I am a little trepidatious about posting this since everyone has an opinion, so probably half will think I am doing something completely wrong, but here goes.

close to last 10 years been a federal employee. Other than a fling with what are called lifetime funds, my assest allocation (other than shifts of 5% here and there depending on what I read) has been:

25% G fund (government funds)
10% B fund (bond funds)
35% C (common stock fund)
10% S (small cap fund)
20% I (international fund)
This is for contributions. I need to rebalance the actual distribution, which I probably do around every 6 months.

This is inspired on the margarita (couch potato) fund of 33% common fund, 33% international, and 33% bond fund.

However looking at my returns over the last 10 years, I estimate it has been 1.3%, and year to date has been -4.5%. I have definitely NOT been experiencing the average 8% return, or anything close to it.

Is there something that I am missing/doing terribly wrong?
I realize that right now International is not doing great, but I feel in the long term I don't want to only be in the US (stocks-wise).
In case you want to know, I am in my mid-40's, 15+ years from retirement and somewhat averse to risk (I don't think I can stomach more exposure to stocks than I already have).

No comments? That bad?
OK here is a specific question. given that the whole Euro deal is probably going to unwind which I could imagine affecting international stock market for a few years, would you reduce international fund? Or is shifting back and forth what I should try to avoid?

I would avoid shifting back and forth. You can live with short term fluctuations. 1.3% over ten years is not too good. Good news is that no stock fund has really done that great over the same time period.

25% in government funds

Is this municipal bonds? Federal treasury bonds? Generally speaking, government bonds pay lower yields than their corporate counterparts. The upside being that the returns are tax free, but thats a non-issue in most retirement accounts.

1/4th of your portfolio in low yield treasury bonds would definitely hurt performance.

I'm roughly in the same boat as you. Although, I like more risk. Your allocation looks about right if you want to avoid a lot of risk, but my belief is stocks have been under performing the market for ~12 years now. Maybe the risk is not being more in stocks? Maybe diversify the stocks more. Instead of just small, large, and international, how about real estate, biotechnology, financial, etc. There's a lot of ETF's out there that do this. But what you have sounds like a 401k, which might not offer ETF's.
Also, I only re-balance when I need too. Such as 5 to 10% out of my original allocation.

Just one man's opinion.

Well this is via the government retirement fund, called TSP, so there are only those choices. But that is something to consider, if I did a Roth elsewhere to choose things that are more diversified.

The G fund is supposed to be "safe" in that is is supposed to be always positive, return greater than inflation, but doesn't promise more than that. It's close to "cash". However you can look up tsp, G fund, and F fund for a more detailed description.

It seems the few people I've talked to at work, seem to either put all their money into G fund (why, I didn't ask) or put 100% into stocks, the rationale since they have social security and the potential for a pension to higher weigh the risks in investments.

I check and my 401k has had about a 3% return in the last 8 years. Sad. I'll be watching this thread closely for good advice.

Also, if you dollar-cost-average into stocks funds, your risk is also somewhat less.

I hear a lot of different opinions as well. Some feel the market is rigged and avoid it all together. Others, just the opposite. The fact is, nobody really knows what the market will do. If everybody knew where the market was going, it would already be there. lol

Yeah. My 1.3 return could be a little off, done by estimating what I put in. There is one year I don't have that info, but it should be relatively close. Well, maybe these past 10 years will be an abberation and hopefully will return to more historic averages. But for some reason don't feel too optimistic. Too bad I was in grad school during the roaring 90's!

Your allocation should probably be more in stocks given your age. The fact is you have taken a risk by not being in stocks. The risk you took was that of underperformance and you have experienced that. But, if you could not sleep at night with more money in stocks then you shouldn't do it.

Your G fund invests in short term government securities that are not marketable. That means that you do not experience any market or interest rate risk but you accept low returns. You might consider the F fund as an alternative. But at this point I don't think it is a great time to switch into longer term bonds so I would wait.

I don't understand your comment about the euro coming unwound. We are a long way from that. At this point I think if Greece and Italy both left the euro it would be a good thing. Greece might do that but Italy is a long way from that route. The biggest problems in both Greece and Italy are tax collection. The biggest problem in Spain is the collapse of the real estate market.

But, even if the euro collapsed, why do you think that would be a bad thing for international stocks? International stocks are things like Philips, Seimens, Toyota, and Nestle. If the euro collapsed, why would that hurt the profits of any of these companies? Many European companies would actually prosper from a poor euro because their prices would be more attractive. Austerity and political pressure with keep their labor and other costs low.

