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November, 2015


Ideally, one's financial allocation strategy will allow for easy investing, average or better total return, and little heartburn. I recommend that each person research to find what approach best fits her or his style, preferred level of risk, and desired amount of active asset management. However, if one simply wants to put money away for long-term goals without careful selection of individual stocks or real estate investment trusts (REITs), it is hard to beat a simple division of one's funds among good mutual fund categories.

We have been experiencing a bull market in domestic equities for over six years. At the same time, returns for natural resources equities and foreign stocks have largely been down. This country's bonds are now vulnerable to anticipated Federal rate increases.

Our table below, then, takes into account these factors plus the ease of administering a small number of investments. The suggested model here is for illustration and can be adapted depending on personal circumstances. An allocation such as this would likely be best for a younger person who does not have the time or skills for directly managing a portfolio yet expects to be regularly purchasing shares for long-term goals.

Investing at first an equal (20%) share of investment dollars in the sample mutual funds/categories will keep things simple and also allow for ready rebalancing. If investing in a 401k plan or an IRA, one can merely direct that one-fifth of all regular investments be used to purchase shares in each fund. If this is not practical, one can rotate investment in the five, adding, for instance, $1000 each to them till all have had an increase of that amount, then repeating with subsequent investments.

A Sample Allocation

Mutual FundTicker
Toll-free No.Expense
Vanguard Total Stock Market Index Fund Investor Shares (domestic stocks)VTSMX$51.18877-662-74470.17%
Vanguard Total International Stock Index Fund Investor Shares (foreign stocks)VGTSX$14.86877-662-74470.22%
Vanguard REIT Index Fund Investor Shares (real estate)VGSIX$25.68877-662-74470.26%
T. Rowe Price New Era Fund (natural resources)PRNEX$30.23800-537-19360.65%
Templeton Global Bond Fund (international bonds)TPINX$11.83800-632-23010.91%

Regular investments of like amounts tend to increase the returns over a single buy-and-hold approach, for the fluctuations in the market result thereby in more shares at intervals being bought when prices are down, thus lowering one's average cost basis. So, if, for instance, the table funds' mean return would otherwise be 10% a year, one's personal investments via dollar-cost-averaging would turn out to be 12% annually. This does not mean that each and every year one would see a 12% gain, of course, only that, given the ups and downs of both the markets and the funds in which one has invested, with some years showing paper profits of more than 12% and some of losses, they will tend over time to move upward at a nice level.

There will, naturally, be times when certain of these funds do much worse than others. With the illustration here we shall keep things simpler by assuming there have not been regular contributions (investments) after the initial purchases. If one began, in this easy example, with $25,000 total, or $5000 in each of the categories, and had an average increase of 12%, one might wind up a year later with $6000 or so in REITs, $4500 in global bonds plus cash, $8000 in natural resources, $5250 in domestic equities, and $4250 in international stocks. One can then reallocate among them to restore the intended 20% allocation (roughly $5600) in each, in so doing assuring that one buys shares low and sells other shares when they are up, once again enhancing the profitability of the overall investment approach. Best of luck with your own allocation decisions and implementation! Some experts say these are even more fundamental to long-term financial success than being talented at picking particular securities.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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