A Reader's Retirement Hangs in the Rebalancing

Dear Dr. Don:

I am a 52-year-old single male with no intended heirs, trying to build a mutual fund portfolio geared toward retirement income with a time target of about five years. Due to a recent real estate transaction, my cash position has increased, and I am about to rebalance my portfolio. After consulting some of the allocation models on the Internet, I am considering a rebalancing as follows: Cash 18%, Bonds 25%, Small- and Mid-Cap Stocks 13%, Large-Cap Stocks 29% and International Stocks 15%.

My specific rebalancing plan is as follows:

Cash: Nexity Bank Money Market Checking Account.

Bonds: (PHDCX Quote)Pimco High-Yield C seems to be a good "hold" fund, but I don't really want to be in any deeper. Using what I think to be an appropriate, but more aggressive strategy for the bond area of my portfolio, and considering current interest rates, my plan is to fill the rest of the bond portion of my portfolio with a utilities fund. I want to buy (IUTLX Quote)Galaxy II: Utility Index Fund.

Small- and Mid-Cap: I would like to balance this area equally between (WAAEX Quote)Wasatch Small Cap Growth and (MUHLX Quote)Muhlenkamp.

Large-Cap: Balanced equally between (NBFCX Quote)Neuberger Berman Focus, (UMBIX Quote)Excelsior Value & Restructuring, (VFINX Quote)Vanguard 500 Index and (WOGSX Quote)White Oak Growth Stock.

International: I consider this the aggressive area of the portfolio and am considering balancing it between (BJBIX Quote)Julius Baer International Equity and (ICTEX Quote)Icon Information Technology -- a tech-fund survivor.

I would like to know if you think I am getting too far from my stated goals with the reasoning I have put forward. How would you handle this differently? By the way, I am able to add about $500 per fund monthly. I would really like to have an established group of funds, make my contributions and be able to forget about research.

Regarding my retirement, my most recent pension plan statement shows: projected monthly retirement income at age 65: $1,683; estimated social security at age 65: $1,190. I also have a Roth IRA that's currently worth $21,692. Thanks for your help.

Regards,

WS

WS's Taxable Account
Name	Shares	Market Price	Market Value	% Total Value	YTD Return	*Stock Industry or Fund Category	Expense Ratio	Sales Loads
(BJBIX Quote)Julius Baer International Equity A	433.65	21.55	9,345	3.98%	-16.05%	Foreign Stock	1.37%	0%
(NBFCX Quote)Neuberger Berman Focus Tr	16.50	28.29	467	0.20	-2.88	Large Value	1.05	0
(PHDCX Quote)Pimco High Yield C	485.26	9.64	4,678	1.99	2.82	High-Yield Bond	1.65	1 (deferred)
(UMBIX Quote)Excelsior Value & Restructuring	300.75	32.32	9,720	4.14	-4.37	Large Value	0.90	0
(VFINX Quote)Vanguard 500 Index	86.66	111.81	9,690	4.12	-8.00	Large Blend	0.18	0
(WAAEX Quote)Wasatch Small Cap Growth	361.01	29.46	10,635	4.53	5.90	Small Growth	1.44	0
(WOGSX Quote)White Oak Growth Stock	204.78	42.42	8,687	3.70	-32.74	Large Growth	0.96	0
Cash	160,000	1.00	160,000	68.11
		Account total:	170,867	65.14%
WS's Roth IRA Account
Unnamed Investments	n/a	n/a	21,692	9.23	n/a	n/a
		Account total:	21,692	9.23%
		Portfolio total:	234,914	100.00%
*Morningstar categories

W.S.,

Redistributing the $160,000 in proceeds from your real estate investment into financial assets more than quadruples the size of your taxable portfolio. Deciding how you want the portfolio to look is a necessary part of rebalancing, but you need to take a first step and decide what you want the portfolio to do for you.

You say that you have a time target of five years. What does that mean? Do you plan on retiring five years from now, or is that the next time you want to look at your portfolio?

An investment horizon is determined by when you plan to start spending part of your portfolio to meet your financial goals. If you're not planning to retire until age 65, then you have a 13-year investment horizon. If you're planning to retire at 57, then you have a five-year horizon. With a longer investment horizon, you can take on more risk in the portfolio because your investments have the potential to recoup any losses before you need the money.

