IRA asset allocation in 2006 for a twenty-year-old
With my daughter Sarah starting an IRA this year, I got to thinking about the challenges inherent in doing asset allocation with limited funds. Most Mutual Funds have a $1,000 IRA minimum initial investment (some are even higher at $2,500). It’s virtually impossible to hit the ‘four corners of the style box’ in both domestic and international funds (+ Emerging Markets) with a $4,000 initial investment.
In addition to naming funds / classes, I’ll name the order of purchase:
Basic Strategy
Diversification - IRA accounts (not taxable) |
|||
(strategy
for 'entry level IRA' accounts for one in their 20's; no bonds nor cash) |
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50% |
Domestic
Stock Funds |
|
|
50% |
International
Stock Funds |
|
|
% |
Category |
Fund Name (ticker) |
Notes |
12.50% |
|
0.2%
expense ratio |
|
12.50% |
|
0.2%
expense ratio; |
|
12.50% |
|
0.25%
expense ratio; |
|
12.50% |
|
0.25%
expense ratio; |
|
10.00% |
Int'l
Large Cap Growth |
0.4%
expense ratio |
|
10.00% |
Int'l
Large Cap Value |
0.4%
expense ratio; |
|
10.00% |
Int'l
Small Cap Growth |
1.36%
expense ratio; |
|
10.00% |
Int'l
Small Cap Value |
1.66%
expense ratio; |
|
10.00% |
Int'l
Diversified Emerging Markets |
0.77%
expense ratio; |
|
100% |
|
|
|
I actually started out using the Mutual Fund picks as outlined by http://www.fundadvice.com/portfolio.html#schwabequity . My rationale was that the ETFs I favor in my portfolios may not be the most cost efficient at low purchase prices (i.e. $10 purchase cost on a $1,000 buy is a 1% ‘load’). As I ‘scrubbed’ those picks against Schwab’s recommendations, I found myself trading off lower expense ratios vs. different returns and ‘tighter definitions’ of the four corners of the style box (i.e. a true ‘value’ fund is preferable for that role over a ‘blend’ that trends towards value).
When I was done with that modified Mutual Fund list, I stepped back and compared it my preferred list of Exchange Traded Funds. I quickly came to the conclusion that the only Mutual Funds that were truly superior to the ETFs I had chosen were the two ‘small corners’ in the International area, LZSMX and TIVFX. These were corners I was having trouble filling with ETFs, and in my own portfolio, I’m substituting with ILF, EZA and IFN. Those latter picks aren’t really suitable for a ‘once a year re-balanced’ portfolio in my opinion.
The total 'weighted expense ratio' (expense ratio of each fund times the weight in portfolio, summed) is 0.57%.
Note that I used This article at fundadvice.com to assist me in choosing which asset classes to buy in what order. They advocate buying one per year (a nine year plan before diversification is complete). I can live with the additional 'churn' of fees in order to achieve the diversification I want sooner.
Send e-mail to: Todd <todd@thepeaches.com>