below. Would this look like a good portfolio? I am thinking 25% in each category right now for simplicity sake but I am open to suggestions.

1) Small Cap 25%
Vanguard Small-Cap Index Fund Investor Shares (NAESX) or
Vanguard Small-Cap Growth Index Fund (VISGX)

Another option for Small Cap:
I also have a 401(k) account that is matched up to 6%. It has a good amount in it so I *could* use that to purchase a Small Cap option. From my research it was suggested that it is sometimes better to have an actively managed Small Cap rather than indexed Small Cap. I am convinced however that Indexing is the way to go for most everything. I have enough in this 401(k) account to meet this 25% mark if this sounds like a good idea.


2) Short Term Bonds 25%
Vanguard Short-Term Bond Index Fund Investor Shares (VBISX)


3) International 25%
Vanguard Total International Stock Index Fund (VGTSX)


4) Large Cap 25%
Vanguard Large-Cap Index Fund Investor Shares (VLACX)


Vanguard Target 2035 consists of the following:
71.6% Vanguard Total Stock Market Index Fund Investor Shares
10.6% Vanguard Total Bond Market II Index Fund Investor Shares
8.9% Vanguard European Stock Index Fund Investor Shares
4.5% Vanguard Pacific Stock Index Fund Investor Shares
4.4% Vanguard Emerging Markets Stock Index Fund Investor Shares

It seems that I would have a little more flexibility as far as balancing with my 401(k) account if I steered away from the Target fund. I do like however the automation of the Target fund. I want to take the route that makes more sense and keeps me diversified the way I should be.

I wouldn't consider myself aggressive but I have several years ahead so I am willing to take some risk. I would say I am in between aggressive and conservative if that helps. I just want to do what makes sense for the average 32 year old.

The Vanguard Fund picks above for my custom plan were my best guess as to what would get me the most diversified. I am open to suggestions.

Thanks so much for your advice -- also the advice on using 401(k) for Small Cap and Bogle's suggestion on bond percentage equalling your age is curiously appreciated.

[easysurfer]

I'm doing the bond equals my age too as for my allocation. Actually, I use 100-age is equities, then age is combinations of both bonds and some cash. As far as the Target Fund, IMHO, I wouldn't use the target fund unless you don't have much outside the target pegged for retirement.

With that said, though I sort of contradict myself because recently I decided to put my HSA into the Wellington Fund which is a balanced fund of equities and bonds. I use that as my only HSA fund allocation and don't count that along with my other allocations.

[brewer12345]

Where's the commodities, non-USD bonds, real estate, merger arb, etc? You are missing a lot of asset classes that are pretty easy to add.

[RockSplat]

Quote:

Originally Posted by brewer12345 Where's the commodities, non-USD bonds, real estate, merger arb, etc? You are missing a lot of asset classes that are pretty easy to add.

Would the Target Funds have covered these areas? I am finding it pretty difficult to pick the right Asset Allocation.

I like the age based bond ratio. I am tempted to stay with the Target fund at Vanguard and raise my bonds in my 401(k) account to balance things out. Would that be a sensible option?

Thanks.

[Alan]

Quote:

Originally Posted by RockSplat I like the age based bond ratio. I am tempted to stay with the Target fund at Vanguard and raise my bonds in my 401(k) account to balance things out. Would that be a sensible option? Thanks.

I don't use the target funds but I do have a very high ratio of bonds in my 401(k) and DW's rollover IRA to get the AA I want. Dividends from bonds is tax deferred in IRA's and 401(k)'s.

[brewer12345]

Quote:

Originally Posted by RockSplat Would the Target Funds have covered these areas? I am finding it pretty difficult to pick the right Asset Allocation. I like the age based bond ratio. I am tempted to stay with the Target fund at Vanguard and raise my bonds in my 401(k) account to balance things out. Would that be a sensible option? Thanks.

Not the ones I have seen. Personally am not a fan of Target funds, but YMMV.

[Focus]

RockSplat, like you, I've been reading many investing books to try to arrive at my "ideal" allocation. Just as helpful (if not more so) have been the extremely informative posts by the kind folks here and at bogleheads.org.

Some months ago, I took another look at Vanguard's Target Retirement Funds and realized that, for me, they were the best option within my company's 401(k), providing access to low-cost index funds that I couldn't get within the 401(k) otherwise. The current approach and glide path of one in particular -- 2015 in my case -- were very close to what I would pursued on my own, and the cost was actually less than if I had invested in the funds separately, since Vanguard charges only 0.18% for this target fund. (The emerging markets fund, for example, has a 0.39% expense ratio, a 0.25% redemption fee, and a 0.50% purchase fee.)

I was shocked to come to this conclusion, by the way. I fully expected, after all my research, to slice and dice my portfolio into perfection.

As you know, it's often advised that for these target funds to work as designed you must put all, or nearly all, of your invested money in them. However, in my case, I'm using them to simplify the core of my portfolio, while maintaining a couple of "levers" that allow for further adjustments and diversification.

For example, as recommended, I'm avoiding bonds in my taxable account, so the target fund isn't viable there. Since I prefer a higher percentage in international equities than my target fund specifies, I'm using my taxable account to invest in Vanguard international index funds and bring my percentage up to the level I want.

All that said, I've begun to wonder if the glide path concept is the best approach for the long term, based on my most recent reading, versus sticking with one stock/bond allocation (say, 60/40 or 50/50). But until I retire, for the reasons given above, I plan to continue to invest in the target fund within my 401(k). Once I transfer my 401(k) funds to an IRA after retirement, I'll take a fresh look at this.

