My wife Sharon turned me on to Individual Retirement Accounts (IRAs).  Being a long-time Boeing employee, I was fixated on Boeing’s generous VIP 401K account.  Sharon on the other hand has had numerous jobs over the years, several of which offered 401K participation.  Sharon’s folks got her started on contributing to IRAs early on, and the ability to ‘rollover’ those old 401K plans into her IRA accounts have formed the bulk of her ‘set aside’ for retirement. 

 

Sharon has convinced me that I should contribute to my own IRA in addition to the Boeing VIP.  The maximum amount to contribute yearly is considerably smaller than the 401K, but every little bit helps. 

 

Cast adrift from the funds that Boeing offers in the VIP, I had to formulate a position in the broader marketplace that I could manage.  Sharon had her funds at Charles Schwab when we met, and I have not yet found a compelling reason to move away from there.  As a ‘fund supermarket’, Schwab offers exposure to a broad array of products.  To be sure, some of the expense ratios aren’t as efficient as those found at low cost houses like Vanguard, but the variety is better, and Schwab is not as averse to ‘rebalancing’ as Vanguard seems to be (some of Vanguard’s funds have penalties if you sell them within five years!).

 

Paul Merriman at http://www.fundadvice.com/ has numerous articles on selecting proper diversification in a portfolio.  Maddeningly, as his website has gone through cosmetic upgrades, links to old articles (that constitute the core of my investing education!) fade into obscurity.  Here’s one that comes close:

http://www.fundadvice.com/fehtml/bhstrategies/0108/0108a.html

 

He sums up his strategy in one sentence:

“The Ultimate Buy-and-Hold Strategy uses no-load index funds to create a sophisticated asset allocation model with worldwide diversification and the addition of value stocks and small-cap stocks to a traditional large-cap growth stock portfolio.”

 

What this has come to mean to me is that you have to hit the ‘four corners of the style box’ as cheaply and tightly defined as you can.  Do this for your domestic stock funds, and do it again for your international portfolio.  Split the two (domestic and international) about fifty-fifty.  He also recommends adding domestic and foreign bond funds for stability.

 

Rebalancing the portfolio periodically is key.  Part of diversification is spreading your risks/rewards across different asset classes.  As different funds performed differently during the course of a year, you end up overweight in some and underweight in others.  Rebalancing enforces a ‘buy low, sell high’ discipline, and it restores your risk/reward tolerance to the level you envisioned.
From 2000-2005, my IRA asset allocation at Schwab looked something like this:

 

Basic Strategy Diversification
40%	Domestic Stock Funds
35%	International Stock Funds
20%	Bonds
5%	Commodities Derivative
%	Category	Fund Name (ticker)	Notes
10%	U.S. Large Cap Growth	Jensen (JENSX)	GABGX is imploding,
10%	U.S. Large Cap Value	Vanguard Value Index (VIVAX)	Merriman says this is 'more pure value', cheaper than UMBIX
10%	U.S. Small Cap	T. Rowe Price Small-Cap Stock (OTCFX)	CLOSED Merely 'average' overall, but beats Schwab Small-Cap Index Fund (SWSMX)
10%	U.S. Small Cap Value	Vanguard Small Cap Value Index (VISVX)	Merriman says this is 'more pure value', cheaper than TAVFX
7%	Int'l Large Cap	William Blair International Growth (WBIGX)	CLOSED Very well thought of 5-star holding.  Substitute FDIVX? (If transaction fee isn't too painful)
7%	Int'l Large Cap Value	Dreyfus Intl Value (DVLAX)	CLOSED Average performance in a description where not much is happening at present.
7%	Int'l Small Cap	Tweedy, Browne Global Value (TBGVX)	CLOSED Not many funds in this description.  Technically a 'medium cap', this fits.  5-star holding.
7%	Int'l Small Cap Value	Oakmark International Small Cap (OAKEX)	CLOSED Average performance in a description where not much is happening at present.
7%	Int'l Diversified Emerging Markets	Dreyfus Emerging Markets (DRFMX)	CLOSED Best Performance in this category
10%	Ultrashort Bond	SWBDX	4-star
5%	Intermediate Government	SWLBX	4-star
5%	International Bond	PFODX	3-star
5%	Commodities Derivatives	PCRDX	After Reading Jim Rogers' book, wanted some exposure to commodities, particularly in IRA
100%

 

(More on commodities derivatives on another page)

The total 'weighted expense ratio' (expense ratio of each fund times the weight in portfolio, summed) is 0.98%.

 

This asset allocation in mutual funds did a fairly good job at building wealth, even in an uneven market.  The international funds in particular seemed to really pull their weight.  I watched the funds evolve with some amusement; by 2005 every international fund I was in had closed to new investors.  Was this a good thing?  A bad thing?  One way of looking at it is that most of the funds closed to new investors because they had attracted more capital than they knew what to do with.  I suppose this is supposed to make me feel ‘smart’, like I got in on the ground floor or something.  The international funds for the most part continued to do well, so I hung onto them for a while, trading off ‘overweight’ quantities annually to rebalance the portfolio. 

 

One bad part about trading in closed funds is that between Sharon and I, we have six accounts at Schwab (IRA, Roth IRA, Contributory vs. Rollover, brokerage, etc.).   Schwab aggregates the accounts together for some purposes, such as determining if you have enough invested with them to be eligible for discounts, etc.  On the other hand, each closed fund determines separately if holding it in one family account enables you to buy it in another.  This made rebalancing a little hellish, as there were barriers to buying / selling:

• Can’t buy this fund in an account where it didn’t exist before
• Can’t ‘re-buy’ a fund if you’ve previously sold it for rebalancing
• Transaction fees were chewing us up on some funds, particularly if we had to buy/sell them ‘twice’ in different accounts to keep everything balanced.

 

The Vanguard value funds (VIVAX & VISVX) have also been problematic.  I selected them because they appeared in a Merriman portfolio as being strong ‘pure value’ (style box) funds, and lo and behold, Schwab offered them as well.  While they have provided decent returns in 2004-2005, the transactional costs imposed by Schwab (perhaps a pass-through from Vanguard) make them painful to rebalance.  My guy at Schwab said something like, “Yeah, I’m surprised that Vanguard agreed to offer them through us.”

In 2006, I jumped to ETF's instead

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