My Roth IRA Asset Allocation

2008 February 11
by Kyle Bumpus
from → 401k/IRA, Asset Allocation

(updated 9/13/12) I’ve received a few emails asking about my personal IRA allocation. As my balance grows larger, I will probably add another asset class or two such as foreign small/mid value and maybe some commodities exposure. In any event, I’ve kept things fairly simple. Here goes…

Notice that with the exception of the International Value fund, my Roth IRA portfolio is completely indexed. The reason for the inclusion of the actively manged International Value fund is that, sadly, Vanguard has no indexed option for this asset class. But with a low (for an actively-managed fund) expense ratio of 0.41%, I feel fairly comfortable getting my international large-cap value exposure here. Needless to say, I will swap it out for an index fund if Vanguard ever feels fit to launch one. What do you think? Any suggestions or comments?

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4 Responses
  1. 2009 July 10
    Newbie permalink

    Look into commodities please. I prefer them to bonds at this point in the cycle and think they are vital to an asset allocation program but perhaps you should look into it for yourself and blog the results? Try the Simply Rich wiki as a starting point…

  2. 2009 July 22
    Will permalink

    I was curious why you chose value index funds. What is the benefit of having all those separate large cap and small cap index funds as opposed to just owning the total stock market index fund?

  3. 2010 February 21
    Ethan permalink

    Will, the total stock market is weighted heavily toward large-cap stocks by definition. Morningstar, for example, defines large-cap as the largest 70% of companies by market cap. Yet the asset allocation decisions of an individual investor should be made with respect to the attributes of each asset class and what role it can play in their portfolio. Small-cap stocks, while only 7% of the total market cap by definition, behave distinctly enough to have established themselves as a unique asset class, or at least a “style” in allocation terminology. How much of that style makes sense for your portfolio has nothing to do with how much of the style exists, or with how much of it exists relative to other styles.

    For example, let’s say you had $10k and you planned to travel internationally but you didn’t know where you were going to go yet. You wanted to preserve the buying power of that $10k relative to some currency that hadn’t been identified yet. Your best bet would be to split it into a variety of currencies so that their relative value motions tended to cancel one another out. When you left for your trip you could convert it back into the currency of the country you had decided to visit. Now, how should you split up the money in the meantime? Should you put 40% of it in US Dollars and only 1% in Norwegian Kroners because that happens to be the percentage of global wealth held in each of those currencies at the time? No, of course not. If you did that, you would remain highly volatile based on the motions of the US Dollar. In this case, the “market cap” of the currencies is irrelevant to your purpose. Instead you should:

    1. Decide how many currencies you can efficiently diversify across before the expenses and hassle significantly erode the value of diversification.

    2. Identify a number of currencies that have demonstrated the lowest possible correlation to one another, yet without underperforming over the long haul.

    3. Diversify *equally* across each of your chosen currencies.

    Kyle is doing the same thing here.

  4. 2010 September 21
    west permalink

    I am starting to be more pro-active at this mutual fund stuff and have read stuff on it even though I hated it. I cannot help but go back and forth between Vanguard Wellington Balanced Index vs multiple Vanguard index funds. Until I came across this website, I decided to go with Wellington, but now, I am doubting yet again. I am the type that wants to just set it and forget it. I am in my 30s, a conservative, which is why I like the Wellington idea and its solid track record since 1929. My plan was to ROTH it and keep adding the max of 5k (if I can) to it per year for the next 30 yrs I suppose. But maybe I need to steer away from my conservative nature and go aggressive like the index diversification that you have?

    #1 So you have all 10 funds as roth, but your annual contribution is only 5k/year, so it means that you can only contribute 500 per fund per year? is that how you do it?

    #2 I see only one short term bond index, isnt it better to just go with the Total Bond Market index to get exposure on short term, interm, and long term bonds?

    Same thing for the international indexes. There is the Total International Index also to give you exposure to europe, asia, and emerging together in one?

    Also, I see your small cap blend and value, doesnt that overlap? Do you believe in the Extended Market Index which covers the mid and small cap blend? If not, how about picking a mid cap blend and a small cap blend?

    Sorry, was just trying to see how to simplify or narrow the # of indexes down so that way, when I divide up the 5k, I can put more on each fund in a portfolio with only 3 or 4 indexes vs 10.

    #3 For obvious reasons, I see that the returns for all of the indexes you listed above are negative. The conservative that I am, I do not want to buy because of the negative %, but buy anyway, correct?

    #4 Instead of debating whether to buy and ROTH the Wellington or buy and ROTH index funds, do you think it will be stupid if I open and ROTH the Wellington and on the side, to open several indexes as NON-IRA so my contribution to these NON-IRA indexes are unlimited? I am sure there is overlap but is that really a big deal? My plan for the indexes is to:

    40% SP500 Index
    30% Extended Market Index
    30% Total Bond Market Index
    (not really sure how big of an impact international index will make, but if it does, I can bring down the SP500 to 30% and put 10% in Total International Index)

    I would love to get input from you or anyone else on this. I just want to get this over with and figured out whether to go Wellington Balanced or indexing. Thanks!

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