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Friday, December 07, 2007

How Do You Asset Allocate Across Different Accounts?

"I am sure most of you have multiple accounts, how do you deal with this issue?"

From our forum "Novice Corner - A place to learn and help others" in the facebook group "Investing for the Long Term."

JG Singh asked:

My question is regarding diversifying or balancing my portfolio.

I have two 401k accounts, 2 IRAs, 2 rothIRAs and a trading account. I have noticed that I have been diversifying and balancing each account on its own resulting in too many positions and more diversification than probably needed. As a result I move with S&P. (altough I am recovering faster than S&P since last week)

What should my approach be? should I be diversified overall (in combined portfolio) or should I worry about diversifying them individually?

I am sure most of you have multiple accounts, how do you deal with this issue?

My reply:

I not only have multiple accounts, but multiple strategies as I experiment with new ideas. I believe in diversification of strategies not just asset classes so I have some "buckets of money" that follow my explore portfolio, some that follow index investing and some that I use to "wing it."

The most important thing to do is put it all on a single spreadsheet where you track your overall asset allocation. It doesn't matter if you have my free portfolio that consists of 120 less your age in equities (VTSMX) with the remainder in Total Bond (VBMFX) or the 7 Vanguard Index Fund core portfolio I recommend in my newsletter mixed with 16 stocks from my explore portfolio and 100 stocks and funds you've accumulated over the years. You want to start with EVERYTHING on a single spreadsheet to see where you are.

The hardest part with putting it all on a single spreadsheet is figuring out how your managed mutual funds are allocated. Mutual funds often have “style drift” where they might start out as a small cap US fund, do great for 10 or 20 years then drift into international and large cap funds as they try to invest the money that keeps flowing in. I’ve owned Fidelities fantastic Contra and Low Priced Stock funds for a long time and they have crushed the S&P500.

Chart of relative performance

Click to see full sized chart courtesy of stockcharts.com

As you can see from the links, FLPSX has drifted to a “mid-cap blend” whereas I bought it in 1998 when it was a small cap value fund. I bought FLPSX to diversify from my small and large cap growth stocks that I made a small fortune on in the 1990’s. Value and small cap have done great the last decade vs.growth so the fund’s style has drifted. Not only that, but FLPSX is only 65% in the US and 35% overseas (Fund Holdings) as it has gone overseas to find value. Its top holding as of 9/30/07 was Petrobras, the oil company in Brazil!

If you really want to stick to plan, you should update your asset allocation to account for style drift each year and make sure you break-down your large holdings into their component asset classes, especially if this materially changes your overall asset allocation.

Make sure you visit:

Kirk Lindstrom's Investment Letter Performance

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