Asset allocation?

**meaghanchan** · 10-28-2007, 05:25 AM

These funds have had great return in the past, but are very expensive. Past returns tend to be a very poor predictor of future returns. Do you have any funds available to you with a lower expense ratio?

Have you come up with a total allocation plan (over all accounts you may have- IRAs, 401k, taxable accounts)? It's important to consider all accounts that you intend for retirement (leave out house funds, emergency funds, car funds, etc) in your plan.

I would do that first- decide how much you want to have in each asset class (stocks/bonds, but also large-cap/small-cap and domestic/international). Once you have that figured out, you can then decide which funds to use to best meet those targets.

**scfr** · 10-28-2007, 06:16 AM

The high net expenses were the first thing that popped out at me. Are these the only funds available?

**Broken Arrow** · 10-28-2007, 07:03 AM

Now see, this is exactly why I don't like my brokerage. While there are other funds to pick from, these expensive ratios are pretty much the same across the board. Until I move on from my current job, this is pretty much what I have to work with.

As for performance, yeah, although I do realize that, it's kind of hard for me to tell which is undervalued and which is just plain lousy. Morningstar is pretty much the only comparative indicator I've got, and that's why I've included them. Or perhaps I'm going about it all wrong? Any other way to tell other than to read between the lines on prospectuses?

**kv968** · 10-28-2007, 08:53 AM

Like everyone else said, the expense ratios are high. Worse than that though is I noticed while looking up the ticker symbols, all but one (RERBX) also has a front-end load. What you want to find out is do the funds wave that load since you're going through your 401k? If not, then you're unfortunately really in a world of hurt.

Regardless, out of the funds you posted, the only one I would consider investing in is the Europacific (RERBX). And not just because it doesn't have a load but because it's a really good fund and the expense ratio isn't that far off of what you would pay had you gotten it on your own. That's not saying you should totally decide what to invest in just by the expense ratios, but you should see if you can do something better.

Does your employer match any of your contributions? If not, I'd say fully fund a Roth IRA first and if you have any money left over, then invest in the 401k. You'll have to decide an asset allocation you can live with but maybe you can use an IRA for all your domestic and bond funds (using decent, lower priced funds) and, if there's money left over, use RERBX in your 401k for your int'l exposure. It's not a fix-all, but something like that might work for you.

**humandraydel** · 10-28-2007, 11:42 AM

Are these the ONLY funds you have? Just seems odd that they would offer ONLY a large cap value, a small cap value, and mid cap growth. What about large cap growth, small cap growth, or mid cap value? Anyway, with these funds I would use this allocation:

35% large cap value
10% mid cap growth
15% small cap value
30% international
10% bond fund

Why? Mainly just because this is an allocation that I prefer to use and those are your available funds.

**scfr** · 10-28-2007, 01:31 PM

BA - You inspired me to blog about something I've been wanting to blog about for awhile:
Asset Allocation / The Smartest Investment Book You'll Ever Read: Scfr's Personal Finance Blog

1. You need to decide what is the right stock/bond mix for you (see my blog for one way to do that).
2. You need to decide what percentage of your stocks you want to be international. 10% used to be the standard recommendation, but nowadays you see 20% recommended routinely and sometimes even 30%.
3. If you want your portfolio to be "market neutral" you'll want about 10% small cap, about 20% mid cap, and about 70% large cap. You'll also want your stocks spread between value and growth.
3. I'm gonna assume your employer offers a match, so you will need to (unfortunately) stick with the funds offered by your employer. If there are other funds available through your employer, you may want to let us know what they are and why you didn't choose them.

**Broken Arrow** · 10-28-2007, 03:51 PM

Originally posted by kv968 View Post

Like everyone else said, the expense ratios are high. Worse than that though is I noticed while looking up the ticker symbols, all but one (RERBX) also has a front-end load.

Yes, you bring up an extremely important point, and after checking the prospectuses, all of them are class A (except EuroPacific, which is R2) with a maximum load of 5.75%.

Well, except for one with 5.5%, but it's not much comfort. Beyond that, the prospectuses have been extremely unhelpful in the details department. It's just copy and paste for the most part. If it wasn't for the employer match, I'd run so fast they wouldn't even know I was there.

Does your employer match any of your contributions? If not, I'd say fully fund a Roth IRA first and if you have any money left over, then invest in the 401k.

