Monday, November 26, 2007

Changing Up My SIMPLE-IRA Portfolio

I've been listening a lot to the Sound Investing podcast by Paul Merriman. It has been real informative and I have to say I'm starting to buy what he is saying. What Paul and the rest of the Sound Investing crew advocate is diversification, and one should spread their portfolio among the available funds that would best represent the most profitable sectors of the market. Towards that end they have set up where you can find what they call their "Ultimate Buy and Hold" portfolios, with variants for a variety of fund families and ETF's. At least that is how I understand it.

I have already talked about opening my Roth IRA with T. Rowe Price. Lucky for me, TRP is one of the fund companies represented at FA. Unluckily for me, TRP's Growth Stock was not one of them. But it seems to me to be a good strategy for diversifying my Roth and possibly Traditional IRA holdings as I build them up. I have also talked about wanting to ramp up my personal IRA contributions at the expense of my current SIMPLE-IRA contributions, which I intend to scale back.

Why? Because my SIMPLE-IRA plan at work restricts me to American Funds which carry a load. Our company has a large enough of a contribution pool our loads are down to 2.5%. But still that seems enough of an incentive for me to convert these contributions to my own no load IRAs. Which is another thing that Paul and gang advocate (no-load funds).
But what should I do with the funds that are in it? I don't want to take them out because it will impact the current loads for everybody including myself. Also I need to make sure that I properly allocate the funds I will continue to make contributions to in order to get the employer match.

I have recently figured out that my current portfolio is weighted very heavily towards domestic large value companies. Not a bad horse to hitch your wagon to, but not exactly diversified either. What Paul and the FA gang advocate is diversifying between domestic and international, small cap and large cap, which my own portfolio is most certainly not. But FundAdvice doesn't have an American Funds portfolio because they don't recommend loaded funds.

Well, I found the answer on Paul Merriman's personal blog, Merriman on Money. On it he answers a question from a reader who is also stuck with American Funds but at least doesn't have to deal with the load. On it he recommends the following allocation which in the following months I am going to try and match my portfolio up to:
20% American Mutual AMRMX
20% Growth Fund of America AGTHX
20% EuroPacific Growth AEPGX
30% Small Cap World SMCWX
10% New World NEWFX
My Current Portfolio (as withheld, not as currently allocated from growth):
15% American Balanced ABALX
15% American Mutual AMRMX
15% Capitol Income Builder CAIBX
15% Income Fund of America AMECX
15% Investment Company of America AIVSX
15% Washington Mutual Investors AWSHX
Of these funds that Paul suggests, the only one that I only currently own is American Mutual. I may keep Capitol Income Builder as part of the 40% that he allocates to American Mutual and Growth Fund of America, because I just like it and I think it covers pretty much the same asset classes as those funds. Perhaps a future post could explore that position.

But what is totally apparent without even doing some fancy MorningStar X-Ray thing on these funds compared to my current portfolio is how small caps and international are obviously represented in his suggestion and totally absent from my current funds.

So I believe reallocation is in order. What I could do:
10% AMCAP Fund ==> New World(10/10)
15% American Balanced ==> EuroPacific(15/20)
15% American Mutual - KEEP (15/40)
15% Capitol Income Builder - KEEP (15/40)
15% Income Fund of America
==> Growth Fund of America (10/40)
==> EuroPacific (5/20)
15% Investment Company of America ==> Small Cap (15/30)
15% Washington Mutual Investors ==> Small Cap (15/30)

For a final Portfolio of:
15% American Mutual AMRMX
10% Growth Fund of America AGTHX
15% Capitol Income Builder CAIBX
20% EuroPacific Growth AEPGX
30% Small Cap World SMCWX
10% New World NEWFX

Hopefully, this will properly allocate my SIMPLE-IRA into representing the right asset classes. Exploring this might make a good future post as well.



Blogger George said...

Saving money through simple IRA is a mode to have an enjoyable retirement. It reduces income taxes. It is easy to operate and there is no requirement to file annual financial reports.

2:09 AM  

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