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The Asset Allocation Training Wheels Are Coming Off

November 2nd, 2014 at 07:11 am

I have made the executive decision to no longer use a Target Retirement fund to manage my retirement asset allocation. That's right, the training wheels are finally coming off. It's time to learn to balance my investments on my own!

I have decided to make this change for a few reasons. The first is that the Vanguard Target Retirement funds charge fees based on the investor share class, and due to my portfolio size, I will save hundreds of dollars per year by moving over to the equivalent admiral share class. That's a good enough reason as any to make the switch, even if I wanted to keep the Target Retirement fund's pre-determined asset allocation. For a few hundred extra bucks per year, I am willing to deal with the so-called "inconvenience" of having to manually rebalance my investments.

Another reason to leave the Target Retirement fund is that I want the flexibility to change my asset allocation. Right now, the 2050 fund allocates 10% to bonds. I do hold bonds, but I'd rather hold them in my taxable accounts, and save the tax-advantaged space for equities with higher growth potential.

As an aside, I've heard the argument for holding less tax-efficient funds such as bonds and dividend-yielding stocks in the tax-advantaged space. My gut feeling, however, is that protecting equity growth and capital gains (especially in the Roth space, which not only grows but is also distributed tax-free) beats out protecting bond interest and dividends (which are designed to be lower), although I am totally willing to be convinced otherwise using math. Right now, though, I'm also using bond holdings specifically as a short- and intermediate-term savings vehicle, so I want them to be easily accessible in a non-retirement account.

I also realized that I am likely going to retire sooner than 2050 and may need to deviate from their glide path anyway, so I might as well cut the cord now.

As for how I'm handling the asset allocation... I have decided to hold a 70/30 split of Vanguard's Total Stock Market Index Fund and their Total International Stock Market Index Fund. This mirrors the Target Retirement 2050's exact ratio of these same two funds (at 63% and 27%) but without the bonds. In reality, this is slightly complicated by the fact that my active 401(k) is held in a separate account with different fund choices, but I'll get as close to this breakdown as I can. The larger goal is to force myself to start actively managing and rebalancing my asset allocation.

1 Responses to “The Asset Allocation Training Wheels Are Coming Off”

  1. Carol Says:

    Congratulations on your "graduation." Depending on what parameters you set for rebalancing, you ought not to have to worry about it too much.

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