The Retiree Portfolio - Location Review

One slight problem with the previous allocation is that the retiree historically prefers making, at minimum, an annual contribution into the Roth IRA account. Now, ideally, the next best place for contribution is the traditional IRA, but it seldom occurs. Whatever fund I put into the Roth IRA must be one whose allocation in the total Retiree Portfolio can increase, even slightly skewed from the original percentages, without veering too far from the general objective for the portfolio.

REIT would not be a good choice-- REIT's are recommended to only occupy 10% of the *equity* portion of an S&D portfolio.

VISVX (small value) could be a good choice-- for someone much younger than the retiree, like, say, me for instance. Inflating VISVX's share in the portfolio introduces more volatility risk.

Which leads me to the next best two choices: VTSMX (total US market) or VGTSX (total international). To me, VGTSX seems to be the better of the two choices. Why? I don't doubt that the ratio of international equities will increase in the face of US domestic equities considering the free market international trade occurring nowadays. Short of world courts coming down hard on alleged unfair Chinese government subsidization of imports and reversing the ballooning trade deficit (the largest single-country deficit ever in US history), curtailing dollar devaluation, and the like, international will only grow in proportion, with possible temporary hiccups, for the coming years.

Without further ado, here's the updated equity allocation scenario:

VTSMX - 25% - 100% (25% allocation of total portfolio) into the taxable account.
VISVX - 5% - 100% (5% allocation of total portfolio) into the traditional IRA account.
VGTSX - 25% - 60% (15% allocation of total portfolio) into the taxable account, 20% (5% allocation of total portfolio) into the Roth IRA account, the remainder 20% (5% allocation of total portfolio) in the traditional IRA account.
REIT - 5% (I *might* eliminate. Need further analysis.) - 100% (5% allocation of total portfolio) into the traditional IRA account.

The Retiree Portfolio- Execution

Today, in the traditional IRA account, I displaced VWELX positions to build up the fixed-income allocations for the Retiree Portfolio:

VBMFX - 13.3%
VFSTX - 13.3%
VBISX - 13.3%

As of today, VTSMX position is now up to 16% in the taxable mutual fund account.

Retiree Portfolio Next Step: Location

The Retiree whose Retiree Portfolio I'm helping construct owns the following types of long-term investment accounts:

56% of the assets are in a traditional IRA account.
4% of the assets are in a 2006-contributed Roth IRA.
The remaining 40% of ther assets are in a taxable account.

With that being said, the Retiree Portfolio's asset location is envisioned as follows:

VTSMX - 25% - 100% (25% allocation of total portfolio) into the taxable account.
VISVX - 5% - 100% (5% allocation of total portfolio) into the traditional IRA account.
VGTSX - 25% - 60% (15% allocation of total portfolio) into the trad. IRA account, the remaining 40% (10% allocation of total portfolio) into the taxable account.
REIT - 5% (I *might* eliminate. Need further analysis.) - 100% (5% allocation of total portfolio) into the Roth IRA account.

The majority of fixed-income assets will be placed in the traditional IRA account.
VBMFX - 13.3%
VFSTX - 13.3%
VBISX - 13.3%

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Last night, in the Retiree Portfolio's taxable account, I executed yet another order to exchange from the Prime Money Market Fund into VTSMX, further advancing their eventual VTSMX position defined above by 20%. To date, that means 16% of the total Retiree Portfolio is now in VTSMX. I'll continue flushing out the remaining 9% VTSMX position very soon.

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After some thinking, here's an asset location update for The Retiree Portfolio:

VTSMX - 25% - 100% (25% allocation of total portfolio) into the taxable account.
VISVX - 5% - 100% (5% allocation of total portfolio) into the traditional IRA account.
VGTSX - 25% - 60% (15% allocation of total portfolio) into the trad. IRA account, the remaining 40% (10% allocation of total portfolio) into the taxable account.
REIT - 5% (I *might* eliminate. Need further analysis.) - 100% (5% allocation of total portfolio) into the Roth IRA account.

The majority of fixed-income assets will be placed in the traditional IRA account.
VBMFX - 13.3%
VFSTX - 13.3%
VBISX - 13.3%

Mixing Passive- and Active-Managed Funds

My coworker posed the following question today:

"If one already owns a total market fund, why buy Wellington?"

OK-- this question might be completely oversimplistic. We need to understand what sometimes turns out to be a complex web of circumstances that would whittle this question down and give it more relevancy.

So, first of all: colleague and I had began reading up on various investment strategies and, at one point in time, I thought we were largely on the same page. Lately, I've noticed he's focusing questions on stock picks, which, I have to be honest with you, Dear Colleauge, it's already challenging enough defining our own core portfolio, let alone be worried about something that's infinitely more complex than asset allocation (with few exceptions).

