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Our Investment Portfolio: Asset Allocation and Location

Written by Nickel - 15 Comments

While I’ve written a bit about our investment allocation in the past, we’ve tweaked things a bit recently so I thought I’d lay thing our here for all to see. Before we go any further, I should note that we have a number of different accounts, including two Roth IRAs, three different employer-related retirement accounts, a SEP-IRA, and a taxable brokerage account.

Because of the complexity of our situation, I have decided to treat our investments as one big pot of money rather than trying to manage each account individually. Thus, we’ve locked in certain accounts with just one investment type, and we adjust the overall allocation using my SEP-IRA. This management is made far easier by Vanguard’s Portfolio Watch tool, which allows us to track and visualize everything in one place.

Here goes…

Our current allocation is an 80%/20% split between stocks and bonds. Our stock holdings are further split 70%/30% domestic vs. international, for an overall total of 56% domestic equities, 24% international equities, and 20% domestic bonds. Here’s what it looks like in a bit more detail:

Domestic Equities
51% – Total Stock Market (VTSMX or the equivalent)
5% – Small Cap Value (entirely VISVX)

Foreign Equities
24% – Total International (entirely VGTSX*)

Domestic Bonds
20% – Total Bond Market (VBMFX or the equivalent)

The Total Stock Market fund gives us relatively broad diversification in domestic equities, whereas the small cap value fund adds a bit of additional weight to small, beaten down companies. I’ve considered adding a small amount of REIT exposure (VGSIX) for additional diversification, but haven’t made a final decision yet. If/when we do this, it will likely come out of the Total Stock Market portion of our portfolio.

As far as asset location goes, the taxable portion of our portfolio is entirely invested in the Total Stock Market, with our Small Cap Value, Total International and Total Bond Market holdings residing in tax-advantaged accounts. We’ve further subdivided things by making the Roth IRAs 100% equities in hopes of maximizing growth there (they’re tax free, after all). As noted above, my SEP-IRA contains a little bit of everything just to balance things out.

For the sake of comparison, our previous allocation looked like this:

75% – Total Stock Market
16% – Total International
9% – Total Bond Market

This previous portfolio was based largely on Vanguard’s Target Retirement 2035 (VTTHX). The problem with the Target Retirement solutions (for us) is that we haven’t been able to find our desired level of aggressiveness combined with our desired “glide path” (change in holdings as we approach retirement). The Vanguard funds in particular start out more aggressive than we’d like, and then transition over to the conservative side too quickly. I also wanted a bit more small cap and international exposure.

Now that we have everything set up, we’re on auto-pilot. The only thing we’ll have to do is to periodically rebalance my SEP-IRA holdings to keep things on track.

*Note: If our international holdings were in a taxable account, we’d likely use VFWIX instead.

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Published on May 5th, 2008
Modified on July 26th, 2008 - 15 Comments
Filed under: Retirement

About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

15 Responses to “Our Investment Portfolio: Asset Allocation and Location”

1
Sara A. Says:
May 5th, 2008 at 9:22 am
I noticed that all the funds you quoted are from Vanguard. Is there any risk to having all of your portfolio in one place like that? Or do you only need to diversify within asset classifications?
2
NCN Says:
May 5th, 2008 at 9:49 am
Man, why did yo have to write such a detailed post!?! Now, I have to go and check out all of my allocations and make a bunch of changes…

Seriously though, it is such a good idea to think about your accounts as ONE BIG ACCOUNT… it’s just like getting rid of credit card debt.. you have to consider all of your credit cards debts as one ONE BIG DEBT…

great read… rock on!
3
nickel Says:
May 5th, 2008 at 9:51 am
Sara: Good question.

Some of our holdings are actually with Fidelity and TIAA-CREF (mainly because that’s what’s available for those accounts). For the sake of simplicity, I just cited the Vanguard fund and then said “or equivalent” when we have a mix of companies.

While holding everything in one place might seem more risky, I’m not particularly concerned about this for several reasons. First of all, when the biggest of the fund companies are quite stable. Second, the separate mutual funds at Vanguard are actually separate legal entities. Finally, the Investment Company Act of 1940 protects your mutual fund investments. When a company runs into hard times, they can’t simply raid you shares and company creditors cannot access your assets.
4
J Says:
May 5th, 2008 at 1:12 pm
Your international holdings should be in your taxable account in the form of VEU.

