Dear Dr. Don,

I need your advice. A year ago, when I was age 50, I had $462,000 in my 401(k) portfolio invested in a stable value fund paying 6.5%. I did that because I felt that the stock market was due for a crash after overheating in late '99 and in early '01. Then, a chatty equities salesman talked me into getting back into the market. After all, the markets had dropped significantly between May and September, 2000. It was a "buying opportunity"!

So I put 90% of this 401(k) money into big-name, top-rated funds and about 10% into his recommended individual stocks. No bonds. I got creamed. Today, one year later, I have only about $340,000: a 26% drop. The Wilshire 5000 index suffered a nearly identical drop during this period.

Today, I reinvested this remaining $340k as shown below. I now have 63% in equities, 37% in bonds. I wanted to retire at 55. Now it looks like age 60 is more realistic. What do you think? Is this a reasonable portfolio?

Best,

JA

JA's Portfolio
Name	Shares	Market Price	Market Value	% Total Value	YTD Return	Morningstar's Stock Industry or Fund Category
JA's 401(k) Account
T. Rowe Price Equity-Income	1,845.00	23.80	43,911	13.2%	-1.0%	Large Value
Vanguard Balanced Index Admiral's	14,150.00	17.45	246,918	74.3	-7.0	Domestic Hybrid
Vanguard Short-term Corp	2,264.00	10.91	24,700	7.4	7.0	Short-Term Bond
Vanguard Health Care	93.87	118.62	11,135	3.3	-9.4	Specialty Health
JA's Roth IRA Account
Vanguard 500 Index	57.21	100.47	5,748	1.7%	-17.1%	Large Blend
Portfolio total:			$332,412	100%

Dear JA,

That's one of the problems with market timing. Without the benefit of hindsight, you can never be certain when the time is right to get in or out of the stock market. Buying the dips worked during the 1990s because stock prices were trending higher over that decade. Trying to pick a market bottom in a down market is much more difficult.

You had the misfortune of reinvesting in stocks while they were still trending lower. Now you've rebalanced again to include bonds. It was a good move to add bonds, but, in the past year, you had three radically different approaches to your portfolio. Making wholesale changes based on where you think the markets will go is a trader's mindset. You're not a trader; you're an investor. Take a longer-term view towards your financial goals and think about how your portfolio will help you reach those goals. The recent revamping is a better approach, but I still have some suggestions of changes you can make.

Don't make your portfolio work any harder than necessary to achieve your financial goals. Being flexible with your timetable helps, too. Your decision to push retirement back five years because of your portfolio's setback is better than increasing the risk in an attempt to reach your original goal of retiring by age 55. Use TSC's retirement calculator to determine how big your nest egg should be before you can retire.

The Vanguard Balanced Index Fund Admiral Shares is a domestic hybrid fund with a 60/40 mix of stocks and bonds. The stock investment follows the Wilshire 5000 Index, while the bond investment follows the Lehman Brothers Aggregate Index of taxable domestic bonds. I'm a big fan of hybrid funds for small investors looking to diversify broadly in both stocks and bonds, but who don't want to own several mutual funds. But your portfolio is big enough for both bond and stock funds. So you don't need the convenience of a hybrid fund.

Vanguard has always been thrifty with investors' money when it comes to annual expenses. The fund company's Admiral-Class shares, however, take that to a new level with lower annual expense ratios for investors who qualify. Many of Vanguard's popular mutual funds offer Admiral-Class shares, with more funds becoming available each quarter. Qualifications vary based on the length of investment in the fund, the amount of money invested in the fund, and the type of account investing in the fund. You've put about $250,000 to work in this fund, which is one way to qualify. You've taken a big hit in your portfolio over the last year, but saving .0007 in annual expenses by owning the Admiral-Class shares is only giving you $175 vs. the Investor-Class shares. Investing three-quarters of your portfolio in this one domestic hybrid fund isn't appropriate. You could own the Vanguard Total Stock Market Index and the Vanguard Total Bond Market Index and be investing in the same securities without the pressure of keeping $250,000 in one mutual fund.

You've moved most of your retirement portfolio to index funds and bonds, with Vanguard's Health Care fund and the T. Rowe Price Equity Income fund, which are your only actively managed stock funds, representing 17% of your retirement portfolio's assets and 26% of your equity investment. There's nothing wrong with that allocation when you're inside of 10 years before your planned retirement. Just don't view indexing as a panacea against market downturns. Investing in funds indexed to the Wilshire 5000 and S&P 500 offers a broadly diversified portfolio that protects you from the volatility associated with investing in individual stocks -- not a declining stock market.

You should have some international exposure in this portfolio. Five to 10% of the total portfolio would be an ample allocation. Your Roth IRA account is one place to consider switching to a foreign stock fund because the stocks in the Vanguard 500 Index also are represented in the Wilshire 5000. One international fund to consider is the Tweedy Browne Global Value Fund.

Remember to consider all of your investments when you look at how your portfolio is invested. After all, it's all your money. How much equity do you have in your home? Do you have a cash reserve for emergencies? How is your taxable portfolio invested? The answer to these questions also will influence the risk and investments appropriate to your retirement accounts.