Day 313: What’s Your Risk Tolerance? (Part 3/Survey Says…)

Okay, so I decided to keep this on the topic of Investing, more specifically on the topic of asset allocation, more specifically on the topic MY asset allocation… as this is about the only thing I have thought about for the past three days.

As I alluded to in Part 1 and Part 2 of this three-part saga (which may not have the appeal of Star Wars or a Wagnerian cycle, but what can you do?), I have been giving a lot of thought to what mix of stocks and bonds works for me.

Yesterday I concluded that I wasn’t going to make an extreme move to dramatically more bonds. Yet I was willing to do more bonds. To be more specific about my situation, I have had my Traditional IRA in target-date funds for awhile. Said funs are 90% stocks and 10% bonds. Since my IRA is about a quarter as big as my Roth–which carries exactly zero bonds–I really was at about 2% bonds.

2% bonds ain’t for the faint of heart! I thought that a slightly higher percentage of bonds wouldn’t hurt. I looked around, figured out what I kind of changes I was ready for. Here’s what I concluded:

  • I want to keep things simple by picking one fund that, like the target-date funds, balances stocks and bonds (instead of mixing and matching with different funds, or what is often referred to as “slice and dice” investing).
  • I don’t want to radically change my position. I figure a 6-10% shift towards bonds is enough right now.
  • I want an inexpensive fund (obviously).
  • I was looking at Vanguard balanced funds that vary between 40% to 60% bonds. After thinking it through, I realized I want to limit how much of the stocks I unload (I want to keep watching them grow!). So I decided to go with a fund with 40% bonds… which is four times more than my current target-date funds had.
  • Now that I knew the allocation of the fund I want (60% stocks/ 40% bonds), the only remaining question from the two choices left: should I keep foreign stocks, or go all U.S. investments? I decided to keep the international stocks, which means I am continuing with the “Three Fund Portfolio” idea that I have been loosely following for a long time, that is, US Total Stock Market, International Stock Market, and Total Bond Market.

So after getting clear on these things, the best choice for me was logical. To summarize, by doing my due diligence–asking myself what mattered to me and doing online research–I realized that:

  • I want one fund
  • I only want a modest shift to bonds (6-10%)
  • I want something inexpensive
  • I want to limit how much of my stocks I give up for bonds
  • I want to keep the Three Fund Portfolio which includes US and International Stocks.

Which (Vanguard) fund would allow satisfy these desires? And the survey says….

Vanguard LifeStrategy Moderate Growth Fund (or by its stock symbol “VSMGX”) Read more in depth about it here.

This fund is 60% stocks, 40% bonds, and includes both US and International stocks and bonds. It’s got a low expense ratio (0.13%, which means that you pay a yearly fee of thirteen hundredths of a percent… or the equivalent of 13 cents per $100 invested… not bad!). As a result of investing in this, my stock-to-bond ratio is closer to 90/10 (well, actually 92/8)… which obviously is still considered quite aggressive! Yet it feels quite satisfying.

FINAL NOTE: I’m generally quite reluctant to make any changes to my investments, as I believe strongly in staying the course. Yet I had a bee in my bonnet over this, and the change I decided to make feels like a fairly modest way for me to adjust my portfolio slightly without changing direction. I am satisfied with the self-examination process I undertook when making my selection.

And satisfaction, folks, is what it’s about!

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