Yes. In fact, my employer has NO MATCH LIMIT!

Honestly, this is the only reason why I even bother with my 401k. Otherwise, I wouldn't even have thought twice before taking all of my money and rolling it into a brokerage of my choice with IRAs.

Actually, I still plan on doing that when I quit or get fired from this job.

You'll have to decide an asset allocation you can live with but maybe you can use an IRA for all your domestic and bond funds (using decent, lower priced funds) and, if there's money left over, use RERBX in your 401k for your int'l exposure. It's not a fix-all, but something like that might work for you.

You know, this is a very interesting suggestion! Unfortunately, I'd be missing out on the unlimited employer matching though. So, for now, that's a no-go.

Originally posted by humandraydel View Post

Are these the ONLY funds you have?

No of course not.

Listing them all would be... well, quite a long list. Rather, these are just the "best" funds that I can find and am considering.

As for value, blend, vs. growth... you know what? Maybe I'm looking at this all wrong, but personally, I don't think they're as big of a deal as people make it out to be. I mean, they're only basic indicators to make sure one doesn't overlap too much. Personally, I care more about whether or not the fund is being managed properly and performance is roughly where it needs to be.

That's also why I've included their benchmarks, so that people can see that they're based on different indices and there shouldn't be too much of an overlap. I hope. I have reservations about the two value caps on Russell 1000 and Russell 2000, but in my current brokeage, I don't exactly have the greatest selection to begin with.

Originally posted by scfr View Post

BA - You inspired me to blog about something I've been wanting to blog about for awhile:
Asset Allocation / The Smartest Investment Book You'll Ever Read: Scfr's Personal Finance Blog

1. You need to decide what is the right stock/bond mix for you (see my blog for one way to do that).
2. You need to decide what percentage of your stocks you want to be international. 10% used to be the standard recommendation, but nowadays you see 20% recommended routinely and sometimes even 30%.
3. If you want your portfolio to be "market neutral" you'll want about 10% small cap, about 20% mid cap, and about 70% large cap. You'll also want your stocks spread between value and growth.
3. I'm gonna assume your employer offers a match, so you will need to (unfortunately) stick with the funds offered by your employer. If there are other funds available through your employer, you may want to let us know what they are and why you didn't choose them.

Thanks scfr. Those are very good advice, and I'll be sure to check out your blog entry. I'll respond to the content there, if any.

In case anyone's feeling froggy, here's prospectus for most of the funds.

**kv968** · 10-30-2007, 02:01 PM

Originally posted by Broken Arrow View Post

In fact, my employer has NO MATCH LIMIT!

Honestly, this is the only reason why I even bother with my 401k. Otherwise, I wouldn't even have thought twice before taking all of my money and rolling it into a brokerage of my choice with IRAs.

Well then that's a different story. The loads are still bad and the expense ratios aren't the best but if you've got an unlimited match, you can work with that. By the way, what is the match if I may ask?

Originally posted by Broken Arrow View Post

As for value, blend, vs. growth... you know what? Maybe I'm looking at this all wrong, but personally, I don't think they're as big of a deal as people make it out to be. I mean, they're only basic indicators to make sure one doesn't overlap too much. Personally, I care more about whether or not the fund is being managed properly and performance is roughly where it needs to be.

Value/blend/growth are basically just to make sure you don't have overlap but it's also crucial to make sure you know which category the funds you're comparing belong to. For example, as of 9/30/07 iShares of the Russell 1000 Growth Index are up 12.5% whereas iShares of the Russell 1000 Value Index are up only 5.9%. If you were to compare a mutual fund that was primarily geared towards a value tilt to a growth fund you may think the fund was lacking when in actuality it might not be. I personally think it's a little more important to pay attention to market cap first, but you have to factor in style also in order to get a clearer picture.

**Broken Arrow** · 10-30-2007, 02:37 PM

Originally posted by kv968 View Post

Well then that's a different story. The loads are still bad and the expense ratios aren't the best but if you've got an unlimited match, you can work with that. By the way, what is the match if I may ask?

$0.28 to the dollar. Not great but I'll still take it.

**kv968** · 10-30-2007, 03:21 PM

Originally posted by Broken Arrow View Post

$0.28 to the dollar. Not great but I'll still take it.

