ETF vs Mutual Funds and Portfolio Allocation

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jasonlaw
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ETF vs Mutual Funds and Portfolio Allocation

Postby jasonlaw » Wed Apr 25, 2007 9:23 am

My wife and I each have a Roth IRA and Tradition IRA (Rollovers from 401Ks) with Vanguard. We are both 32 years old and have about $120K invested in these accounts. We are continuing to fund the Roth IRAs with about $15K per year. I am right now invested in Vanguard Index Mutual Funds, but am looking into using some ETFs especially in the tradition IRA accounts. Would ETFs be better than mutual funds?

I am also trying to decide which funds and asset allocation to use. I want to be aggressive with the amount of time I have until retirement and I like to keep expenses very low. Currently, we have a target asset allocation of 45% Large Cap (VFINX), 15% Mid Cap(VIMSX), 15% Sm Cap(NAESX), and 25% International(VGTSX). I am considered adding possibly an emerging markets fund as part of my international.

Any advice would be welcomed. Thank you.

Jason

Walt
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Postby Walt » Wed Apr 25, 2007 9:38 am

Sounds like you are doing some great things you are spreading your investments out and maintaining diversification. Remember cost is only an issue in the absence of value, low cost is great as long as you are buying quality. ETF can be a great addition to your portfolio, just make sure that the underlining equity’s fit your goals. It is tempting to go aggressive, and chase those big returns. My advice is to stay in balance, I know it does not sound exciting but you might consider adding a bond fund for some downside protection. I feel that no less then 10% in bonds and no more then 15% in aggressive with the bulk in quality growth funds or equity’s would be a good fit.

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tinyhands
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Postby tinyhands » Wed Apr 25, 2007 10:10 am

I would encourage you NOT to contribute $15k per year to the Roth as that will exceed the maximum contribution limit and you'll be taxed 6% on the excess.

With a 30 year investment timeline, I prefer a heavier weighting in small-caps over large and pure growth funds over income or growth-income blend funds. I'm not familiar with all of Vanguard's funds, so don't take this as gospel, but at a glance I prefer VISGX, VMGIX, and VGEQX over the 3 you mentioned, in order of decreasing weightings. If you're not limited to Vanguard funds, you obviously have many more options. There are a lot more choices in international & emerging markets.

Regarding ETFs versus mutual funds, I prefer them. 3 alternatives (although there are many others) to the above funds might be VBK, VOT, and VUG.

I respectfully disagree with Walt's comment about "no less than 10% bonds" (I would argue for no MORE than 10%, at your age) and "no more than 15% aggressive" (also due to your age).

Walt
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Postby Walt » Wed Apr 25, 2007 10:26 am

I do fall into a more conservative category, the way I look at is if you had the 120K as cash in your hand, and you were getting ready to invest it would you allocate it in the same way? (Or would you really consider the risk) If you have money out side these accounts that is in some more conservative places then take that into consideration when looking at you entire picture. And Tinyhands is 100% correct do not over contribute to your IRA accounts max of 4K per person put the extra money into a reg account

jasonlaw
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Clarification

Postby jasonlaw » Wed Apr 25, 2007 12:26 pm

We will not be investing more than the maximum into IRAs. We will invest the maximum and then probably another $5K through my 401k. Thanks for the advice.
Jason

dolver
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Postby dolver » Wed May 02, 2007 9:35 pm

I don't have much to back this up, but I get the general feeling that I am only going to invest in index funds for the equity portion of my investments. I feel if I do:

Vanguard Total Stock Market
Vanguard Total International Stock Market
S&P 500 index (through my 401(k))

I should be all set on that front. I am just starting out, and I plan to read some more stuff from John Bogle, because I feel as though I agree with a lot of his thinking, but those offerings are dang diversified AND don't have the potential fees, costs, risks associated with actively managed funds, etfs, common stocks, etc.

Eventually, once I have established my base, I will want to add other types of investments: Real Estate, Bonds, once I get older, etc. But in terms of playing the stock market, I think those will do me. Anyone think I'm crazy? Speak up and save my naive self. Thanks folks.


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