[mb]

Quote:

Originally Posted by brewer12345 Where's the commodities, non-USD bonds, real estate, merger arb, etc? You are missing a lot of asset classes that are pretty easy to add.

What do you use for merger arb?

[mb]

What about TIPS?

[brewer12345]

Quote:

Originally Posted by mb What do you use for merger arb?

MERFX. Long track record, conservatively managed, generally dependable. It will probably never hit the ball out of the park, but generally produces decen returns and held up extremely well through 2008 and the debacle in the early part of 2009.

[RockSplat]

Quote:

Originally Posted by wishin&hopin Some months ago, I took another look at Vanguard's Target Retirement Funds and realized that, for me, they were the best option within my company's 401(k), providing access to low-cost index funds that I couldn't get within the 401(k) otherwise. The current approach and glide path of one in particular -- 2015 in my case -- were very close to what I would pursued on my own, and the cost was actually less than if I had invested in the funds separately, since Vanguard charges only 0.18% for this target fund. (The emerging markets fund, for example, has a 0.39% expense ratio, a 0.25% redemption fee, and a 0.50% purchase fee.) I was shocked to come to this conclusion, by the way. I fully expected, after all my research, to slice and dice my portfolio and possibly not getting the right asset allocation.

I came to the realization today as well that the Target fund is the best option for me. I did however change from the Target 2030 to the Target 2035 since I will be 60 years old at 2035. This in effect moves my bonds from 17% down to 10%.

I seemed to think 20% bonds would be best for me. I have a good general knowledge but I can't really say that I am smarter than the people that put the Target fund together. If they think 10% bonds is the right match for a 32 year old right now then I will go with that.

I have about $63K in the Vanguard target. I also have about 65K between my employer 401(k) and wife's 403(b). They are both through Prudential and have an age based allocation. I looked at the possibility of turning off the age based option but it seems that the lifecycle at Prudential matches the Target fund pretty closely.

For me I think the risk of splitting these funds out of the lifecycle would be more risk than me personally trying to slice and dice. I have been pleased with the performance between Prudental and Vanguard.

I am however only contributing the minimum amount to the employer sponsored programs to get the employer contribution. The rest is going to Vanguard Target and I think that is a good plan.

One thing to note though -- I read somewhere that the Vanguard Target funds still filter through the costs of the underlying funds. This might not be accurate information but I do wonder if we are paying the .19% expense for the Target and on top of that additional costs for the underlying funds. On the other hand Vanguard may be discounting the entire package at .19%. Can anyone provide insight here?

I also want to add that it is valuable for me not to have to adjust my asset allocation and keep up with it. It is very comforting knowing that this is happening automatically without my action. I am in the technology industry so that might have something to do with why I like the automation.

The thing I love about Vanguard is the trust with them. I do wish they followed Bogle's principals a bit more in regards to the age=% of bonds. There seems to be a lot of professionals that disagree with this and thus the Vanguard Target funds appear to fall more into the new age thoughts rather than Bogle's (in regards to suggested bond holdings anyway).

I am glad I did all of the research. I will have my mortgage paid off soon and we do not have any other debt. Once the mortgage is gone I will be investing heavily into muni-bond funds in taxable accounts. Other than a 6 month emergency fund I do not do any taxable account investing right now. I can't wait!

Good luck with the retirement and happy number crunching.

[mb]

Quote:

Originally Posted by brewer12345 MERFX. Long track record, conservatively managed, generally dependable. It will probably never hit the ball out of the park, but generally produces decen returns and held up extremely well through 2008 and the debacle in the early part of 2009.

Thanks! According to Google Finance the 5 and 10 years betas are -1.95 and -1.66.

[Ed_The_Gypsy]

I am not sold on target funds. I still like to twiddle the knobs.

I like having a large part in equities (ideally 100%, but I have slipped recently) until I get close to the finish line. Then, start building a CD ladder for about 5 years out. (I might make it 7 to 10 years these days.)

I also like 50/50 US/international. See Merriman:
FundAdvice.com - The perfect portfolio
And Les Antman:
Personal Financial Planning - Message Board - Yuku
(but it is harder to find Les' key posts--sorry). Les says that your portfolio will recover faster if it is 50/50.

Bernstein (The Efficient Frontier) also supports 50/50 for less volatility.

Gypsy

[Darryl]

Rocksplat, congratulations. Simple has it's merits.
At your age if you stick with this choice it's highly likely you will outperform most of your peers especially the ones who invest large amonts of time studying and trading.
Focus on your career and a LBYM lifestyle and you will probably have a good outcome.

[Dennis]

Might want to look at Settling on a plain old balanced fund - Early Retirement & Financial Independence Community

[Focus]

Quote:

Originally Posted by RockSplat One thing to note though -- I read somewhere that the Vanguard Target funds still filter through the costs of the underlying funds. This might not be accurate information but I do wonder if we are paying the .19% expense for the Target and on top of that additional costs for the underlying funds. On the other hand Vanguard may be discounting the entire package at .19%. Can anyone provide insight here?

According to this page on bogleheads.org, Vanguard is an exception:

Quote:

Vanguard's funds of funds do not add an extra expense, but some fund companies do charge an expense for the fund of funds, in addition to the expenses charged by the underlying funds.