It sounds as if you want a one-decision portfolio. You choose your funds, set up a contribution schedule and see where things shake out five years from now. Well, I'm here to tell you that you don't want a one-decision portfolio. If you don't want to track your investments and make decisions about when you need to rebalance in order to improve your ability to meet your financial goals, then you need to hire someone to take on that responsibility. There are certainly enough firms providing that service.

The table below shows how the taxable portfolio would look if you implemented your planned rebalancing. Regardless of how you decide to rebalance the portfolio, though, you first need to make a decision about your time frame for rebalancing. Making a series of investments allows you to average in over a time period, reducing the risk that you're buying at a market top. But the longer your investment horizon, the less concerned you need to be about spreading out the investments. Because it's a taxable portfolio, you need to be careful about not investing just before a fund makes its quarterly or annual distributions.

WS's Proposed Allocations WS's taxable account
Name	Shares	Market Price	Market Value	% Total Value	YTD Return	*Stock Industry or Fund Category	Expense Ratio	Sales Loads
Large-Cap
(NBFCX Quote)Neuberger Berman Focus Tr	546.43	28.29	15,459	7.25%	-2.88%	Large Value	1.05%	0%
(UMBIX Quote)Excelsior Value & Restructuring	478.30	32.32	15,459	7.25	-4.37	Large Value	0.90	0
(VFINX Quote)Vanguard 500 Index	138.26	111.81	15,459	7.25	-8.00	Large Blend	0.18	0
(WOGSX Quote)White Oak Growth Stock	364.42	42.42	15,459	7.25	-32.74	Large Growth	0.96	0
		Account total:	21,692	9.23%
Bonds
(PHDCX Quote)Pimco High Yield C	485.26	9.64	4,678	2.19	2.82	High-Yield Bond	1.65	1(deferred)
(IUTLX Quote)Galaxy II Utility Index Ret	3,178.28	15.30	48,628	22.81	-12.27	Specialty-Utility	0.40	0.40
		Account total:	53,306	25.00%
Small- & Mid-Cap
(WAAEX Quote)Wasatch Small Cap Growth	470.45	29.46	13,860	6.50	5.90	Small Growth	1.44	0
(MUHLX Quote)Muhlenkamp	263.64	52.57	13,860	6.50	7.33	Mid-Cap Value	1.28
		Account total:	27,719	13.00%
International
(ICTEX Quote)Icon Information Technology	1,518.68	10.53	15,992	7.50	-9.92	Specialty-Technology	1.37
(BJBIX Quote)Julius Baer International Equity A	742.07	21.55	15,992	7.50	-16.05	Foreign Stock	1.37	0
		Account total:	31,983	15.00%
Cash	38,380	1.00	38,380	18.00%
		Account total:	38,380	18.00%
		Portfolio total:	213,222	100.00%
*Morningstar categories

Utilities funds aren't the staid investments they once were. Choosing to put 23% of your taxable portfolio into the Galaxy II: Utility Index Fund isn't a substitute for a bond investment. I'd suggesting finding a bond fund or two; (VBMFX Quote)Vanguard's Total Bond Market Index Fund is worth taking a look at.

You may want to reconsider your bond and cash allocation. Assuming that you actually invest in bonds, having an 18% cash allocation and a 25% bond allocation is conservative if you're planning to retire in your sixties.

Sticking the (ICTEX Quote)Icon Information Technology fund investment in with your international component doesn't make sense to me. How about creating a category for speculative risks, allocating 10% of your taxable portfolio to that category and putting this fund in the new category?

If you're going to put all your investments into boxes, make one of the boxes a grab bag. That way you don't wind up calling a utility fund a bond investment, or a technology fund an international investment. And don't forget to consider how your Roth IRA is invested when looking at your portfolio's allocations. If you have all your speculative investments in the Roth account, then you don't have to worry about the tax implications when trading those investments.

Contributing $500/fund/month to the portfolio is a substantial investment. We haven't discussed your income, but continuing that level of investment will go a long way toward meeting your financial needs in retirement.

Lastly, I'd suggest taking a different approach to managing these investments. Look at what you want from the portfolio, and then look at an asset allocation that gives you the highest probability of achieving that result. Taking on risk unnecessarily and not being adequately compensated for the risk that you do take on are two of the biggest problems you face in managing your portfolio. If you don't know what your portfolio's average return has to be to meet your financial goals for retirement, you don't know how it needs to be invested. "Guesstimating" the allocations between stocks, bonds and cash is easy to do when you aren't considering the ramifications of that decision.

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