Slow down a bit. Spend the next month reading the boogleheads forum daily. There is some very good investment advise discussed on a wide variety of investments, strategies, importance of risk, etc. The references provided are top notch as well.

Some people will say that ETFs are better than normal index funds because of the expense ratio, but the admiral versions have the same expense ratio as the ETFs and what if you are personally more comfortable with funds than trading ETFs?

Take the Vanguard 500 index fund (VFINX) and its ETF (VOO). The expense ratio of VFINX is 0.18% and for VOO, it is 0.06%. On $10,000, which is the amount you need for the Admiral version of the index fund (expense ratio 0.07%), the difference is only 0.12%, which would be $12 per year. If you’re looking at only $3,000 in the funds, it’s a difference of $3.60 per year. Personally, I prefer the index funds over ETFs and for that cost savings, the extra reducing of my comfort level isn’t worth it.

I also don’t agree with the push for target funds. Like you, I prefer to have more control over my money. But they were great when I was just starting out and didn’t have the funds to share around with Vanguard’s $3,000 minimums.

Re-balancing only has tax implications in a taxable account. In your Roth IRA and your Individual 401(k), there are NO tax implications. That’s why they always say to re-balance in your IRAs and 401(k)s before in a taxable account.

If you think your allocation is goofy, you should have seen mine for the first 6 months of my 401(k)! I had some of pretty much every fund the 401(k) offered and most of them were actively managed. It was more than a little ridiculous. To top it off, I was only putting $283.33 per month into it and I had the following crazy allocation after 6 months:

Total balance: ~$2,400
Employer stock: $893
PIMCO Total Return Inst: $308 (active)
Artio Inter Equity Fund A: $307 (expense ratio: 1.27%)
Am Beacon SmCap Val Plan: $88 (expense ratio: 1.16%)
Vanguard® 500 Index Fund Inv: $73
Vanguard® Windsor II Fund Inv: $72 (active)
Retirement Savings Trust: $228
Vanguard Target Retirement 2050: $312
Vanguard Strategic Equity Fund: $88 (active)

What I told myself was that at least I was contributing to the plan…

I finally have it in a much better place, with only four funds (Vanguard Total International Index Fund, Vanguard 500 Index Fund, Vanguard Total Bond Market Index Fund, a small amount in the Retirement Savings Trust, and the matching in my employer stock which is a smaller portion of my portfolio each month). The best part? I know why I picked each one and what purpose it serves.

Good luck with your re-balancing J.D. and at least you know more about why you picked your goofy investments than I did about why I picked the above ones! The investment policy statement should really help you to understand why you made decisions in the future.

I actually think the greater risk of managing a “conservative bucket” and a “risky bucket” is allowing them to operate too independently. You may have the allocation you want in each, but if you fail to realize that the size of the buckets have changed relative to each other, then you’ve changed your allocation overall.

I.E. if you decide your ideal allocation is:

40% conservative with 50% in TIPs and 50% in overall bond market

60% risky with 33% in total stock market, 33% in international stock, and 33% in emerging markets

why not just simplify it and say your asset allocation is:
20% TIPS
20% overall bond market
20% total stock
20% international stock
20% emerging markets

I think everyone struggles with this in one way or another. Dieting, saving, spending time with the kids- we all know what we should do, but its just flat out hard sometimes!

I am glad to see that you are looking at this re-balancing idea as a process that might take several years. I must admit I was a little nervous when I was reading your article and you starting talking about selling to rebalance (DON’T DO THAT!).

Buying to rebalance is a much smarter plan (tax wise). And taking time to rebalance is never a bad thing.

So, if I think energy stocks will perform well, then it’s okay to have 5% in them — but not 18%. And if I’m trying to be conservative, it’s okay to invest in bonds. I know you might not have done so, but it’s still a valid choice (a good choice even).

