Last week, my wife and I made a big change to our retirement portfolio — one that we’ve been discussing for a little over two months now.
Background: In September, Vanguard announced significant changes to their LifeStrategy funds (specifically, lower expense ratios and a change to fixed, all-indexed allocations). Those changes have now gone into effect.
The change my wife and I made was to move every dollar of our retirement savings over to Vanguard’s LifeStrategy Growth Fund. It’s now the only fund in our individual 401(k) and our IRAs — with the exception of a portion of my Roth, which, as mentioned before, is in Vanguard’s Short-Term Treasury fund because we use it as part of our emergency fund rather than as retirement savings.
For reference, the underlying allocation for Vanguard’s LifeStrategy Growth fund is as follows:
- 56% Vanguard Total Stock Market Index Fund,
- 24% Vanguard Total International Stock Index Fund, and
- 20% Vanguard Total Bond Market II Index Fund.
Why We Made the Change
The primary reason we made the change was to defend against what I’ve come to see as the biggest threat to our investment success: me.
To be more specific, it’s my temptation to tinker that scares me.
Because of my work, I’m constantly reading about different investing strategies. Most, of course, are nonsense — nothing more than methods of using the stock and bond markets as a lottery. But there are still countless ways to invest that are reasonable.
And when I go to rebalance our portfolio, I’m often tempted to make little changes. Most such changes would probably be fairly benign, like the one we discussed here. But my fears are that:
- One day I’ll do something truly stupid, or
- I’ll bounce back and forth between reasonable allocations, but do so at exactly the wrong times (for instance, choosing to overweight small-cap and value stocks, then bailing out after a period of relative underperformance).
My hope is that this automatically-rebalanced, everything-in-one-fund sort of portfolio will keep me from such temptations — both because I won’t have to execute any transactions other than buying more of the same fund and because that fund is an explicit reminder to myself that I’m not supposed to mess with anything.
I see two other benefits as well:
- It’s less work, and
- It puts my money where my mouth is, given that the whole point of this blog is to show that investing in a simple, hands-off way really can be quite prudent.
A Slightly Different Allocation
Obviously this change adjusts our asset allocation somewhat. Relative to our old allocation:
- We now have 10% less in REITs and approximately 10% more in non-Treasury bonds (mostly government mortgage-backed bonds and investment-grade corporate bonds), and
- We now have 16% less in Total International Stock Market and 16% more in Total (U.S.) Stock Market.
Overall, I think the effect of these changes will be rather minimal. As I’ve said before, asset allocation is a sloppy science. Small shifts one way or the other between asset classes don’t usually make much difference in an investor’s long-term success.
Still, the decrease in international allocation did give me some pause. (In fact, it was really the only thing that made me hesitant about the switch at all.) In general, I’m somewhat more comfortable with a higher international allocation rather than significantly overweighting U.S. stocks relative to their market weight.
In the end, I decided that I’m more worried about a Mike-messing-something-up scenario than I am about a scenario in which the U.S. stock market significantly underperforms the total world market for an extended period.
One potential drawback is that Vanguard could change the allocation of the fund at some point in the future in a way that I don’t like. Because I follow Vanguard-related news fairly closely though, I’m confident I’d hear about any upcoming changes in plenty of time to move out of the fund if we decide the changes don’t make sense for our needs.
As with any change, it has its pros and cons. It’s not perfect. But I like it. I like that it’s simple. I like that it’s easy. And I like that it will (hopefully) keep my meddling hands off our portfolio.