Portfolio Allocation for My Roth IRA

When it comes to Roth IRA, I want to make sure not to over diversify. This means having as few accounts as possible and as few funds as possible. If two funds can meet your asset mix target, don't go for an extra third. Since I'm looking at a 30 year investment span for my Roth IRA, I'd also want to set up the account with a fund company directly to avoid the commissions charged by brokerages. This requires me to pick a good fund company that has several good cheap funds that can satisfy my asset mix target. Vanguard is the first that comes to my mind. Their funds are relatively inexpensive. And they don't charge nothing. Not even a custodian fee. But I didn't choose Vanguard at the end because most of their funds require a $3,000 initial investment, which means for the year 2008, with the $5,000 contribution limit, I can only purchase one fund. This will not meet my target. Then I discovered Dodge & Cox. After reading everything from their website and talking to one of their people on the phone, I decided go with them. I think their funds' expense are reasonable, the way they do business is clear, and their management team are serious investors. Though they only have 4 funds, I can use 3 of them to meet my asset mix target. They are rolling out an international fund in April or May as well, so one more option for the future to choose. Their minimum initial investment is $1,000 per fund. The only less perfect thing is that they charge a $12.50 per customer (not per fund) maintenance fee every year. But I still think Dodge & Cox will serve me better in the long run comparing with Vanguard. (Vanguard will take me at least 3 years to meet my asset mix target). Here is my final portfolio with them:

1st Level		Target	D&C
	U.S. Stocks	50.0%	50.0%
	Foreign Stocks	40.0%	39.9%
	Bonds/Cash/Others	10.0%	10.2%
	Total	100.0%	100.1%
2nd level_full	Giant/Large	80.0%	89.0%
	Mid	20.0%	10.7%
	Small/Micro	0.0%	0.3%
	Total	100.0%	100.0%
2nd level_non Foreign	Giant/Large	60.0%	62.4%
	Mid	20.0%	6.5%
	Small/Micro	0.0%	0.1%
	Total	80.0%	69.0%

Portfolio Allocation for My 401K

After setting up the asset-mix target for my 401k account, I wasted no time and started building my portfolio. But before allocating my money according to the asset-mix target, I had to decide which funds to invest in. This process was relatively easy since I've only got a limited choices to choose from. (This is not uncommon for an employer sponsored 401k plan.) When it comes to picking mutual fund for retirement (meaning I will held them for at least 30 years), my first and must-followed criteria is:

Avoid Expensive Fund!!!

This follows after my philosophy: control the things that you can first. The past performance of a fund is at the end of my checklist, if it is even included in my check-list. Now, what do I consider an expensive fund? This is a tricky question to answer because the annual expensive ratio usually don't tell the whole story. If you were to dig into the fund's Statement of Additional Information (SAI), you would be surprised how much more you would be paying besides the expense measured by the expense ratio. The turn-over rate has a positive correlation with the commissions your would be paying, (the bigger the turn-over rate, the higher the commissions), but it doesn't tell us how much exactly the commissions would be. I actually examined the SAI for all the funds I picked for my 401k, and to be honest, even I was able to find all the numbers, these expense related numbers are not by any means easy to understand. I think one day I'd call the fund company and ask their guy to go through the SAI with me. But, just to give you a clue how crazy the actual cost could be, Vanguard Institutional Index Fund (VINIX) has the lowest annual expense ratio (0.05%) among all the funds in my 401k, after adding the numbers of extra costs, the actual expense ratio becomes 0.22%, which is 4 times more! It's time consuming and boring to go through all the SAIs, so I came up with the following rule:

Avoid funds with both annual expense rate > 1.2% and turn-over rate > 150%!!!

These funds would be thrown out no doubt period. Though funds on the boarder line will be considered, for example, my FID overseas (FOSFX) has an annual expense 1.00% and turn-over rate 132%, I prefer funds with expense rate below 0.5% and turn-over rate below 50%. Enough being said, here is my 401k portfolio:

Cap	Ticker	Contribution %
Large Index	VINIX	30
Mid	VHCAX	17
Small	VEXRX	20
Foreign	FOSFX	29
Bond	VBTIX	4

This portfolio meets my asset-mix target. How did I come up these numbers under the "contribution %" column? I designed this neat excel workbook (download it here).

• First, you need to fill out the "Data Entry" tab by looking up the your funds in morningstar and obtaining the corresponding info from the portfolio page. (A page like this) Look at the Market Capitalization table and Asset Allocation table on the page. You also need to subtract the foreign stock holding from the stock holding to get the U.S. stock holding.
• Second, go to the "Result" tab, enter your estimated contribution % and then notice the table on the lower right will give you the mixing result under these contribution%. By comparing this table with your asset mix target and adjusting these contribution%, you can figure out the appropriate contribution%.

Since I wasn't able to find a free and user friendly portfolio allocator that does what I want on google, I came up with my own. Let me know whether this small tool is helpful to you.
Here is the comparison of the resulting mix with my target:

1st Level		Target	401K
	U.S. Stocks	65.0%	64.7%
	Foreign Stocks	25.0%	25.2%
	Bonds/Cash/Others	10.0%	10.2%
	Total	100.0%	100.0%
2nd level	Giant/Large	55.0%	58.0%
	Mid	25.0%	27.4%
	Small/Micro	10.0%	10.6%
	Total	90.0%	96.0%
3nd level_non foreign	Giant/Large	35.0%	36.7%
	Mid	20.0%	19.9%
	Small/Micro	10.0%	10.5%
	Total	65.0%	67.0%