I have a lot of European colleagues and friends. None of them are worried about a collapse. Most would be happy to kick out the weaker members. Their biggest complaint is that they are paying for tax evasion and welfare handouts in some of the weaker countries. I would not invest in the Greek government right now but I have no problem owning euros and would scoop up ECB bonds as fast as I could if they offered them. You have to remember that "Europe" has essentially no debt. The debt is in individual countries. It would be like if the US government were debt free and we were concerned that Arkansas, California, and New Jersey were broke. Would you then think the whole dollar thing was coming unwound?

I'd be curious what some of the European members of this forum think!

Check this out...http://www.bogleheads.org/wiki/Lazy_Portfolios

I use a version of Bernstein's "Coward" Portfolio. I have reduced the bond holds and increase international exposure so it doubled, half emerging (VEMAX) and the other half of the international allocation is in Vanguard's big international fund. I also have some exposure to longer duration bonds, as riding the pine is not that much fun and I personally don't think interest rate risk is as high as many tout.

Looking at the couch potato funds, does that mean I should shift what is in G fund to the F fund? But I also hear now is not a good time to invest in bond funds...

I wouldn't do it now, at least in one lump. You could consider dollar cost averaging from the G to the F.

There are a few issues here. First off, the F fund pays a higher return partly because it invests in longer term bonds and partly because it invests in somewhat riskier bonds. Longer term bonds will decline in price when interest rates rise, which they eventually will. But that probably will not happen for at least 2-4 years. Until then you are missing an opportunity and that is actually costing you money.

If you are truly risk adverse and opposed to market timing then you might not be comfortable with switching and deciding when and how to switch because that is, by definition, timing. That decision will cost you a couple of percent of your balance per year. There is nothing at all wrong with that but I do believe you should recognize it.

The Federal Reserve is meeting today and tomorrow. On the agenda is whether to continue "Operation Twist." That operation is intended to (and actually is) pushing long term interest rates down and that causes the prices of long term bonds to go up. If they decide to continue that operation then bonds probably will go up for at least another 6 months to a year.

I'd like to be able to give you a straight answer. But with bonds it is essentially impossible not to time the market. When you make a choice to invest in bonds you also have to choose the maturity period (long, intermediate, or short). There's really no way around it. And, the most "conservative" bonds, 30 year US Treasuries are also the ones that fluctuate the most in price as interest rates change. So your statement that you are a conservative, risk-adverse investor makes it difficult to suggest that you involve yourself with bonds until you understand them and are comfortable with their behavior. The reality is that, even though they fluctuate in price, much of the fluctuation is NOT random. The arguments against timing usually come down to the unpredictability of random behavior. So basically, if you think you should switch to something else I'd rather you read a bit about bonds and decide for yourself what you are most comfortable with.

Good luck

Educate yourself. http://www.bogleheads.org/wiki/Bonds:_Advanced_Topics

Investopedia also has a more technical Advanced Topic page for bonds.

Not all bonds are subject to interest rate risk, or as sensitive to it.

A Bond fund's avg duration tells you the approximate amount the value will decrease with each 1% increase in interest rates. E.g., 5 year avg duration, interest rates rise 1%, you loose ~5% of the bond fund's value.

Of course, if you are holding a fixed-yield bond and interest rates rise, you are only subject to interest rate risk if you choose to sell on the secondary market. If you hold to maturity, there is no risk.

Good luck.

I agree. I was looking for the duration of the F fund but could not find it. The yield recently has been very good though.

The OP only seems to have funds available not individual bonds so interest rate risk applies to the F fund. The G fund though is actually more like a variable rate CD. It only invests in nonmarketable government bonds. Since the source of interest rate risk is the market, the G fund carries no interest rate risk per se. Any interest rate risk would be in the form of opportunity cost.

I've always admired Scott Burns and the couch potato portfolios for their simplicity and aesthetics. The idea of the even proportions is easy and appearling. Over time though I've decided that they're a little too simplistic for me and since I can take on more risk, keeping that high an allocation to bonds just to keep things at even percentages was unwarranted.

Will look again at your asset allocation to see if I have more concrete idea, but in general I'd tell you not to stress too much about your return over the last several years. Pretty much any buy/hold "lazy" portfolio has had low returns because of the market crash. It doesn't necessarily mean the portfolios are set up badly or won't return something more like the long-term average when actually held long-term.

I'd recommend you set up your own investment philosophy statement - your current asset allocation and how you intend to modify it as your retirement timeline grows closer, how often you rebalance, etc. And then just carry that out until you're much closer to the end line, regardless of the up/down swings.