I’ve done it! I got tired of my market-timing foolishness and bought IVV anyways today. I also put in orders to exchange all my Vanguard funds to try and match the asset allocation I decided on previously. Here’s what my actual portfolio looks like now:

16% iShares S&P 500 Index ETF (IVV)
19% Vanguard [Large Cap] Value Index Fund (VIVAX)
20% Vanguard Small-Cap Value Index Fund (VISVX)
11% Vanguard REIT Index Fund (VGSIX)
11% Vanguard International Value Fund (VTRIX)
11% Vanguard Emerging Markets Stock Index Fund (VEIEX)
11% Vanguard Intermediate-Term Investment-Grade Bond Fund (VFICX)

If you want to know exactly how much I have of each, my total invested amount is $63,400. I’m very happy I finally did this. My previous Vanguard Target Retirement Funds (such as VTIVX) were not a horrible choice, but I think this portfolio will outperform it in the long run with minimally added risk. In other words, I believe that it is closer to the Efficient Frontier.

If you want to read about my whole retirement portfolio planning saga, here are the highlights, starting from way back in 2004:

2004
December – Which Broker for my Roth IRA?
December – Read some books which really helped me understand the reasoning and power behind index investing: A Random Walk Down Wall Street and The Four Pillars of Investing.

2005
January – Decided on Vanguard Target Retirement 2035 Fund (VTTHX)
August – Should I Rollover My 401k and Where To? Part 1, Part 2, Part 3, Part 4.

2006
March – A Portfolio Snapshot; Decided a change was needed.
March – Portfolio Options: Slice & Dice, Keep It Simple, or Just One Fund.
April – Final Target Portfolio
April – Choosing a Discount Stock Broker: Part 1 and Part 2.
April – Ended up with opening an account with Scottrade.

Now that this is all set, and I have some free trades from Scottrade burning a hole in my pocket (thanks to you all), I have the itch to spend some time learning about trading individual stocks and options. However, if anything, active trading will remain a very small part of my overall portfolio.

Ok, so here’s my final draft for my new retirement portfolio. I’ve decided to go with a portfolio based closely on my Keep It Simple Portfolio. The twist is that I’ve decided to keep all my taxable funds in exchange-traded funds (ETFs), while keeping my tax-deferred IRA funds in conventional mutual funds. Hopefully this will allow me to take advantage of the tax benefits of ETFs where they matter, while at the same time keeping the simplicity and automatic dividend reinvestments of mutual funds. First, my overall target asset allocation:

90% Stocks / 10% Bonds
(40% Large Cap / 20% Small Cap / 20% Int’l / 10% REIT / 10% Bonds)
[Read more…]

Ah, mutual fund companies love your money, and fully realize many people are lazy, busy, or just don’t want to deal with money. So they created the All-in-One fund. The one I like the best for our purposes is the Vanguard Target Retirement 2045 Fund (VTIVX). I don’t really care about the dates on the funds, as each company does things a bit differently. Let’s look under the hood. Currently, VTIVX has the following underlying funds:

Vanguard Total Stock Market Index Fund (VTSMX) – 70.4%
Vanguard Total Bond Market Index Fund (VBFMX) – 12.1%
Vanguard European Stock Index Fund (VEURX) – 11.8%
Vanguard Pacific Stock Index Fund (VPACX) – 5.7%
[Read more…]

When I talk about maximizing your return (reward) for a given amount of risk, that is called being on the Efficient Frontier. For a very neat illustration of this, check out this Interactive Risk/Reward Chart from IFA, which lists 15 index portfolios as well as 20 of their suggested portfolios.

The individual index portfolios illustrate that individual asset classes like 1-Yr Bonds, Emerging Markets, or Micro Cap each have their own risk/reward characteristics. But, if you combine a bit of each, you can make a nice happy combination to optimize your risk/reward ratio. Why take any extra risk without more reward? That nice sloping line is the Efficient Frontier. My portfolio options are somewhat similar to the #80 dot, but with some tweaks to minimize expenses and complexity.
[Read more…]

Now, let’s see if we can take the slice and dice portfolio option and make it a bit simpler, and hopefully avoid all extra fees.