Hey, even if you knock off the load, you're still getting 22-23% instant return

**Broken Arrow** · 10-30-2007, 06:47 PM

Originally posted by kv968 View Post

Hey, even if you knock off the load, you're still getting 22-23% instant return

Indeed! Now if I can just get my employer to knock off the brokerage for a better one....

**jIM_Ohio** · 10-31-2007, 05:53 AM

I did not see where you are paying the load. American Funds, for example, are often offered in 401ks without load and you get the A shares to boot (so you get the lower expenses without paying the load). My wife has two American funds as part of her 401k, and pays no load on either. She has other funds which suggested a load when looking at financial websites, but no load is paid from her 401k deposits.

Second point, fund expenses all above 1% is "high", but please remember the stated returns already have that expense factored in (so returns are higher before expenses). The funds you have are solid.

Back to the problem (asset allocation). You mention 30 year time horizon. How often would you rebalance?

My asset allocation is

44% large cap domestic
15% mid cap domestic
15% small cap domestic
15% international large cap
10% international small cap/ emerging markets
1% bond (this position grows 1% every 6 months), I am also 20 years away from needing the money, not 30 years like you.

I expect around 9% returns from my allocation. I rebalance every 6 months, which includes selling 1% off top of each fund to increase my bond position as market trends upwards.

In your case I would put at least 25% in international. I would also put at least 25% in large caps. I lean towards more large caps because that is where stability comes in with 100% equity type portfolios.

My wife owns the American EuroPacific fund in her 401k. I consider it a core international holding.

Do you have other holdings in a Roth IRA or other account?

**Broken Arrow** · 10-31-2007, 08:52 AM

Thanks for chiming in, Jim.

To answer some of your questions anyway, I plan on rebalancing it semi-annually... such as yourself. I currently have no other IRA retirement accounts. I am very tempted to get a Roth, but the unlimited match makes it hard to say no to.

Finally, the issue with the load still perplexes me. I had a hard time finding any information on it, but the prospectus does state a maximum load of 5.75%... but where do I find the information for what the exact amount is in practice? I've also shot off an email to my brokerage asking about it. Hopefully, they'll answer back shortly.

**jIM_Ohio** · 10-31-2007, 09:06 AM

Originally posted by Broken Arrow View Post

Thanks for chiming in, Jim.

To answer some of your questions anyway, I plan on rebalancing it semi-annually... such as yourself. I currently have no other IRA retirement accounts. I am very tempted to get a Roth, but the unlimited match makes it hard to say no to.

It sounds like the 401k investments are your only choices then (because I agree maximizing the match is priority).

Have you done some calculators to suggest what your stocks/bonds ratio is? 70-30, 80-20, 100-0 type allocation?

step 1 to me is deciding on the stock-bond allocation (at a high level). Then explain why you want this.

If you are thinking 100-0, I would make every attempt to get the 100% equity divided into 4-6 equity mutual funds. Large Cap domestic, mid cap domestic, small cap domestic, international large cap, international small cap and maybe a 6th aggressive fund (like company stock) or something silmilar.

Rate each choice with how aggressive it is

conservative
Large Cap Domestic
Mid Cap domestic
Large cap international
small cap domestic
small cap international
emerging markets
company stock
aggressive

Then allocate more to top than you do to bottom 2:1 to 4:1 type ratios. In my example I am 3:1 large cap (45% large cap to 15% for any other selection-or lower). My logic is that if I have 100k invested, 45k is in large caps, typical 9% return is 4k gain. 15k in a more aggressive investment with a 20% return is a 3k gain... meaning I can make the same dollar amount with a lower principal/higher return on the more aggressive investments.

Rebalancing every 6 months will help capture these hot streaks. You will barely notice slowdowns in the aggressive sectors because the percentages are 1/3 the core holdings.

If you are more conservative than 100% equity, that changes things, IMO. Because the large caps will be conservative, and the bond position more conservative, the ratio might be closer to 2:1 or 3:2 between conservative equity positions and aggressive equity positions.

20% bond
20% large cap (40% conservative)
15% small cap, 15% mid cap, 15% international, 15% company stock for example. the 40% conservative position vs 15% aggressive position is still there, but the conservative position is divided between the bonds and stocks.

You could slice and dice this any way you want. Choose something, then learn as you go. I knew little of asset allocation as I was starting, but 10 years later it is what I concetrate on.

Asset allocation?