We were relatively debt-ridden at the time. Now, what are we taught to correctly do with debt? Yes, pay it down first before anything else. We've been dealing with that ever since.

Colleague is starting their savings from scratch. Colleague is in their late-20's to early 30's.

Colleague has previously expressed keeping their core portfolio simple, containing at most 2-3 core funds. These would include a total market fund, a fixed-income fund, and something else. Hopefully, Colleague sticks with this.

Now, Colleague and I have previously reviewed various Vanguard funds, one such being Wellington. Wellington's attraction stems from its built-in equity to fixed-income ratio (roughly 60/40), its value tilt, a factor which has commanded a return premium over the years, its proven ability to ride out the most recent bear market, 2000-2002, without significant value decreases, its high dividend rate for investors interested in and income fund, its classification as a balanced fund, and, most importantly, its extremely low expense ratio, practically unheard of for being an active-managed mutual fund.

Wellington sounds like it *might* be for an aggressive retiree due to its aggressive value tilt, equity allocation, while providing income in the form of dividends.

If someone *only* owned a Total Market fund in their portfolio, they're viewed as very young, with many years of life and career (which will mean a long series of contributions ahead of them), and very aggressive, without the need for dividends.

I had the Retiree Portfolio often discussed in this blog temporarily park a significant portion of assets in the Wellington fund when I was unable to expeditiously define the asset allocation because of the following characteristics: its one-stop solution, its AA mix, its blend, along with its superior handling of market downturns.

A hypothetical 50/50 mix of Total Market fund / Wellington would exhibit the following characteristics:

Stock Style Diversification

31 31 20
5 4 4
2 2 2


0 100 0
0 0 0
0 0 0

Considering this mix, the only issue I see is that the portfolio's equity portion seems tilted towards large-cap with little exposure to mid and small-cap positions for an early saver. Also, there doesn't seem to be much diversification with the fixed-income portion: it's 100% intermediate-term. However, everything else seems OK: it's balanced, it's blended, and the fixed-income durations don't go beyond intermediate-terms.

So, not a bad mix, depending on an individual's needs and goals.

RETIREE PORTFOLIO DRAFT #2

After some consideration, Draft #1 was seen as "a bit too aggressive" for a portfolio aimed to generate and maintain income, quell volatility, reduce risk, and introduce value stabilization by *some* S&D and diversification (yet not be aggressively eager about this), while simultaneously being SIMPLE and ELEGANT.

In fact, I'm shifting the focus of the porfolio composition from a multi-asset S&D (slice and dice) makeup into a portfolio that consists of 3 core holdings, with some smaller side dishes. The 3 core holdings are VTSMX, VGTSX, and... um, fixed-income positions of some form.

The 60/40 equity/fixed-income makeup is still maintained.

I still plan to divide the equity allocation into 50/50 domestic/international. Here's where I disagree with critics of my portfolio, who believe that I'm internationally over-weighted. My rationale is I want my portfolio to reflect the WAP (world allocation portfolio) and the global economic integration that's steadily increased over the past many years.

To address all these points, I might eliminate the following assets:

- REITs
- Int'l small-cap stocks
- Emerging market stocks

I'm also reducing positions in the following:
- Domestic value stocks
- Possibly the high-yield corporate bonds

When taking into account all of these factors, here's Draft #2, showing the direction the retiree's portfolio is heading:


VTSMX - 25%
VISVX - 5%
VGTSX - 25% (Total International Fund)
REIT - 5% (Again, I *might* eliminate. Need further analysis.)

VBMFX - 13.3%
VFSTX - 13.3%
VBISX - 13.3%

Morningstar's X-Ray provided the following asset breakdown for the Draft #2 portfolio:

Asset Allocation

Portfolio
Cash 3.04
U.S. Stocks 34.70
Foreign Stocks 24.35
Bonds 37.20
Other 0.71
Not Classified 0.00


Stock Style Diversification



25 26 19
10 7 4
5 3 1

Not Classified 0.00%



65 35 0
0 0 0
0 0 0

Not Classified 0.00%

Investment Professional Opines about ETF's

One of the few financial professionals I genuinely respect, Rick Ferri, gave Maria Bartiroma same face time on CNBC. Click here for his take on the recent ETF explosion.

Aside: I interviewed at Dimensional Fund Advisors (DFA) today. Strange how everything seems to be a series of coincidence: I've commonly read about them in my research. DFA is only one of a handful of firms where the remainder of the elite group of financial professionals and scholars I truly admire formed and are currently changing the way investing should happen (they only manage some of the largest pension funds in the US-- which are far larger than any individual mutual funds and other offerings). I only wished my recruiter didn't pressure me to go in while I was still suffering from my cold because my first impression wasn't definitely the best. I guess we'll see what happens next week.