Asset Allocation Questions

I am now making sure that I have a good asset allocation. I have a plan of the following based on some web tools...

Large Cap 30% Mid Cap 28% Small Cap 22% Foreign 15% Bonds 2% Cash 3%

I am 28 years old. Married. Kids in the next 2 years. Own our own home.

a) What do you think of the breakdown? Do you need more data? To give an opinion?

b) How do I break down a total stock market fund into the small, large, mid categories? What are the %s of each?

Thanks,

Matt

Reply to
Matthew Johnson
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Re bond percent: You do mean investment grade bonds, don't you? Can you explain why the % you have is so low (to me)? I think stocks are somewhat overvalued, and investors are still skittish, so I anticipate a somewhat flat stock market for the next several years. A bond ladder may yield more than stocks with their reinvested dividends of only 2-3% or so. I should think you'd want 5 to 15% in IG bonds.

Re mutual fund market cap breakdown: Type in the mutual fund symbol in the window at the top of

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, then click on "Portfolio" on the left. At the top will be the market cap breakdown of the fund.

Reply to
Elle

Do many people adjust their allocation based on the outlook? If so, isn't that trying to time the market?

Since this is in a 401k, I don't have the option to do a bond ladder.

I will check it out. Thanks.

Reply to
Matthew Johnson

I guess I'd ask, do you have faith in the web tool - do you know what it's basing the recommendations on? There's no right or wrong really, just different opinions on what mixes are likely to provide acceptable returns within the ranges you'd like to see. If this came through "Financial Engines" you could read through their site to see how it suggests allocations for you, there's a lot of info there, or used to be last time I looked at it.

FWIW, that's a much heavier weighting towards smaller stocks than the broad market. So this would make sense if you believe that smaller-company stocks are likely to do better than large-company stocks (or the tool thinks that, and you believe in the tool's methodology). That's the basic point - once you deviate from the "market portfolio" (that total-market fund) for your US stocks it should be for a reason, otherwise, the default decision is to just buy the total market fund for that part of your portfolio.

A 15% allocation to foreign stocks is in what I'd call a "common" range

- neither aggressive in choosing foreign stocks, nor neglecting them. Some people go a lot higher (esp, these days, if they think the US dollar is going to fall) and some people "just don't like them". Over the very long term their returns have been fairly similar to US stocks but they have helped smooth out returns along the way.

There's no weighting towards value stocks, which some people, like me, believe are likely to provide slightly higher long-term returns. OK if you don't believe that of course, but I see better arguments for leaning towards value stocks than small-company stocks. There's a ton of discussion out there on this, the "value vs. growth" issue.

The low allocation to bonds & cash suggests you typed in some aggressive numbers for riskiness. And the "2%" number suggests what to me is a false precision in whatever tool spat out these numbers. You usually need to make larger changes than that for it to register. Not the end of the world but if this is going to be transferred out to an IRA someday you might not like having, you know, a $216.82 bond fund position to deal with - especially if there are charges for liquidating.

In your other post you mentioned that this is a 401k...the specific funds available in your plan can influence your allocations. If for example the foreign fund is lousy you might not include that, especially if you can do so through an IRA (if you also have an IRA).

Your total-stock fund probably tracks one of the indices below, and the data won't be too different from each - though definitions of small/mid/large vary from one index publisher to the next:

Russell 3000

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link on the right, "competing indexes comparison," pulls up nice one-pager that should give you a good idea of the division into small-mid-large, as measured by different indices - you'll see there's overlap among them.

Wilshire 5000

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site isn't quite as user-friendly as Russell's in its presentation of data, but in theory the index is a little more inclusive than the Russell 3000. Not noticeably so, though.

-Tad

Reply to
Tad Borek

"Matthew Johnson" wrote

I'd say yes and no.

My point above was more that I feel the bond allocation that many tools give is higher than the one you propose in anticipation of some flat markets at some point. Now in particular seems to me to promise such a market.

Regardless, I didn't know that the allocation plan you posted was strictly for a 401(k) and so a bond ladder within it is out of the question.

I will assume you have rejected for now using a Roth IRA for some of your retirement savings. If not, you might want to ask about whether putting all you can into a 401(k) is optimal plannng.

Reply to
Elle

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