I Changed My Roth IRA Asset Allocation
I recently changed my Roth IRA asset allocation, which had been static several years now. The reason for the changes wasn’t to chase performance, but to further diversify my portfolio now that I’ve accumulated enough assets to make it worth the effort. I had always planned on expanding my allocation eventually and thought it might be instructive to list the changes and my reasons for making them.
My Old Roth IRA Asset Allocation
Early last year, I posted my Roth IRA asset allocation in response to a few inquiries from curious readers. My previous allocation was:
- 10% Vanguard 500 Index fund (VFINX)
- 10% Vanguard Value Index fund (VIVAX)
- 10% Vanguard Small Cap Index fund (NAESX)
- 10% Vanguard Small Cap Value Index fund (VISVX)
- 10% Vanguard REIT Index fund (VGSIX)
- 10% Vanguard Total Bond Market Index fund (VBMFX)
- 20% Vanguard Total International Index fund (VGTSX)
- 20% Vanguard International Value fund (VTRIX)
This allocation is a good one and I would recommend it to any young, aggressive investor with a high risk tolerance and long time horizon. However, I took my ever-growing account balance as an opportunity to further diversify (well, ever-growing with the exception of 2008).
My New Roth IRA Asset Allocation
- 10% Vanguard 500 Index fund (VFINX)
- 10% Vanguard Value Index fund (VIVAX)
- 10% Vanguard Small Cap Index fund (NAESX)
- 10% Vanguard Small Cap Value Index fund (VISVX)
- 10% Vanguard REIT Index fund (VGSIX)
- 10% Vanguard Short Term Treasury fund (VFISX)
- 10% Vanguard FTSE All-World ex-US Index fund (VFWIX)
- 10% Vanguard International Value fund (VTRIX)
- 10% Vanguard Emerging Markets Index fund (VEIEX)
- 10% Vanguard FTSE All-World ex-US Small Cap Index fund (VFSVX)
Why I Changed What I Changed
The allocation looks pretty similar but with four important changes:
- Swapped Total International Index for FTSE All-World ex-US Index – True, total international has a slightly lower expense ratio, but it completely lacks exposure to the Canadian stock market. As one of the wealthiest nations in world, I feel exposure to Canada is important. Besides, Vanguard has a reputation for lowering its funds’ expenses as their assets grow. I feel confident the price tag on FTSE will eventually come down and in the meantime, I’m comfortable paying marginally more for Canada.
- Swapped Total Bond Index for Short Term Treasury fund – David Swensen convinced me to make this move in his book Unconventional Success. In it, he argues short-term U.S. Treasuries have superior risk-return characteristics and better diversification characteristics than corporate or foreign bonds. I couldn’t argue with his logic and since the total bond index holds approximately 50% of its assets in corporate bonds, decided to go ahead and make the switch.
- Added Emerging Markets Index – Previously, I held about 8% of my portfolio in emerging markets (through total international and international value) and thought that was a bit light considering emerging markets are likely to drive global economic growth over the next century. Thus, I decided to dedicate 10% of my portfolio to emerging markets which, in addition to the emerging market portions of my other international funds, pegs my total exposure at around 16%-17% of assets. It’s an aggressive move, but not an imprudent one, I think.
- Added FTSE All-World ex-US Small Cap Index – I finally got around to adding small-cap international exposure, which I had been craving for a long while. Again, this particular fund’s expense ratio is a bit on the high side (for Vanguard), but I fully expect it to come down as its assets grow and Vanguard passes on economies of scale to fund owners. At only 10% of assets, the absolute size of this holding is actually pretty small, so the additional expense won’t add up to much in dollar terms.
Would I Recommend This Portfolio To Others?
Honestly, I would not recommend this portfolio to most investors. It is extremely aggressive and requires a steadfast belief in the buy-and-hold philosophy to stay the course. It is tailored entirely to my own circumstances and thus probably isn’t appropriate for all but the most risk-tolerant and financially-stable young investors. Remember, the most important determinant in your own ideal asset allocation is going to be your risk tolerance followed closely by your time horizon and need to take risk. Just because this allocation works for me doesn’t mean it’s appropriate for anybody else. After determining your own ideal asset allocation, do your own research on a reputable financial website (such as Morningstar, using a free Morningstar account) to research specific fund options.
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Any thoughts on long-short mutual funds?
Right now, my Roth IRA is only in the Vanguard Mid-Cap Value Index Fund Investor Shares (VMVIX). I opened it 2 years ago maxing it out each year. I am an amateur investor and like you, I have a high tolerance for risky volatile allocations and will be divvying my account up among several of the Vanguard high risk funds. I figure since I am 30 years away from retirement, I can stomach it.
Any thoughts on adding a international bond fund such as RPIBX? I would like exposure to this asset class and currently I can’t get it through Vanguard.
As an asset class, the only advantage I can see international bonds really offering is currency exposure. But I already have currency exposure through my foreign stocks funds, so I don’t feel the need to own foreign bonds as well. I suppose they wouldn’t hurt, but I see no real need to own them.
Larry Swedroe mentions foreign short-term bonds in the context of combining them with domestic short-term treasuries purely for the imperfect correlation. Even though the standard deviation of short-term treasury instruments is already very, very low, he notes that pairing them with foreign instruments can lower the combined deviation even further.
Seems a pretty minor tweak, and it’s true that Vanguard doesn’t offer a solution there. But when you do this for a living and have access to DFA funds, I suppose you end up tweaking things at this level, eventually.
Oh, and if you were purely pursuing Swedroe’s goal you would want a currency-hedged fund. On the other hand if you aren’t happy with your overall currency exposure, this is as good a place as any to add some.
Enjoy your site and blogs and have read most of the same books you have! I also think your asset allocation above is pretty nice. While you don’t currently have any commodities exposure, Vanguard’s precious metal fund is a nice way to get some of that (VGPMX). You’d probably want to keep the exposure low. I like it because you get a broad basket of metals rather than simply gold and the dividend is pretty tasty. Perhaps future iterations of your portfolio will include that. Keep up the good blogging.