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July 18, 2008 |
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Question:
I currently have a Vanguard rollover IRA that's worth about $120,000. I expect that I will not need this money for eight years or more. I have taken $100,000 of this and allocated it according to your suggested Vanguard buy and hold strategy based upon a 60/40 equity/fixed ratio. I split the remaining $20,000 evenly between the Vanguard Strategic Equity Fund and the Vanguard Windsor II fund. I have always like these two managed funds. Do you think this little investment wrinkle of adding these two funds to your buy and hold suggestions is safe? Or are there any pitfalls to this strategy?
Answer:
I don't think it's a question of safety. You have properly diversified 5/6 of your portfolio and you are using the final 6th to overweight to a couple of things. Even if you overweighted to truly awful funds or asset classes, that would not tear down your whole IRA.
The real question is what benefit, if any, you are getting from this final 1/6 of the portfolio. If you accept the notion that 97 percent of your return can be accounted for from the asset classes you invest in (and if you DON'T accept that, you probably don't want to follow our buy-and-hold strategy), then you should ask what asset classes those two extra Vanguard funds are in.
Vanguard Strategic Equity, a mid-cap blend fund, is right smack in the middle of the style box. I would argue that it doesn't do anything at all for you in terms of asset diversification. The other is a large-cap value fund, and that gets you into the value camp a bit more, so there is some usefulness there.
If I wanted to start with 100k and use another 20k to skew the portfolio, I would look to small and value and international-small. I'd also look at a real estate fund. I would look beyond Vanguard to have more possibilities in those areas. You'll find some good ideas in the suggested portfolios on our Web site.
Bottom line: What you are doing is not very risky. But neither is it very useful. I don't see Strategic Equity as doing anything at all for you.
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