401K Rollover – Follow Up #1

Today’s blog is a follow up to my blog covering 401K Rollover:
http://paulsgang.blogspot.com/2010/06/401k-rollover.html. Brief summary:

I decided to transfer my Sun 401K account to a Schwab IRA 401K rollover account with the following asset allocation:
• Cash (future investments) – 18%
• US stock market index – 58%
• International non US market index – 12%
• Emerging market index – 12%

I planned to use the following Exchange Traded Funds (ETFs) for my stock allocation:

• US stock market index - Vanguard Total Stock Market ETF (VTI)
• International non US market index – Vanguard FTSE All-World ex- U.S. ETF (VEU)
• Emerging market index - Vanguard’s MSCI Emerging Markets ETF (VWO)

As of today the only investment I’ve made is to start a 90 day Certificate of Deposit (CD) ladder for my cash allocation. I will buy a new 90 day CD every 30 days using 1/3 of my cash allocation. Every month I will have 1/3 of cash available for any new investment opportunity. There are two main advantages to laddering CDs or bonds:

• By staggering the maturity dates you are not locked into a CD or bond for a long duration.
• It provides investors with the ability to adjust cash flows according to their financial situation and/or investment opportunity.

As of today I have made no investment in the stock portion of my allocation. The following table shows the major US indexes, the ETFs I will use for my stock allocation and US $/Euro (June 14, 2010 was the first day I could have made investments in my account):

Date DJI S&P 500 VTI VEU VWO EUR/USD
06/14/2010 10,190.89 1,089.63 57.20 40.90 39.97 1.2301
07/16/2010 10,097.90 1,064.88 54.24 40.35 39.37 1.2931
Gain/loss -.9% -2.3% -5.2% -1.2% -1.5% +5.1%

All the ETFs for the stock allocation of my 401K rollover had a decrease of value from -.9 to -5.2%. The Vanguard Total Stock Market index (VTI) had the largest decline of -5.2%. The Vanguard International non US market index (VEU) had the smallest decline of -1.2%. The ETF VEU regional component is 44% Europe without the Euro gaining 5.1% versus the US dollar the decline for VEU would have been around -3%.

Starting this quarter (ending September 31st) I will start making investments in my stock allocation over the next three (3) quarters using the dollar cost averaging investment method unless there is a major stock pullback (in which case I may invest all at the same time). For example, I will invest 4% of emerging market stock allocation over the next three (3) quarters until it totals 12% (my emerging market allocation). The major advantage of dollar cost averaging is that it helps to reduce the market risk of your investment by buying investments over time.

I may make a modification to my Schwab 401K rollover portfolio to add 5% allocation (lowering the cash investment to 13%) to ‘real’ assets by using REITs when they are a good investment opportunity (I will write a future blog about when REITs are a good investment opportunity).

Please chime in with comments on when you think I should buy these ETFs or if I should consider a different allocation strategy. What do you think about adding ‘real’ assets (for example, trees, real asset, etc.) to 401K rollover portfolio?


© 2010 Paul Cusick

Paul