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Retirement Portfolio Needs Some Tweaking

A careful diversification among mutual funds can improve this reader's investment strategy.

Dr. Don,

I am 35 years old and will earn between $75,000 and $80,000 this year. I put the maximum amount in my company's 401(k) plan every year. I also have a retirement plan where the company contributes 4% of my earnings into a fund that I don't control. I have a Roth IRA that is a rollover from a previous job's 401(k). I would like to retire at age 59 and will have my house paid off when I'm between 50 and 52 years old.I have attached my portfolio for your review. Any advice you can give is greatly appreciated. Sincerely,G.G.

Dear G.G.,

Limited choices in a 401(k) plan make for frustrated employees. By choosing one of the large

no-load or low-load mutual fund families, your employer has made it easier for you to manage the annual expenses of your mutual funds, while potentially giving you a wide array of choices to meet the investment needs in the account.

Increase your contributions to the Roth IRA to match the increases in contribution limits starting in the 2002 tax year. Continue to fund the maximum to your 401(k) too. You're still about 25 years away from your planned retirement, and the more you can salt away over the next few years, the easier it will be to reach your retirement goals. A


feature by Bob Trinz describes how this year's tax bill increases the contribution limits for retirement investments.

Your employer's pension plan hasn't been listed as part of the portfolio because you don't have control over how these assets are invested. That doesn't mean you shouldn't be aware of how the plan's assets are invested. A review of the plan's investments can help you decide if you should modify the asset allocation in the accounts you can control. For example, a large fixed-income (bonds) component in the pension plan could reduce your need for fixed-income exposure in your 401(k) or Roth IRA accounts.

I don't see the need to hold the

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Vanguard Total Bond Market Index and the

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Vanguard Total Stock Market Index in both the 401(k) and the Roth IRA account. It's all your money. Look at diversification as something you do in the portfolio, not in the account.

I'd rather see the bond component of your portfolio in the 401(k) account than in the Roth IRA. Such a change would allow you to increase your stock exposure in the Roth IRA account. This is beneficial because qualified distributions from the Roth IRA will be tax-free in retirement but taxed at your marginal income tax rate out of the 401(k) plan. Put the mutual funds where you expect the greatest investment returns in the Roth IRA because those returns will be tax-free in retirement. Because bond funds typically generate more income than capital gains, it makes more sense to have the income-oriented fund pay income taxes and the capital gains-oriented funds invested where those gains won't be taxed.

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You'll notice that I haven't spent any time with your taxable portfolio. With only 2% of your financial assets currently invested in one stock, it doesn't have a whole lot of relevance to the success of your retirement portfolio. If you do start adding to this account, invest in individual stocks that you plan to hold for the long-term, tax-efficient stock mutual funds or exchange-traded funds (ETFs).

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Vanguard Primecap is having a rare off year, hurt by its large holdings in airline and technology stocks. Looking at it in conjunction with the

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Vanguard Growth Index fund and the


Vanguard Morgan Growth fund, you have a lot of your portfolio invested in the same sandbox. Remember that the Vanguard Total Stock Market Index owns all of these

large-capitalization stocks, too, so you're adding emphasis to the large-cap area by layering these other funds on top of that investment. That's OK, but when you're splitting your investments between a growth-oriented index fund, a value-oriented fund (

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Vanguard Windsor II) and two other large, actively managed capitalization funds, the layering is more of a mishmash than a cohesive strategy.

Decide if you'd like to reallocate these investments among index funds, actively managed funds and your leanings toward growth vs. value investing. Consider adding some sector funds rather than funds categorized by the size of the firms in which they invest. For example, you could add an emphasis in the health care sector by investing in the

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Vanguard Health Care fund. You could also add some international exposure to the portfolio, but I don't have a Vanguard fund to recommend in this area. You should have more flexibility in your Roth IRA account to choose non-Vanguard funds, but be cognizant of trading costs and annual expenses when buying these funds.

Send In Your Portfolio

If you would like to submit your portfolio for a makeover, send it to Give us enough details -- dollar values or percentages -- so we can determine how your assets are allocated. Also tell us a little about yourself and your investing goals, and let us know how we can contact you if we have further questions. Though we'll use only your initials publicly, please include your full name so we can verify your identity. Unfortunately, we cannot guarantee your portfolio will be selected for a makeover, nor can we promise to respond individually to everyone who submits a portfolio.

Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. At the time of publication, he owned shares of the Vanguard Growth Index fund, though positions can change at any time. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at