Welcome Young Dreamers!

[charlie]

I am a wavering "lumper" having most of my IRA
in Vanguard's Target Retirement 2025. However,
I am becoming increasingly interested in being a
"splitter" for the IRA in my name and leave my
wife's IRA in the 2025 fund and put our after tax
fund in 2025 as well. In the "splitter" IRA I am considering using the "coffee house" formula" in all Vanguard funds:

10% in Large Cap Index
10% in Value Index
10% in Small Cap Index
10% in Small Cap Value Index
10% in REIT Index
10% in Total International Index
20% in Short Term Corporate
20% in TIPs fund.

I have already started "value averaging" into
Small Cap Value Index, the REIT Index and TIPS
at the rate of $5K per quarter. If the recent
down draft in REIT and TIPS continues, I will
get more aggressive. I will probably start the other
funds during the year.

This will give us an overall 60/40 split in the total
portfolio.

Currently our after tax account is 100% in TSM.
I know that the 2025 fund is less tax efficient,
but it is worth it to me to have the 60/40 mix
run on autopilot. However my male harmones,
still kicking at age 70, want to do the "splitter"
thingy for part of our portfolio.

Do you see any problems? Re-balancing the "splitter"
every year should not be a problem even for my
dear wife Lyn (whose eyes glaze over on this topic)
if I should have to take up residence in the old
folks home with drool cup in hand.

Cheers,

Charlie (aka Chuck-Lyn)

 

[charlie]

Sorry about the double post. Senility is creeping
in at an alarming rate.

Charlie

 

[cute fuzzy bunny]

I might pass on the small cap blend fund in favor of more of the small cap value. It beats up on the growth and blend funds with great regularity and pays a better dividend. Same with the large cap value, although large cap growth does occasionally have its day (like in the late 90's).

Total international is good, but it heavily underweights japan (3:1) and the emerging markets (9:1). Maybe I'm the only one seeing a recovery (finally) in japan, but I equal weighted europe and japan, and have a full 4% of my total port in emerging markets. In the total international index you'd have 1% net of your portfolio in emerging markets. Not that theres anything wrong with that; they're volatile and a little peaky right now.

Other than that, looks good, lump away.

 

[Cut-Throat]

TH,

According to Bernstein. It is more important to stick with an Allocation of Asset Classes than trying to come up with the 'perfect' portfolio. IOW - Tweaking your portfoilo every couple of years has a negative effect.

Just a point to keep in mind. Once you get an Asset Allocation Plan, stick with it for the long haul. This is more important than anything else!

 

[zbwmy]

Hello Mark,

Hmm, I think we have a disconnect so let's make sure.  I'm pretty sure I have these terms right - someone please correct me if I'm wrong.  The "actual" rate is what the market actually returned.  The historical actual rate of return for the market is generally accepted to be about 10-11%.  "Real" means "actual" rate of return minus the inflation correction.  The historical real rate of return for the market is generally accepted to be about 7-8%.  It depends on what historical periods you use for the calculations of both actual returns and inflation rates...  Anyway. The real rate of return will give current year dollars for ball park projection calculations.  The actual rate of return will give future year dollars for ball park projection calculations because it is not corrected for inflation.  Most people like to think in terms of current year dollars and that means handicapping your actual expected rate of return by your expected inflation rate meaning the real rate of return.  Yes, you are right the SSA and the pension plans report to you in current year dollars.   So unless you expect to see 10% as a real return rate (more like 13-14% before inflation), you will need to adjust for inflation to see the results in today's (current year) dollars.  

Maybe there wasn't a disconnect, but I feel better now.  Yes, a lot of folks use the 6% real figure.  Why?  I think that folks do this for two reasons.  The first is most folks don't ride 100% in the stock market.  While diversification gives you a less volatile portfolio, it also provides you with a smaller return than 100% stocks (although some would argue this statement).  The second reason is that if you can hit your mark with the lower rate of return, great.  You might be pleasantly surprised by a higher return in the long run.  Pleasant surprises are much more fun to deal with than disappointing surprises.  Along this same thought line, some folks just don't think the market is going to perform quite as well in the near future.  Belt and suspenders?  However you want to think of it.  

I can't "retire" until age 57, so I'll quit and then file for retirement at 60.  It would be nice for me to be able to file the retirement paperwork at age 47...  

Hope that helped.

Chris

Thanks Chris,

You cleared it up. Our retirement ages are inverse. I must retire by age 57, but can retire at age 47.
Mark

 

[newellcr]

TH,

Fine points, but that portfolio is not possible to recreate in zbwmy's retirement plan and my answer was aimed at his plan (although, I still believe that diversification handicaps the portfolio). The yearly re-jiggering would cause me heartburn. It's my personality, but the "losses" over the last couple of years from my S&P fund haven't caused me any heartburn or lost sleep. Just out of curiosity, have you seen any "model" diversified portfolios that consider the fund expenses. I suspect that with a small but growing portfolio this non-S&P (market) diversification split would be expensive wrt fund expenses. This could (further) handicap the diversified portfolio. I haven't seen any diversified models that I think are practical, then again, I haven't looked for them. Mostly, what I find in the magazines is the equivalent of hand waving, saying that this will be up when that's down and all is swell in the end.

If folks have a defined benefits pension and/or they believe that SS will be around for their retirement in some form, they have a built in diversification depending on how you look at it. Yes, there are pitfalls in this type of thought, but there are pitfalls to all investment choices.

I enjoyed your reply,

Kind Regards,

Chris

 

[cute fuzzy bunny]

The "rejiggering" is standard rebalancing. A typical balanced fund rebalances automatically. If you're buying multiple asset classes separately, you can do the rebalancing yourself. Or not. There are a lot of lines of thinking on this.

Me, I'm doing a couple of rebalances. If small or large cap value have a big run up over a couple of years, and the other is down or hasnt, I'll skim some off the winner and move it to the loser to re-establish my original percentages. If japan runs up and europe sputters (which has happened), I'll take some away from japan and give to europe. If my bond holdings run up and stocks drop, I'll take some away from bonds to feed the stocks.

Simple rebalancing, no more, no less.

As far as fund expenses, my aggregate expenses are exactly .25%. And believe it or not I may be able to reduce that to .20% with just a couple of changes in my small cap funds and/or by replacing a fund or two with cheaper ETF's. Still considering that.

True, this level of diversification isnt possible in zbwmy's available 401k choices but if they have a taxable account, one can spread their allocations between the two. I was more or less generically responding to the topic of overall asset allocation.

Other points:

- Dont read finance magazines.

- Read Edmunds "retire early and live well" or Bernsteins "Four pillars of investing". They'll explain the asset allocation theory and give you more real data and proof points than you're going to want to read. I did a "book report" in "investment strategies" on bernsteins book if you want to cut to the chase.