I revamped our portfolio this fall with the intent of simplifying it. I settled on the total market approach.

Update: Here is my most recent asset allocation update.

My final percentages were a cross between the strategy of the Vanguard Target Retirement funds (specifically the 2045 fund) and Taylor Larimore’s four fund portfolio at the Bogleheads forum consisting of:

  • A Money Market Fund
  • Total Stock Market Index Fund
  • Total International Index Fund
  • Total Bond Market Index Fund

The premise for both of these strategies is using index funds to match the total market. Instead of weighting each asset class equally weighting is in proportion to the capitalization in the total market. Here’s our current asset allocation:

asset allocation

Asset

Actual

Target

Total Bond Market Index Fund

10%

10%

Total International Index Fund

19%

18%

Total Stock Market Index Fund

60%

62%

REIT Index Fund

6%

5%

Small Cap Value Index Fund

5%

5%



Bond Allocation

I settled on a 90/10 stock/bond split based on our high risk tolerance and relatively young ages (28 and 31). This was one of the changes I made, as we were previously 100% in stocks. We officially have about 30-40 years until retirement, so we need to have a heavy stock allocation; however we plan on retiring much earlier!

International Allocation

Vanguard published a terrific International Asset Allocation research paper. The final results indicated that a 20-40% international allocation is reasonable with a starting point of 20%. Therefore, I adjusted ours to be 20% of our stock allocation (18% of the total portfolio) with plans to increase it each year. I haven’t decided exactly where I will stop, but I would assume between 35-40%.

What made me really think about it was when Moolanomy phrased it this way “What if we think of each country as a company?” in how much should we invest internationally? That’s a great way to look at it and a reminder that I wouldn’t invest 80% in one company (the United States)!

Overweighting

I have chosen to overweight the small cap value and the REIT sectors. The additional return may be slight, but I felt that devoting 5% to each was reasonable. Only time will tell if this was a good choice.

Limitations and Substitutions

Much of our portfolio is housed in our tax advantaged retirement accounts. With those come limitations on access to specific funds (and my beloved Vanguard Admiral funds).

Here’s some of the substitutions I was able to make in various accounts to minimize expense ratios:

  • Total International Index Fund: 85% EAFE Index fund and 15% emerging markets index fund.
  • Total Stock Market Index Fund: 75% S&P 500 Index fund and 25% extended market (S&P 500 completion) index fund.

Expense Ratio

The total weighted expense ratio for our portfolio is 0.158%. I would like to reduce it further by optimizing the funds held within each account and have made this as a to-do for 2008.

Further Reading

My Money Blog has a great series in progress that explains in great detail some of the ideas above: bond, international, and small cap and value allocations. I share many of his viewpoints on asset allocation and he does a much better job than I could have done laying it all out.

Action Plan

While simplification is not common in some aspects of my finances it is for our portfolio. Our portfolio is large enough now that screwing up an asset allocation will cost me much more than before. Our contributions are relatively small compared to the compounding effect. Sticking to my asset allocation will likely be the determining factor in meeting our dollar plan.

What is your asset allocation?






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Comments to My Asset Allocation: Total Market Approach

  1. Very well thought out and you encouraged me to reconsider my allocation. One way to reduce expense ratios would be to look at the ETF counterpart to the Vanguard funds. The Total Stock Market ETF is about 10 basis points lower than the mutual fund. Of course, the ETF may not be available in your 401(k) and depending on your brokerage commissions it may not make sense to make monthly contributions to an ETF.

    Steve

  2. @ Steve: I plan on doing a full evaluation in the future of all the ETFs that I have available to replace some of the index funds. I have put it off because we are close to qualifying to admiral shares for at least one fund. Thanks for the reminder!

    Madison


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