I would never put very much in gold, but I could see it having a purpose for 2-3% of a portfolio, as you’ve suggested.

Incidentally, gold’s volatility is the very reason it might merit inclusion. High volatility + low correlation to the rest of the portfolio means that has
great potential to offer a “rebalancing bonus.” That is, its contribution to the portfolio’s overall return would be greater than its stand-alone return.

William Bernstein does a much better job of explaining this concept than I do.
On gold specifically: http://www.efficientfrontier.com/ef/adhoc/gold.htm
On the “rebalancing bonus” in general: http://www.efficientfrontier.com/ef/996/rebal.htm

That’s a question I ponder myself sometimes. I don’t necessarily think it’d be a bad idea, but I haven’t yet done it myself, and I doubt I will.

My first reason is that the difference in expense ratios between international bond funds and US bond funds appears to be quite large–larger than the difference in ERs between US stock funds and international stock funds. So you pay more for international bond diversification than you pay for international stock diversification (much more, if we consider expense ratios as a proportion of expected returns for the asset class).

The second reason has to do with an investor’s goals. Specifically: What is the goal for the bond portion of your portfolio? If the goal is to have a portion of your portfolio that is rather stable, then I’d stick with US bonds, as currency risk will increase volatility.

If the goal is simply to add a (hopefully) uncorrelated asset class to your portfolio (much like the goal when increasing the number of stock asset classes), then an international bond fund may make sense. However, given that they have high expense ratios and lower long-term expected returns than stock funds, I wouldn’t add one until I’d diversified into every stock asset class I could think of.

Many investors would argue that you can’t get more diversified (regarding US stocks) than holding a simple Total Stock Market fund. Others (myself included) would argue that you can be better diversified by overweighting small cap and value holdings, as your friend suggested.

It’s impossible to say ahead of time whether a more “limited set” would perform better than you current holdings. All I can say is that your portfolio appears to be quite well diversified and very low cost. And in my opinion (as long as your current allocation matches your tolerance for volatility), it’s hard to do any better than that.

As to the difficulty involved in rebalancing, you’re absolutely right that you could cut down on the work involved by switching to a portfolio of fewer funds, but it would likely be at the cost of some (perhaps small) degree of diversification.

50% Domestic Stocks. Mostly Total Stock Market, with some holdings in Small Cap and Value because the Total fund is most heavily invested in large-caps, and some REIT.
10% Total International.
40% Bonds. Mostly Total Bond, with some holdings in Inflation-protected bonds and GNMAs.

This comes to eight funds (standard index funds only, not ETFs), and is similar to the 8-fund portfolio Mike has outlined above. My question is: Is this too complicated (mainly in the sense of, is there too much duplication)? RJ Weiss writes, “Many investors underrate the importance of simplicity,” but he does not elaborate on his reasons.

My friend’s argument was that with more funds, you have more flexibility in rebalancing. On the other hand, Vanguard’s site does not make rebalancing easy, as you have to buy and sell each fund rather than simply typing in a set of new percentages (as you can do with Fidelity, where our company has its 401k). I’ve complained about this to Vanguard in the past, but to no avail. But that’s secondary to my main question, which is whether the 8 funds I have would perform any better than a more limited set, or even just the Vanguard Target 2015. Thanks.

With an ER of just 0.19% and absolutely no work involved, I recommend Vanguard’s target date funds to lots of people. If they match your targeted allocation, what’s not to love?