n00b investor - help me balance my portfolio?

[midjd]

I have been slowly delving into the investment world for a few months now. My selection process has been haphazard at best and I think there is quite a bit of overlap. I'd like to streamline things while making sure I have the best asset allocation for my age (27).

Here are my holdings:

1) Roth IRA (Schwab)
SCHF (International) - 15 shares
SCHG (Large cap) - 80 shares
SWERX (Target 2040) - 449 shares

2) Non-retirement savings (Vanguard)
VFIAX (S&P 500) - 82 shares
VTIAX (Total International Index) - 395 shares
VTSAX (Total Stock Index) - 358 shares
VDEQX (Diversified Equity) - 136 shares

I also have a 457 plan through work that (I think) is invested in the Target 2040 fund - about $3K in there. I put in 10% a month to that one, and another 10% goes into my after-tax retirement account, also invested in Target 2040 (balance around $5K).

I am happy with the way the target funds are performing, and I like the "set it and forget it" philosophy with my retirement - but at the same time I'd like to have a more active role in the non-retirement account.

Any thoughts/suggestions are greatly appreciated!

[2kids10horses]

For someone 27 years old, you're doing pretty good!

I didn't look up the value of those holdings... the number of shares doesn't mean much. It's the value of those shares that need to be diversified.

But, at 27, you have a long investment life ahead of you. It would pay for you to learn about investing. From your post, it looks like you have a basic idea, and none of the things you have are bad.

A couple of things you are you are missing are a mid-cap fund, and a small cap fund. These are smaller companies, and that's generally where the real growth is. You have a total market fund and a S&P500 fund... I dunno, those two seem to me to overlap too much. I'd go one or the other. The "other" money, I'd put in the ETF IWM, that the Russell 2000 index. That will give you the exposure to the smaller companies. It will be more volatile, but the long term returns are greater. And time is on your side.

Just as an aside, I personally don't care for the "Target" funds. They're designed for people who are clueless about investments. They don't want to learn how to do better, and just want someone to hold their hand. There is a built in fee for this service that hurts your return.

The very fact that you posted on this board shows you have an interest in managing your money. Most of the folks on this board are 'active' investors rather than 'passive' investors.

[Deleted]

I think Target funds are fine. Hopefully Phil will get on line and explain why he would have preferred to invest in them (they weren't around when he started out). Basically he believes they do a much better job of regularly re-balancing than the average investor.

The only issue I see with them is possible duplication. You really need to know what you already own in order to view your situation holistically to have proper asset allocation. DH bought into Target funds about 5 or 6 years ago when he was 45. Unfortunately he didn't give much thought to the fact that we already owned a sizable chunk of Large Cap stocks as well as investments in my 401k/457 in S&P 500. So we recently went through a rebalancing exercise which included us getting rid of the Target fund and buying into a bond fund last week. We're retiring in about 17 months and we need to start backing down a portion of our equities.

Also on your list of books to read is A Random Walk Down Wall Street. If you haven't read it, it should be one of the first books to read (and not too hard).

[phil5185]

I think Target funds are fine. Hopefully Phil will get on line and explain why he would have preferred to invest in them (they weren't around when he started out). Basically he believes they do a much better job of regularly re-balancing than the average investor.

That's right, I would use them if I were young. And I also agree with Kids&Horses, they are great for clueless investors (as well as accomplished investors) . The field of investing is dichotomous - the theory is very complex using detailed statistics, differential equations, 1000's of books - yet when you reduce the theory to practice it becomes deceptively simple - ie, buy index funds and leave them alone for 30 or 40 years.

Index funds normally 'beat' about 85% of the professional fund managers, that is because they must consistently earn 14% in a market populated with 11% stocks. (The 3% is to pay for the management and overhead.) The Targets are mostly a mix of index funds that are allocated for your age. A feature is that they are re-allocated in real time for you. Where if you did it yourself, it might take 6 months to recognize (& validate) poor performance plus anther couple months to get re-allocated - so you could be out-of-market a few months each yr.

Generally the Targets are on the conservative side - you can compensate by selecting a target that is farther out than 'real' - ie, if you will retire in 2040 you might use the 2050 target fund.

[midjd]

Thanks for the responses! I'm going to the library this weekend, I'll definitely be checking those books out. I had a sneaking suspicion I was way overloaded in the large-cap segment. I did some rebalancing this weekend, since I just finished fully funding the Roth and it seemed like a good opportunity.

So now (excluding the target funds, which I'm not going to mess with until I do some reading) I'm about 18% small cap, 25% international, 25% S&P 500, 12% mid cap, and 8% each in large cap and the Total Stock Market Index. Even though I know there's still some overlap, it makes me feel better to have things spread out a bit. Thanks again for the advice!

[2kids10horses]

That allocation looks pretty good!

Now, may I add in a kicker... Maybe allocate 10% (depending upon your risk tolerance - maybe 5%) as a lottery ticket! I don't mean waste it, but use it for something that might really turn into something.

Let me illustrate:

When I was still in college (back in the early 1970's), I was studying Business Administration, and Computer Science. I remember standing in line at the cafeterial, and reading the WSJ, required reading for one of my business classes. On the back page of the Wall Street Journal there was an article about Seymour Cray. He was the chief architect for Control Data, and he resigned from CDC to form his own company, "Because he was tired of working on small computers". Whoa! CDC made SuperComputers! And he was tired of working on small computers?!?

Well, he must be either crazy, or have some insight to the future. I had a little money, (or rather, my father had a little money that was my college fund) and I investigated, and I told my father to buy some Cray Research. We did, $10,000 worth. Back in those days, I got the 10Qs in the mail, and you could watch the money move from Accounts Payable as they bought stuff, to Inventory, and then on to Cost of Goods Sold as they sold the computer. Back in those days, each one was sold before they could make it. They used them for nuclear research, weather forecasting, and super secret military stuff. Anyway, over about 8 years, that $10K grew to over $300K. I sold a little along the way, until I cashed out. But, that one deal really paid off and appreciated far more than any mutual fund could have done.

So, it might be worth your while to take the occasional rider on a promising stock that might be your lottery ticket. (By the way, I missed Apple.)