Every year, your international holdings are being assessed a foreign tax that comes out of the fund\’s NAV.

If you hold the fund in a taxable account, you can take a credit for that tax against your tax return at year end (your broker should send you the amount of the credit you can take).

When held in a tax-deferred account, this credit is lost.

By the way, you do NOT get this credit if you hold Total International in a taxable account, as it is a \”fund of funds\” and not eligible to receive the international tax credit.
5
nickel Says:
May 5th, 2008 at 1:50 pm
J: That’s a valid point. However, I already had substantial Total Stock Market holdings in the taxable account, and I’m trying to lock down one investment type per account (with the exception of my SEP) for the sake of convenience. Selling the Total Stock Market to achieve this would result in a significant taxable event.

Given that it’s going to reside in a tax sheltered account, I went for the fund of funds in preference to the ex US fund (VFWIX) because the latter has a 0.25% purchase fee and it provides no advantages in a tax sheltered account.
6
J Says:
May 5th, 2008 at 2:53 pm
\”Selling the Total Stock Market to achieve this would result in a significant taxable event.\”

I don\’t know what your tax bracket is, but if you can get into the 15% bracket your LT cap gains rate is zero in 2008.
7
nickel Says:
May 5th, 2008 at 3:00 pm
J: Unfortunately (or fortunately, depending on how you look at it) we can’t get into the 15% tax bracket.
8
tom Says:
May 5th, 2008 at 4:02 pm
nickel,

Why so much in the total stock market fund? Why not break that into: Large cap, small/med cap, total stock market, sector specific, REIT?

Just curious…
9
nickel Says:
May 5th, 2008 at 4:08 pm
tom: I have to keep it relatively simple because I’m trying to manage our allocation across seven accounts and three fund companies. Not everyone has everything that I’d need to do what you’re suggesting, and I can’t move money back and forth between accountw. I have to simplify things a bit in order to keep things manageable. It becomes exponentially more difficult to achieve the right balance as we add more funds.
10
Trent Hamm Says:
May 6th, 2008 at 12:05 am
This is a fantastic idea, but not as fantastic as me.
11
Ben Says:
May 6th, 2008 at 10:00 am
Overall I’m aiming for (includes my wife’s accounts)
85% Stocks
15% Bonds (my age -20, change when I’m 40)

Among Stocks (just my accounts)
40% Intlâ€”Vanguard Total Intl Stock Index (VGTSX)
30% Large capâ€”My 401k’s S&P 500 option (MASRX) + Vanguard Large Cap Index (VLACX)
15% Mid capâ€”Vanguard Mid Cap Index (VIMSX)
10% Small capâ€”Vanguard Small Cap Index (NAESX)
05% REITâ€”Vanguard REIT Index (VGSIX)

I am stuck with MASRX as the only index fund my company offers in it’s retirement plan

My wife has her own accounts including a fidelity target date fund, and a couple sector funds (Vanguards’ precious metal and energy funds). She likes it that way. I have to say her sector funds have been awesome for balancing against the current slowdown, they often go up as the rest of the stock market goes down. So maybe she’s onto something.

I use Vanguardâ€™s Portfolio Watch tool as well – so handy. It even knows what % of bonds are in my wife’s target date fund. I was impressed. It took me a while to get happy with a strategy, but it feels really good to be on auto pilot now.
12
Karen Says:
May 6th, 2008 at 5:00 pm
In response to your response to Sara, I would really like to see what your TIAA-CREF holdings are because that’s what we have to choose from and I am finding it difficult to understand how these funds compare to the more commonly discussed funds.
13
Kirk Says:
May 6th, 2008 at 10:38 pm
I would look to add REITs and commodities as well as international bonds and some TIPS. These will give you a lower volatility portfolio and a higher return if you rebalance strategically or annually.
14
No Taboo song Says:
September 30th, 2008 at 11:14 pm
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15
Chris Says:
May 16th, 2009 at 12:47 pm
I haven’t grasped the logic yet behind investing in bonds at all. If I am to retire in 30 years why should I hold any bonds at all if stocks have always out performed bonds during this time period?

Everywhere I look I am told to hold more bonds closer to retirement. But what assumptions are being made about how I want to retire and how much money I will spend on myself during retirement vs. how much I want to leave as an inheritance when I die?

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