IRA Investing: How We Diversify and Balance Our Portfolio



Everyone has an image of their ideal retirement. Maybe it’s retiring on white sand beaches, days at the golf course, or maybe it consists of a more modest idea of working part time and enjoying your grand kids. Whatever it may be, it will take savings discipline to get to your end goal.

For our household, my wife and I each have a 401K through our current employer. In 2010, I also opened a Roth IRA for both of us. Since 2010, we’ve been able to max out our Roth contributions annually (which is $5,500 per year for 2014). Without a doubt, this is the most difficult aspect of building net worth: SAVING. Once you’ve managed to open a retirement account and save some money; now what? The key is determining what your ideal asset allocation is, investing your balance in line with that allocation, and re-balancing periodically. Let’s take a look at my wife and my Roth IRA accounts as an example:

#1 Ideal Asset Allocation

This is a difficult question for most people. What is an ideal portfolio? What it all boils down to is risk. What is your individual risk tolerance and how close are you to retirement? If you are young and the type of person that will keep their money in the market through bull and bear markets then you probably have a higher risk tolerance than someone that is nearing retirement and is likely to pull their funds out of the market when there is volatility. I adhere to the 120-rule. Subtract your age from 120 and that will give you the percentage of your portfolio to invest in stocks, the remainder in bonds. I’d note that some people adhere to the 100-rule, but I’m a bit less conservative and tend to lean toward investing in stocks over the long-term. For me, since I’m turning the corner on 30, then I invest 90% of my portfolio in stocks and 10% in bonds (120 – 30 = 90%).

#2 Investing Your Balance in Line With Your Target Allocation

Now that I know I’m 90% into stocks and 10% into bonds, it’s time to get down to research. For our retirement accounts I personally aim for low cost index funds with a few low cost mutual funds that I feel have strong track record of performance. I’ll have a future post on the specifics of what I evaluate when selecting an investment. At this point it’s important to diversify as much as possible. For the 90% that I invest in stocks, I invest in a variety of funds including Large Cap stocks, Mid Cap stocks, Small Cap stocks, Blue Chip Growth stocks, Dividend Stocks, International Stocks, and Blue Chip Value stocks. With such a large allocation to stock funds, I tend to allocate more to large cap blue chip stocks. For the 10% to be invested in bonds, I usually find one or two diversified bond index funds. Play around with the percentages until your portfolio of investments is diversified and contains the right mix of funds. Here’s how I rebalanced our portfolio at the beginning of 2014:

Fund Description Asset Class Portfolio Allocation %
S&P 500 Index Fund Large Cap Equity 30%
Dividend Growth Fund Larg Cap Equity 20%
International Index Fund International Equity 15%
Large Cap Value Large Cap Equity 10%
Strategic Income Fund U.S., Domestic, Int’l Bonds 10%
Blue Chip Growth Fund Mid-Large Cap Equity 5%
Mid Cap Index Fund Mid Cap Equity 5%
Small Cap Index Fund Small Cap Equity 5%

#3 Re-balance Periodically

Once your portfolio is established it’s important to review your target allocation and update your investments periodically. I re-balance annually. Which means each year I determine whether I need to change my target allocation, then I sell/buy the funds in my investment portfolio until it is in line with my target allocation.

This is just a quick and simple way to get your retirement account setup and invested. In a later post I’ll describe what funds we selected for our Fidelity Roth IRA accounts and how we decided on those funds.

DC @ Young Adult Money
DC @ Young Adult Money

I honestly don't review asset allocation nearly as much as I should.  I have a lot more in international equity than you do, but to each their own.  I have a decent amount in target date funds.

Financial Tour Guide
Financial Tour Guide moderator

@DC @ Young Adult Money I've actually been thinking about moving a greater portion to international equity.  I definitely think there is some great opportunity in some of the emerging markets outside of the U.S. I may consider bumping that up to 20% for my 2015 re-balance.  Target dates are such a great way to go to automate your allocation and automatically adjust as time goes on.

DC @ Young Adult Money
DC @ Young Adult Money

@Financial Tour Guide @DC @ Young Adult Money I like being expose to international equity for the simple purpose that I already feel extremely exposed to the US economy.  My job, real estate (home), stocks, etc. are all tied to the US economy and the US dollar.  I like the idea of having bets elsewhere to offset that risk.

DC @ Young Adult Money
DC @ Young Adult Money

@Financial Tour Guide @DC @ Young Adult Money Definitely.  We have an employee stock purchase program at my work and I typically sell it as soon as I get it every six months.  I'm going to change that strategy, though, and hold the stock for at least 1 1/2 years so that I can avoid short-term capital gains.  It's still interesting to think about whether or not I'm doing the right thing.  I think with a smaller company I'd avoid holding the stock for too long just because of how erratic small-cap companies can be, but with a large-cap I think I'm safe.

Financial Tour Guide
Financial Tour Guide moderator

@DC @ Young Adult Money @Financial Tour Guide Definitely depends how strongly you feel about the company’s future share price. My wife works for Amazon and receives RSU’s (restricted stock units). I used to sell them immediately after vesting because I figured with her salary and a portion of her 401-K tied to Amazon, I wanted to diversify. Unfortunately, I’ve used this strategy over the past few years and Amazon’s stock price continues to skyrocket! (Now it’s at about $435/share). Sometimes I like to go back and calculate how much appreciation we missed out on if we had simply held the RSU’s to date… it’s painful.