Publish date:

Some Portfolio Tweaking Will Ensure Couple's 'Prudent Risk' Goals

For starters, fully fund Roth IRA accounts.

Hi Dr. Don, I love your column and have learned a lot from it. My partner and I are both 34 and are eager to get your advice on some of the specifics concerning asset allocation. We both work for nonprofits (medical social work and ending homelessness) and own a home that we expect to live in for years to come (we owe $220,000 on the 7.125% fixed mortgage -- the home is worth about $350,000 today). As investors, we are comfortable with a large degree of prudent risk, given our goals of long-term growth toward early retirement. What do you make of the overall allocation? Any concerns? Any concerns about the funds we're in? Any suggestions as to whether or not we should be in emerging markets as part of our international exposure? How about a small-cap value fund? We have no bond exposure -- should we? One of us has the option to contribute to a 403(b) annuity with no employer match. Given that there is no employer match and that the annuity-based funds are very expensive, we've chosen not to participate to date. Is this a good decision? Any other thoughts you'd like to share about the portfolio? We're happy to accumulate some more cash even in the taxable account -- one benefit of last year's downdraft is some banked capital losses. We keep about $20,000 in cash and Series I Savings Bonds for emergencies. DG


Lobby for lower-cost investments and more choices for investments in the 403(b) plan. Too often employers focus on what's easiest for their benefits area to manage vs. what's best for their employees. Without a matching program, I'd recommend fully funding Roth IRA accounts first, before starting to fund the 403(b) plan. If you're paying an extra 1%-2% annually in account expenses in your 403(b), you could invest in mutual funds that manage their tax ramifications or in individual stocks in your taxable account and be potentially better off than in an expensive variable annuity or mutual fund. For inspiration read Options for Dealing with Poor 403(b) Investment Choices on

Even though you think of the Series I Savings bonds as part of your emergency funds, I'm counting them as bond exposure in your portfolio. If you hold the bonds for less than five years before redeeming them, you'll lose three months interest as an early withdrawal penalty. It's still a smart move for this money because if you don't need to tap the funds, they'll earn an inflation-adjusted return. This series of Savings Bonds offers inflation protection by having part of the

interest payment representing the inflation rate as measured by the

Consumer Price Index. Newly issued Series I bonds currently pay an annualized 6.49% rate. Because of the inflation adjustment, the interest rate changes every six months. Adding to your Series I holdings will give you fixed income (bond) exposure with an inflation hedge.

If you want to add an emerging markets fund to your portfolio, I'd recommend that you do it by selling some

(ARTIX) - Get Artisan International Fund Inv Report

Artisan International. That's because I feel your international exposure is about where it should be, and the only other fund with much in the way of international holdings is

(VGHCX) - Get Vanguard Health Care Inv Report

Vanguard Health Care. The

(PRMSX) - Get T. Rowe Price Emerging Mkts Stk Report

T. Rowe Price Emerging Markets fund you suggested in your correspondence is a solid offering for a small fraction (2%-3%) of your portfolio.

By investing in three of the


family of funds, you open yourself up to some stock overlap in your portfolio.

(BOGSX) - Get Black Oak Emerging Technology Fund Report

Black Oak Emerging Technology fund is brand spanking new, so I don't have a listing of assets, but

(POGSX) - Get Pin Oak Equity Fund Report

Pin Oak Aggressive Stock and

TheStreet Recommends

(WOGSX) - Get White Oak Select Growth Fund Report

White Oak Growth Stock have a fair number of holdings in common. Recognize that you aren't getting much diversification by owning these two funds. Both funds share the same managers, so it's not surprising they share some of the same investment ideas.

I'm not sure what has caused your affinity for food stores, but between

Webvan Group



Whole Foods



Hain Celestial Group

(HAIN) - Get Hain Celestial Group, Inc. Report

, you've got 6% of your portfolio in grocery-related stocks. Webvan was beaten down by tax-loss selling at the end of last year and has bounced back from those lows. I think that its stock has the least potential of the three stocks.


(VEXMX) - Get Vanguard Extended Market Index Inv Report

Vanguard Extended Market Index gives you an inexpensive way to invest in the

Wilshire 4500

, but the fund incurs a lot of volatility and isn't very tax efficient. It would make more sense to own this in a tax-advantaged retirement account than in your taxable portfolio. Don't test the

wash-sale rule by selling and then buying the fund back within the 30-day window. Wait a month before getting back in.

You've got 12% of your portfolio in small-cap stocks already. I agree that you need to put some cash to work, but I don't feel you need to add substantially to your small-cap holdings. If you do decide to invest more in this area, use mutual funds vs. individual holdings and let the fund manager do the research work.

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. 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 .