Choosing funds
I generally use the same allocation for all clients. The stock allocation is divided into these asset classes:
20% US large cap
20% US large cap value
10% US small cap
10% US small cap value
10% US real estate stocks
20% International stocks
10% Emerging markets stocks
The fixed income portfolio is generally divided as:
50% short-term bonds (high quality)
50% intermediate-term bonds (high quality)
So, someone that chose portfolio C, 80% stock, 20% fixed would have this allocation:
16% US large cap
16% US large cap value
8% US small cap
8% US small cap value
8% US real estate stocks
16% International stocks
8% Emerging markets stocks
10% short-term bonds (high quality)
10% intermediate-term bonds (high quality)
I prefer index funds whenever one is available. For value funds, the deepest value is the best. For small cap funds, the smallest cap (if diversified) is the best.
For the allocation to International, if there are choices for intl small or intl value, I would definitely use those; break up the 20% intl maybe as 10% intl, 5% intl value, 5% intl small.
When choices are not available, make the best substitution. If there is no emerging markets choice, make the intl choice be 30%. When there is no real estate choice, add more to US small and US small value. Mid-cap value is just fine instead of large-cap value.
Stable value is a good choice for short-term bonds. These funds generally have a good yield and no risk. Bond market index funds are good, and are in the intermediate-term bond category. Foreign bond funds are good choices, if they are currency hedged (although this is rare).
If there are no index funds available, I generally look for funds that have historical returns closest to the index. I don't want a fund that beat the index by 8% one year and then lost to the index by 8% the next year. If a fund underperorms 1% each year, but is consistent, that's the one I want.
I also like funds that say "small-cap value" or whatever, as they will tend to not have style drift. You wouldn't expect an SCV fund that is called "small-cap value" to have mid-cap growth stocks a few years from now. Finally, if 2 funds are about equal in all of these things, choose the one with the lower expense ratio.
Finally, more and more 401(k) are offering fund choices from Dimensional Fund Advisors (DFA). These are great. If you have "DFA Global Equity" as a choice, and using portfolio A, pick 100% that fund and forget about it.
Ok, so on to the funds. How about splitting the stock allocation like:
20% SSgA S&P® 500 Index Fund
20% RS Value Fund
15% SSgA Russell® 2000 Index Strategy Fund
15% Allianz NFJ Small-Cap Value Fund - Class A
30% SSgA MSCI EAFE Index Strategy Fund
And the fixed portion:
50% SSgA Stable Value Fund
50% DWS Core Fixed Income Fund - Class A
Note that I did not do a great deal of research on these particular funds. If one of the other funds is a little better in the qualities I mention before, go ahead and use the other fund.
I'll throw one more post in for good measure about allocation and rebalancing.
-Tom
|