Theoretical Allocation
20% S&P 500 (VFINX or VTGIX)
20% Large Cap Value Index (VIVAX)
20% Small Cap Value Index (VISVX)
10% REIT (VGSIX)
20% Total International Index (VGTSX)
10% Intermediate-Term Bond (VFICX)
[Read more…]

Man, figuring out a good set of funds to work into your asset allocation plan is hard! There are so many different funds to choose from. So I’ve decided to break it down into three possible scenarios that I can then choose from, varying from complex to super-simple. The first scenario is to pick a variety of funds that each focus on a specific asset category. This will result in more complexity and possibly higher fees, but in theory may result in better long-term returns.

First, I’ll list the funds that I would use in theory, and then I’ll list how they would actually fit in reality into our two Roth IRAs, one Traditional IRA, and taxable accounts. The goal is to put the most tax-inefficient funds into the most tax-deferred accounts.
[Read more…]

Well if you’re going to try and change your portfolio, you might as well take a ‘Before’ snapshot for comparison later. I entered our retirement account holdings as of today into Morningstar’s X-Ray tool and got the following asset allocation:

This is based on our current holdings of only two mutual funds:
[Read more…]

For those that have an Roth, Traditional, or SEP IRA at Vanguard like me, you probably noticed that they charge a custodial fee of $10 a year for each mutual fund you have with a balance of less than $5,000. This can add up if you own multiple funds in different IRAs. The only way to get around this is if “the IRA owner?s Vanguard account assets (including IRAs, employer-sponsored plans, brokerage accounts, annuities, and nonretirement accounts) total $50,000 or more.”

I just discovered that for joint accounts, the total value goes towards both account holders. For example, if my wife and I hold a joint taxable account with $50,000 in it, we would both be exempt from IRA custodial fees no matter what our IRA balances were, even though the $50k is shared between us. Might be helpful for those near the threshold.

Now that I have decided to stop spending time learning to trade individual stocks, I want to focus instead on optimizing our retirement portfolio. Right now we have almost $50,000 in retirement accounts, and if I liquidate my stock positions and start adding money regularly to a taxable brokerage account we can keeping building on that. That seems like enough money to split in between some different mutual funds to achieve a more specific asset allocation.

I intend to choose an asset allocation based on Modern Portfolio Theory, which tries to achieve the greatest return for a given amount of risk. Or the least risk for a given long-term expected return. There is lots of math and research behind it, but I’ll get more into that later. I’ve gone ahead and ordered a book dedicated to this, The Intelligent Asset Allocator by William Bernstein, to be my main resource. My overall goals are to (1) make my portfolio optimized with minimal expenses and (2) make it easy to maintain and continuously add money to.

I’m sure some of you are motivated to do avoid some of the financial mistakes shared yesterday. A good way to start is by funding yourself an tax-advantaged IRA. Fidelity has come out with a pretty decent product for this – their SimpleStart IRA. You just need to commit to contributing $200 a month ($2,400 a year) to the IRA, and you can avoid the $2,500 initial minimum investments of many of their funds. Also, as you are not paying any trade commissions and there are no annual maintenance fees, more of your money is going towards your investments.

Fidelity’s Freedom Funds, which are automatically rebalanced based on your planned retirement timeframe, are a good simple option I would recommend for those without strong opinions otherwise. This is just one option I’m throwing out there. Either way, get started!

Added: I’ve done a more thorough comparison of ‘IRA Options For Those Starting Out‘, including brokers that require a committment of only $50 per month.

Simplified Employee Pensions, or SEP-IRAs, are a retirement account available to both small business employers and employees under certain requirements. Although I’m sure they are covered more thoroughly elsewhere, I wanted to jot some notes down focusing on the self-employed, that is, you are both the only employer and employee all rolled into one. Beware, during my research I found a lot of outdated and thus inaccurate information online.

Who’s Eligible?
Anyone who has any amount of self-employment income, even if you already have a retirement plan with your other job.
[Read more…]

Before I finish my taxes, I’ll have to decide how I want to put some of my self-employment income away for retirement. I didn’t know there were so many options! In addition to the usual Traditional and Roth IRAs, I could also do use any of the following:

• Simplified Employee Pension IRA (SEP-IRA)
• Savings Incentive Match Plan for Employees IRA (SIMPLE IRA)
• Keogh Profit-sharing Plan
• Individual, or Solo 401k’s
• Solo Roth 401k’s

I’m definitely going to explore all these options soon, but due to their deadlines the only one that I can actually use for 2005 income is the SEP-IRA, which allows me to open and fund it as late as the extended deadline for tax returns. Gotta love easy decisions.