IRA asset allocation in 2011

  Category FundName Ticker Percent Expense Ratio
US Equities 49% US Large Cap Stocks iShares Russell 1000 Growth Index (IWF) IWF 9.00% 0.20%
US Large Cap Value iShares Russell 1000 Value Index (IWD) IWD 9.00% 0.20%
US Small Cap iShares Russell 2000 Growth Index Fund (IWO) IWO 8.00% 0.25%
US Small Cap Value iShares Russell 2000 Value Index Fund (IWN) IWN 8.00% 0.25%
US - micro cap iShares Russell Microcap Index (IWC) IWC 5.00% 0.60%
ETF - REIT Vanguard REIT VNQ 10.00% 0.13%
Commodities15% ETF - Commodities ProShares Ultra DJ-UBS Commodity UCD 7.00% 0.95%
ETF - Silver iShares Silver Trust (SLV) SLV 4.00% 0.50%
Gold streetTRACKS Gold Shares NYSE:GLD GLD 4.00% 0.40%
International Equities 36% Intl Large Cap Value iShares MCSI EAFE Value Index Fund EFV 8.00% 0.40%
Intl Large Cap Growth iShares MCSI EAFE Growth Index Fund EFG 8.00% 0.40%
ETF - Int'l Small Cap Wisdom Tree International Small Cap Dividend DLS 8.00% 0.58%
Intl Diversified Emerging Markets iShares MSCI Emerging Markets Index Fund EEM 8.00% 0.68%
REIT - Intl Wisdom Tree International Real Estate Sector fund DRW 4.00% 0.58%
100.00% 0.41%

The total 'weighted expense ratio' (expense ratio of each fund times the weight in portfolio, summed) is 0.41%.

The domestic offerings seem to be 'right on' with the asset allocation strategy I'm trying to follow. They are tightly defined, and the expense ratios are much better than what I saw with Mutual Funds. Best of all, the trading cost is a stable $8.95 per trade at Schwab, so I won't have undue 'friction' stopping me from taking advantage of re-balancing.

The international offerings are a mixed bag. EFG and EFV are perfect for hitting the upper corners of the style box, but I had trouble finding anything that targets the lower corners (Small Cap Value & Small Cap Growth). DLS has come out as a decent choice.

EEM has Diversified Emerging Markets targeted well. Six years ago this seemed like a 'find', now it's a $46B holding with average daily volume of 57 million shares!

Note that this portfolio is a little heavy on non-traditional assets like REITs and Commodities. The IRA Portfolio is largely Sharon's, while most of Todd's portfolio is in his Boeing 401K. The two chunks are about equal value, but the Boeing funds are pretty limited. Therefore, the "interesting" stuff is traded in the IRAs.

This is more of a 'trader's' portfolio than a 'buy and hold'. In particular, the commodities holding, UCD, is highly volatile. It's a replacement (for me) for the mutual fund DXCLX. DXCLX behaved the way I wanted, but I don't like the mechanics of a mutual fund.

You can have a porfolio like this and re-balance it once a quarter or so, but I prefer to re-balance when the funds are "out of balance", not on a fixed schedule. My out of balance trigger is 10% of allocation. Put simply, if my Gold allocation is 4%, I want to buy gold if my portfolio is holding less than 3.6% (10% down from 4%). I want to sell gold if my portfolio is holding more than 4.4% (10% up from 4%).

On the one hand, this gets a little complicated. I am not a day trader. I don't run these numbers daily. I tend to listen to about 90 minutes of news a day (on my moderately long commute), and I hear things like "oil is up" or "the dollar is down" or "Asian markets are trending up". When I hear a trend that would tend to drive my porfolio out of balance, I take the ten minutes or so to "run the numbers". I download my balances into MS Access and run a report (most folks would use Excel, I happen to be comfortable with Access instead).

On the other hand, having a system like this is welcome in times of turmoil. Once you digest the mechanics of it, it's pretty simple. It's a mechanical way of "buy low, sell high". If gold is running, sell it and buy what is lagging. It's comforting.

There have been times where the trend is changing quickly and seems to "have legs" (e.g. oil is going up, up, up) where I've held on and not done a trade until an individual holding is maybe 15-20% out of bounds, but that's just me.

I should also say that I'm lucky enough to have a decent pension due from Boeing, so my portfolio is more agressive than most. It's almost like I have an annuity that ensures basic living expenses, so I can 'go for it' with my elective investments.

Having said that, I believe this basic methodology of setting your asset allocation and re-balancing when investments get "out of bounds" is sound no matter what your risk profile. If you're retired already and running a very conservative portfolio of 50% bonds and 50% equities, this re-balancing technique can work for you. If stocks are running up, you make your "living" withdrawals from stocks. If stocks are tanking and bonds are up, you make your living withdrawals from bonds.

I tweak my asset allocation every 3 years or so. So far, I don't subscribe to the common wisdom of getting more and more conservative as I approach retirement age (at this writing, I am 50, with a goal of being financially able to retire at 55) since I do have that pension as cushion. My tweaking of the portfolio is more in response to mega-trends. For example, being deep in international equities was pretty big in 2005, but now in 2011, everybody is doing it, and it's harder to observe "de-linking" from the S and P 500. Commodities were pretty hot a few years ago, and folks are piling in. REITS are *not* favored at this time, so I am keeping my percentages going, thinking I might catch a bottom and a decent rise.

These are just my thoughts, your mileage may vary - your risk is your own, etc.

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