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Mix and Match

Jonathan Clements

MY PORTFOLIO HAS evolved over my 35 years as an investor, as I’ve learned more and as new funds have become available. A total stock market index fund? Sure, I’ll consolidate money in that. An emerging markets index fund? Yeah, a modest stake looks promising. How about a small-cap value index fund? The academic literature says that makes sense.

Today, I own a dozen different Vanguard Group mutual funds, each giving me exposure to a different part of the global financial markets. Some have had excellent performance. Some haven’t. The poor performers don’t much bother me. That’s the price you pay for portfolio insurance—otherwise known as diversification.

Instead, what nags at me is the complexity. As I approach age 60 and ponder working less, do I really want to keep tabs on all these funds and rebalance them periodically? Am I being overly clever? This has led me to consider five possible investment mixes, all involving Vanguard funds:

Targeting Retirement. Perhaps the simplest solution would be to opt for a single Vanguard target-date fund for my longer-term money, plus a money-market fund to hold money that I’ll spend over the next few years. This will become a more appealing option in February, when Vanguard will lower its target-date fund expenses to 0.08%, equal to 8¢ a year for every $100 invested. Vanguard Target Retirement 2030 Fund might be the right choice for me. In January 2030, I’ll turn age 67.

Almost my entire portfolio is in traditional and Roth retirement accounts, so the potential tax-inefficiency of a target fund, as it rebalances and shifts to bonds over time, isn’t an issue. Instead, my bigger concern is the relatively modest stock allocation of Vanguard’s target funds once they’ve passed their target retirement date. The stock allocation continues to fall, reaching just 30%. That’s way too low for my taste. I could compensate by buying, say, the 2040 or 2045 fund—but those, too, will eventually land at 30%.

One-Stop Shopping. Instead of one of Vanguard’s target-date funds, I’ve toyed with buying one of its LifeStrategy funds, plus—once again—a money market fund to cover upcoming spending. Vanguard’s four LifeStrategy funds don’t change their stock-bond mix over time. Instead, each of the four funds has a fixed asset allocation, ranging from 20% to 80% in stocks. For instance, Vanguard LifeStrategy Moderate Growth Fund aims to keep 60% in stocks at all times.

Like Vanguard’s target funds, the LifeStrategy funds hold a diverse collection of Vanguard index funds. One downside: Unlike the target funds, the LifeStrategy funds aren’t slated for an expense cut, which means I’d pay a tad more—0.11% to 0.14% a year, depending on which of the four I chose.

The Classic. If I bought a Vanguard Target Retirement or LifeStrategy fund, I’d be getting something akin to the classic three index-fund portfolio—a total U.S. stock market fund, a total U.S. bond market fund and a total international stock fund—with some foreign bonds and maybe some inflation-indexed bonds also thrown in.

But there’s a case to be made for buying the three funds directly, rather than as a package. The overall annual expenses would be a tad lower. I could also hold stocks and avoid bonds in my taxable account, which should be more tax-efficient. In addition, I could limit my selling to bonds if I needed to generate cash during a stock market decline. By contrast, if I owned a target or LifeStrategy fund, selling during a market decline would mean selling a little of everything, including stocks—not something I’d want to do. Still, I could probably sidestep that risk by keeping perhaps five years of spending money in a money-market fund or a short-term bond fund.

Three to Two. Instead of the classic three-fund portfolio, I could make things even simpler by going for two total market funds—Vanguard’s Total World Stock ETF and its total U.S. bond market fund—plus a cash account for upcoming spending needs.

I’d argue that Vanguard Total World represents the ultimate in stock indexing: You get every stock in the world of any significance bought according to its market value. To me, it’s the quintessential buy-hold-and-forget stock market investment.

Indeed, I’m thinking of purchasing the fund in my Roth accounts, which I hope to leave untouched and instead bequeath to my kids. Because that’s my goal, I can take plenty of risk and owning 100% stocks makes sense. I’d also consider buying Vanguard Total World Stock in my regular taxable account—if I were starting from scratch today. But instead, I already own a stock index fund in that account with hefty unrealized capital gains, and it doesn’t make sense to take that tax hit to swap over to Vanguard Total World Stock.

Going in Style. Today, I use index funds to overweight U.S. and foreign value stocks and small-company shares, as well as emerging markets. Meanwhile, I have my bond holdings split between a short-term government bond fund and a short-term inflation-indexed bond fund.

I’m not quite ready to abandon these portfolio tilts. But I’m toying with housing them within my traditional IRA, while devoting my various Roth accounts entirely to Vanguard Total World Stock. Thereafter, as I ease into retirement, I may gradually abandon these tilts. Where will I move the money? I’m not 100% sure.

But I’m thinking of perhaps splitting my traditional IRA, putting longer-term money in Vanguard LifeStrategy Growth, with its 80% stock exposure, and money earmarked for spending in the years ahead in a short-term government bond fund. But whatever funds I settle on, one overriding principle will guide my thinking: As I age, I want my financial life to be simpler.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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