AssetBuilder Inc. Registered Investment Advisor - Simple Investing. Smart Future.

Hello Scott, 

I currently have a 401K account with the State of Texas containing approximately $53K that is currently down 2K for the year.  I am currently invested 50/50 in the Fidelity Diversified Intl. Fund and the Lord Abbet Small Cap Fund and have obtained returns of 18.10% and 16.56% respectively over the last three years.  I am no longer employed with the State of Texas but can move the money into various funds offered by the State.  The other funds available are the following: VIGIX, VWENX, VIIIX, FBIDX, FEAFX, MGOYX, NYVTX and Wells Fargo Target Funds up to year 2050.  I was interested in maybe looking at moving the money to a Margarita Couch Potato investment but the exact Vanguard funds and TIPS you picked for the Couch Potato are not offered with the State.  The State also offers self-directed funds through Charles Schwab but none of the funds offered were any of the ones you suggested.  I know you have talked highly of the Vanguard Wellington fund.  Should I leave the money in the 401K with the State and invest in the funds offered or should I look at moving all of the money (even though it is down a little) to a Couch Potato investment or Asset Builder fund since I have little investment knowledge?  If I should move the money, should I wait until it goes up or move it now?I would greatly appreciate your advice.  Thanks.  Eddie in San Antonio, TX.  

You can come very close to the Margarita portfolio in the State of Texas plan by dividing your money equally between FDIXX (Fidelity Diversified International, ticker FDIXX, ER 0.93%), Vanguard Institutional Index (ticker VIIIX, ER 0.03%, and Fidelity U.S. Bond Index (ticker FBIDX, ER 0.33%). You won't have TIPS, except to the extent they are included in the broader index, and the international equity fund will be managed, but you'll have the broad asset allocation and an average expense ratio of only 0.43 percent a year. Two of the three funds would be index funds.

Vanguard Wellington (ticker VWENX, ER 0.16%) will give you a significantly lower annual expense but it will also give you a smaller commitment to international equities. You can compensate for this by putting 75% of your account in Wellington and 25% in Fidelity Diversified International. This will get you very close to the Margarita asset allocation and it will also give you a lower average expense ratio of about 0.35%. Both are managed funds so you've got a significant manager risk bet here. Also, Wellington is likely to change their allocation between domestic and international equities so you'll have to keep a watch on that and adjust accordingly.

I see Davis NY Venture, Munder Mid Cap, and Fidelity Mid-Cap as much as manager bets as asset allocations so they don't really further the fundamental Couch Potato goals of (1) low expenses, (2) broad asset class diversification, and (3) avoidance of manager "bets" through indexing.

The biggest advantage of moving from the 401k account to an IRA Rollover account is that you will be able to significantly expand your diversification of asset classes while avoiding manager bets. Depending on where you roll the account, for instance, you could build a 6 to 10 part Couch Potato portfolio for an average expense ratio cost of about 0.40% a year, perhaps less if you used Vanguard ETFs. Moving to AssetBuilder would do all that but it would add 0.45% a year for doing the allocation work and keeping it done.

Either way, it appears that both the comparable risk Couch Potato Margarita portfolio and AssetBuilder portfolio 9 would have provided a somewhat higher return than Vanguard Wellington, even though Wellington was a top decile fund over the last 5 years. Whether this will continue in the future, of course, is not known. I think you can credit this to broader diversification of asset classes. You can check this out for yourself by examining the trailing period performance figures we put on the website at http://assetbuilder.com/Investing/inv_potato.aspx.

Scott