Index fund diversification

[Misfire]

Ok, I've been convinced. Fundamental analysis is bogus, successful mutual fund managers are luckboxes, and the best place to invest for retirement is in the market as a whole.

So now what?

I have about 18k rotting away that I need to invest soon.

Thanks

[gull]

Determine your risk tolerance.

[Misfire]

Somewhere between money markets and naked calls on penny stocks.

Seriously, I'm 28, and don't plan to touch this money until about 65. I don't want to speculate, just get solid growth and spread out the risk as much as is practical.

[arsoisaen]

personally i have it 100% in vhgex - vanguard global equity.
its a world stock, 38% us, 50% intl, the rest i dont remember.

slightly more risky than i should be doing but i figure hey im a poker player i deal with ups and downs everyday.

if you really want to leave it and just ignore go with something like vtivx, which is a target retirement fund. auto rebalance, and with 18k you can only do so much if you want to avoid low balance fees.

[DesertCat]

[ QUOTE ]
personally i have it 100% in vhgex - vanguard global equity.
its a world stock, 38% us, 50% intl, the rest i dont remember.

slightly more risky than i should be doing but i figure hey im a poker player i deal with ups and downs everyday.


[/ QUOTE ]

VHGEX is not an index fund, it's actively managed. Though it's got a great track record over the last 11 years, beating it's index by 3% a year. And the fact that it's balanced between U.S. and intl protects you from devaluation of the U.S. dollar, and may provide higher returns because they invest in less efficient markets. I'm not a fan of actively managed funds, but this is a pretty savvy pick IMHO, you certainly could do much worse.

If you want to got the index fund route, I recommend a total market index fund over a less diverse fund, like the S&P 500 funds. There are periods where the 500 kills the rest of the market, and times where it gets killed. And there might be something to the theory that smaller stocks offer better returns. Check out the VTSMX.

If you want to balance your U.S. exposure, you could also do about a third or quarter in an intl index such as VGTSX.

On Technologic's thread, ETF's have been brought up and from what I've read index ETF's seem to be more tax efficient than index funds, but I'm not an expert and unsure of how much of a difference it makes. Basically ETF's don't have to sell components for redemptions, so it doesn't create as many cap gains as an index fund. And it might also have some advantages when the index is rebalanced, not sure I understand that part yet. But they certainly appear worthy of research.

[Misfire]

This is all in a traditional IRA right now (rolled from a 401k). I'm planing to convert it to a Roth as I soon as I can save up the cash for the tax bill.

This means the tax advantages of ETFs over index funds don't really matter, right?

I guess my biggest question is, with only 18k, what's the sounded way to diversify?

[DesertCat]

[ QUOTE ]
This is all in a traditional IRA right now (rolled from a 401k). I'm planing to convert it to a Roth as I soon as I can save up the cash for the tax bill.

This means the tax advantages of ETFs over index funds don't really matter, right?

I guess my biggest question is, with only 18k, what's the sounded way to diversify?

[/ QUOTE ]

Right, tax advantages don't matter in an IRA. And if you really don't plan to touch it until age 65, then two index funds, US and Intl, are a good approach. Esp. since you should be contributing more each year, you will benefit from "dollar cost averaging" if the markets have a bad year or two.

When you reach ages 45-50 you might want to think about rebalancing some into bond funds. If you don't want to think about rebalancing, vanguard has these "Life" funds that will automatically adjust your bond fund exposure as you get closer to a target retirement date. There is info on their web site if that interests you.

[SlowHabit]

DesertCat,

There was a post earlier (I do not have the link) that said "Dollar Cost Average" is a losing proposition. Can you give any insights on this?

As for index funds, I'm going 50% international and a lot value funds.

[cardsharkk04]

Any opinion on my spread of vanguard funds?

10k in VEIEX
10k in VFINX
5k in VGSIX
5k in VHGEX
5k in VISVX
5k in VPACX

I don't mind a decent amount of risk and I have more money available to invest too.

[DesertCat]

[ QUOTE ]
DesertCat,

There was a post earlier (I do not have the link) that said "Dollar Cost Average" is a losing proposition. Can you give any insights on this?

[/ QUOTE ]

I vaguely remember something but can't remember the point. But I can give you examples where dollar cost averaging isn't a good idea.

One example, assume you are 25 years old and have $1M in cash that you wanted to invest for 40 years to achieve the highest possible return from an index fund. But assume the market is at some sort of peak and you don't know if it's due for a decline. You would naturally worry about investing at the top. One solution could be to dollar cost average. You would buy a small amount of the index each month, say $20k, and in five years you'd be fully invested. That way your average cost should be below the average price over that five years.

But what if the market doesn't decline? In fact it increases substantially during the five years? DCA costs you money because you could have put all your money in at the cheapest possible price, but instead you waited and paid ever higher prices as the index rose. In fact, the argument against DCA for lump sum investments is that you are keeping most of the lump sum in lower yielding investments and losing the time value of having it in the (presumably higher yielding) index fund. Unless you really have insight into whether the market is currently overvalued, my guess is that DCA over long periods (over a year or more) is probably not a great idea for lump sums.

But usually you don't have a big lump sum to invest. If you are going to save similar amounts each year or month to invest, DCA works for you for free.