529investing

Portfolio(s)

I set up Genevieve’s 529 account with Vanguard. I chose Vanguard for a couple of reasons. I liked the fact that I could pick my own asset allocation and my own Vanguard index funds. For something like a 529 account, I believe index funds are the way to go. I will be testing this theory because both of the benchmarks I have chosen are actively managed funds. Finally, I am familiar with Vanguard and its funds.

Now it is time to determine my asset allocation. Think of asset allocation as diversification. We know that you should not put all of your eggs in one basket. Asset allocation can be one of two things: You can allocate your investment among different types of securities, for example, stocks, bonds, cash, etc. Or you can allocate your investment within one type of security. For example, if you had a portfolio of stocks, you could diversify with a portion in technology stocks, financial stocks, conglomerates, and energy companies.

I chose a 70%/30% stock/bond split. Given that I have only a 20-year timeframe (keep in mind that the last 10 years for stock were essentially flat), a 70/30 split seems like the correct return vs. risk ratio for me. Below is a chart from an AAII (American Association of Individual Investors) article. Based on historical performance, a 70/30 stock/bond split has a significant reduction in risk (or price variation) without a significant reduction in overall return.

Risk vs. Return

Risk vs. Return

What is interesting is that the mix with the highest return with the least amount of risk is an 80/20 bond/stock split, which is also the lowest risk possible. This may be a good asset allocation to switch to once college gets a little closer.

Now that I have my asset allocation determined, I have to come up with a mix of Vanguard index funds for diversification within an asset class. For my stocks, I want 40% international and 30% domestic. I feel over the next 20 years there will be more growth overseas than here at home. For the U.S.-based stock, I split 15% into the Total Stock Market Index fund and 15% into the Small-Cap Index fund, thinking that over the next 20 years, small caps will outperform the broader market. For the bond portion, I have 15% in the Total Bond Market Index fund and 15% in my favorite fund, the High-Yield Bond fund.

529 Asset Allocation

529 Asset Allocation

Is this my ideal portfolio? No. It is close though. Vanguard limits you to five funds. I would love to add three more funds. To see what they are, click here.

The real secret to this portfolio is the rebalancing. Every 6 months I am going to check to see if any one or two funds have grown to a point that they are 5% higher than the initial holdings. If so, I will sell off the “profit” and add it to the other funds to get the asset allocation back to 70/30. Over time, this “buy low, sell high” should even itself out and yield some nice overall returns.

Benchmarks:

1.) Actively Manged Fund: American Fund’s The Growth Fund of America® (CGFAX)

2.) Age-Based Mutual Fund: T. Rowe Price Retirement 2045 (TRRKX)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: