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Hi Dr. Don,

I am a 26 year-old engineer working for Kaiser Permanente. I have started investing in the 403(b) option provided by my employer. It works similar to a 401(k) plan. My goal for this investment is retirement. I have tried to diversify my investment. My portfolio allocation is shown at the end of my letter. I feel that I have overdiversified. Since I have a long time horizon, I want to know if my asset allocation is OK or not. I have enough insurance. I make full payment of my credit card bills regularly. I am investing around $10,000/year. Please let me know your opinion about my portfolio allocation. Thanks, SH


Congratulations on starting your retirement savings in your 20s. It seems like the hardest time to think about retirement and actually commit funds for goals 30 to 40 years away, but by socking it away now, it makes it that much easier to reach your goal of a comfortable retirement.

I have a lot of people asking me to review their percentage allocations when they start out contributing to a 401(k) or 403(b) plan, but I've never had anyone invest in 13 separate funds before. As you know, diversification helps you reduce volatility (price swings) in your portfolio by investing across many different industries and sectors of the economy. Index funds invest in the stocks, or bonds, that comprise a given index, such as the

Wilshire 5000

or the

S&P 500

. Index funds are diversified, at least to the extent that the index itself is diversified.

Unfortunately, it seems like you've tried so hard to diversify that you wound up investing in too many index funds. Normally, I like to see investors that are just starting out in a 403(b) or 401(k) plan concentrate their investments in diversified funds, instead of diversifying their investments across concentrated funds. You've taken a different approach, however -- you've diversified your investment in diversified funds. I think that's overkill and you should scale back on the number of funds in this account.

Spreading $10,000 over 13 funds does achieve your diversification goal, but you could have done it just as efficiently with three to four funds. I'd be interested in knowing what you paid in account administration fees last year. If each mutual fund charged you a $25 account fee, you would have paid $325. That's 3.5% on a $10,000 investment before even considering the annual expense ratios for the funds.

On the other hand, the mutual funds that you selected have, for the most part, very low expense ratios, and it's unlikely that you had to pay a maintenance fee on every mutual fund you own. My point, though, is that when the account is just starting out, these fees can really place a drag on the portfolio's return.


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, you have 27% of your portfolio invested in international stock funds. Domestic investments held by these funds reduce the foreign stock weighting to about 21%, but that's still high compared with the typical 403(b) investor. This area might be the first place to scale back.

Also, in your 20s, I think it's more appropriate to keep your cash investments where you can easily access them, rather than in your retirement account. The yields on money market funds are going down with every

Fed rate cut that comes to pass, so I don't really think you need a money market fund in this 403(b) account.

Another thing to keep in mind is that when you own something like

Vanguard's Total Stock Market Index

, you own the domestic stock market in all sectors and all capitalization ranges. Adding other domestic stock funds allows you to handicap or weight different sectors. For example, you could add an S&P 500 index fund to overweight the large capitalization stocks.

A final thought: If your employer isn't matching any part of your 403(b) contributions, you might consider opening a Roth IRA as part of your retirement strategy instead of contributing up to the limits of the 403(b) plan. The Roth contributions are made with after-tax dollars but grow tax-free when taken as qualified distributions. This would be a good way to give you some investment flexibility down the road. If you have the money to both fully fund your 403(b) and the Roth IRA, then go ahead and do both.

Dr. 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