Anyhow — I’m not sure how things will shake out here. I think Mr. Piper is right: I need to write an investment policy statement. I think GRS reader Dylan had me draft one a couple of years ago, but I don’t know what I did with it. I’ll try to track it down.

Will’s point is that if I have two separate buckets, then each bucket must operate independently of the other one. So, if one bucket is my conservative investments, it should still have some small exposure to stocks because it will increase the overall returns while decreasing volatility. Similarly, the stock bucket should have some bond exposure for the same reasons.

The net effect is that my overall portfolio — independent of “buckets” — will still be balanced, but each individual bucket will be balanced, too. Right now, that’s not the case. One bucket is all bonds, and the other is all stocks.

Also, I do agree that the market has climbed a lot over the past couple of years and is likely to shift directions. I think that’s probably a year away, but that’s just a guess, right? I think that gives me time to make some slow, considered decisions. But it’s also a reason I want to reduce exposure to more volatile investments, such as my energy fund and my Latin American fund. I need to make my investments more general and less specific.

I’m trying to develop this new framework as a way to look at personal finances, right? And the three pieces are earning, spending, and saving/investing, right? In my original article, I pointed out that it’s possible for a person to excel at one and suck at the others. Well, I’m pretty darn good at earning, I do okay at spending, but I feel like my skills at saving/investing leave a lot to be desired. All I have right now is theory, and I haven’t figured out how to put that theory into practice. I’m working on it.

That’s a long way to say thanks, everyone, for the feedback. I appreciate it. I know I’ve got some goofy stuff going on with my investments. The time to have set things right was 2009 when I was shifting everything around. Now, it’s going to be tougher. Yes, I could sell everything and start from scratch, but the tax implications there are scary. Instead, I’m going to make gradual changes, which means my ideal allocation (whatever that turns out to be) probably won’t be reached for several years.

I’m okay with that. It took me a long time to get out of debt, too. But eventually I did it, and now I have some solid skills. It’ll take me a long time to determine my investing strategy, but once I have it, I’ll be better off for it.

This approach may be a falacy because it can backfire on limiting your future returns.

JD, there is nothing wrong with FSENX, good returns in this market. FNARX is equally as good, or better. Way too much emphasis on bonds in your current allocation, in my opinion. I have never owned a bond and have been retired from a relatively low paying job since 1982.

Stock Index – Vanguard 500 Index Portfolio 77.5%
Bond Index – Vanguard Long-Term Bond Etf 22.5%

On target-date funds: you can pick based on your estimated retirement age, or you can just pick the one that currently has the asset allocation you want. Then if it gets more conservative too slowly for you or too quickly for you, you can switch to a different one. If it’s within a retirement account, there won’t be any fees or tax ramifications for doing that.

On your decision to have your age in bonds: one good reason to do this is that by sticking to this, your portfolio will automatically get more conservative as you age. But as sandi_k point out, there are other ways to do that (I hadn’t heard 120-minus your age for stocks–last I heard was 110 minus your age, but just pick something you like). And it doesn’t have to change by one year each year. Maybe you need to get conservative faster because you’re retiring young. Or maybe not, because you’re going to need your funds just as long as someone who’s retiring old.

Lastly, just a reminder that you don’t have to stick with whatever you decide forever (though you might want to institute a 30-day waiting period rule for any changes).

Man, JD, between your book and the amazing articles you’ve posted in the past year seems like you have all the information you need to apply to your own portfolio.

Though having a Fidelity target date fund is better than doing nothing!

Great post (as always). When you mentioned the idea about using “buckets,” it really stood out to me–I tend to build them as well (“I need money for _____ in about 5 years”).

I’m sure there are as many ways to “plan” your savings and investing accounts as there are people in the world, but my strategy involves these very same “buckets:”

http://www.younginvesting.com/2011/04/how-money-can-buy-you-happiness-part-1-preparing-your-buckets/

http://www.getrichslowly.org/blog/2009/06/02/the-lazy-way-to-investment-success/